The role of financial development cannot be overemphasized. Although mainly focusing on the size of the financial market, financial development has been proven to affect income growth as well as income redistribution, putting to rest the suspicion of the role of financial development by some scholars over several decades. Moreover, economic crises, which are now occurring more frequently, have highlighted the importance of financial stability and safety in maintaining a sustainable economy. While financial development contributes to economic growth through efficient allocation of financial resources, they also influence income disparity by benefiting low income classes relatively more than others.
Financial development, in fact, is is more associated with quality improvement than with quantity growth in financial services. Precisely speaking, quality is more important than quantity in financial development as development may reduce demand for financial services by providing fewer financial resources to satisfy consumers’ needs and wants, or by increasing their opportunity sets given the same amount of financial resources. In addition, we should distinguish ‘development’ from ‘growth’ in order to discriminate the quality and quantity measures.
Financial development can be not only a defensive protection measure against financial crisis but also an indispensable ingredient for economic and social development that benefits all economic and social classes. Generally speaking, financial underdevelopment may hurt the low income class more than the high income class and vice versa, as we observed amid recent financial crises. A well-functioning financial market can provide stability and a stepping stone for a sustainable economy and society.
Financial development in a market economy should bring well-informed consumers and providers of financial services together. Consumers can compare financial products and services based on information available to them and select a long-term contract with the expectation that the contract will continue until maturity. Sellers of the products can also target their ideal customer group, taking into consideration their competitive advantages and limited human and financial resources and offering their products and services to attract their target consumers.
Indeed the reality is different from this ideal situation of perfect and complete information. In the 1970’s, Spencer (1973) and Rothschild/Stiglitz (1976) published seminal papers on information asymmetry in the labor or financial market, assuming that consumers (or employees) are more knowledgeable than companies. At the time, consumers, not companies, suffered due to asymmetric information, being forced to rely on contract type offers – in particular, the low risk group of consumers was subject to consequential loss from information asymmetry.
It was not until four decades later that the opposite argument arose with evidence of uninformed financial consumers and the necessity of their protection in the global society. Both civil society and government unanimously support consumer financial protection in spite of the minority still complaining about financial consumer fraud. This unimaginable change between the 1970s and the 2010s may be attributable to the unprecedented invention of a number of new and complicated financial products after financial liberalization in the 1980s, leading to a free exchange regime, liberal interest rate systems, and the growth of derivative markets coupled with the slow development of consumer literacy or familiarity with service providers.
Among all kinds of contemporary services, in fact, I may well say that the consumption of financial services and that of medical services are the most critical in terms of the impact on human life and the level of information asymmetry between consumers and service providers. Medical doctors serve and treat their patients with dominant knowledge distance to safeguard the health and well-being of patients, while financial intermediaries do the same to safeguard their customers’ wealth and well-being in a similar environment. Medical service is similar to financial service in modern times in terms of complexity and impact on consumers, and thus both are subject to serious consideration in consumer agencies worldwide. One difference between the two is that financial complaints may be so common and wide spread, for example amid financial crisis, as to lead to class action, while medical complaints may not reach similar proportions. In this regards, the importance of financial consumer protection cannot be overemphasized.
2. Introduction to the IAFICO
The IAFICO aims to serve as a global platform for sharing information, knowledge on “Financial” products and services, regulations and supervision, institutions and culture, education and training in order to reasonably serve financial consumers’ interests and well-being as well as to facilitate long-term financial development from an impartial perspective. Headquartered in Seoul, Korea, the academy was founded in December 2014 by a dozen Asian professors interested in the above issues. You can see their photos on the website (www.iafico.org). The second annual meeting, held on Jeju Island, Korea, could include about 80 attendees from about fifteen countries.
The IAFICO conducts research on financial consumers from a global perspective – probably the first of its kind, while the Korean Academy of Financial Consumers (www.kafc.org), created in 2010, is the first organization with the same research agenda, but mainly in a local context. So to speak, the IAFICO is the international version of the KAFC, which is very unique in the Korean academic society that performs research on finance, insurance, or consumer science, without relies on financial support from the financial service industry. For the sake of impartiality, the IAFICO shuns relationships with for-profit corporations in the industry and prohibits its president from serving as an outside director for any bank, security broker, insurance company and so on. In principle, the IAFICO is to be run by individual academic members and to be financed by the members and by several non-profit organizations in the financial sector.
The IAFICO was created to do research on financial consumers from a global perspective. As far as I understand, the financial consumer has never been a research agenda except at the KAFC as noted above. The academy examines consumers using financial services provided by banks, stock brokers, insurers, credit cards, etc. in all countries worldwide. Across countries, we compare the consumers, products, services, distribution channels, providers, rules and laws and other institutional structures surrounding consumers. Consumers may share commonalities or may differ from each other, some experiences may be portable to other countries and some countries may have impeccable products or institutions that other countries should emulate.
As for financial consumers, financial products and services, financial systems and regulations, financial distributors, there are huge differences across countries. We can find various attitudes toward consumption and saving, risk and return, investment and insurance in different countries, as much as the differences in the culture of financial intermediaries and financial supervision systems, which may be path-dependent. For instance, Korea appears to have a larger power distance between financial supervision agencies and the supervised groups than other countries, while the Japanese financial watchdog takes a stricter position regarding their charge than their Korean counterpart. Moreover, Korean insurance salespersons emphasize self-interest more than those in other countries, to the disadvantage of financial consumers. Some countries show longer term orientation to financial contracts than other countries.
Some differences should be reduced sooner or later to improve the financial market structure or facilitate economic growth, while others may not or cannot be resolved. As a decisive factor for national prosperity, as noted by Acemoglu and Robinson in the book Why Nations Fail (2013), Institutions or motivation-generating systems may be changed more easily than cultures or people, providing another path to development or growth for the countries concerned. According to a Chinese proverb, a wise man or country learns from others’ mistakes and failures as well as from their success stories. Many experiences and ideas can be shared among first movers and their followers.
For instance, many developing countries strive to mimic extraordinarily successful strategies and experiences related to the Korean economy, for which the main characteristic comes from hard pressure on the financial service sector to maintain stability in order to generate capital for growth in the real economy sector. To be honest, I am not so sure whether the unbalanced growth strategy was the best solution that could be shared with other emerging economies or not, as the Korean financial service sector is still lacking comparable competitiveness in such real sectors as automobile, electronics and ship-building. Another serious situation in the Korean financial system was the handling of the financial crisis amid the Asian crisis in the late nineties, with the increase of the interest rate to attract foreign capital flow, resulting in huge unemployment and corporate bankruptcies. This kind of solution has not been applied since to avoid the subsequent financial crisis. Instead, a completely opposite solution has been provided in the form of financial easing and lower interest rates. China is a good example of a country that enjoys the slow follower’s advantage as far as the financial system is concerned.
3. Research & activity of the IAFICO
The IAFICO, the one and only global academic institution concerning financial consumers, was created by several Asian scholars who share similar opinions regarding the Importance of Financial Consumers in the global and regional economy, under-emphasis of financial consumers in current financial systems, existing forums focusing on business or regulatory perspectives, the necessity of cross-country comparison of experiences, ideas, or best practices from the standpoint of financial consumers. The original founders and members of the academic institution aim to share relevant information, either successes or failures, for financial development, to discuss financial issues in an impartial manner from the perspective of financial consumers, to find long-/short-term solutions for economic and social development, and to collectively suggest solutions to common issues across countries. Like any other academic society, the IAFICO’s regular members include university professors and academicians in principle, but membership is open to consumer activists, regulators as individual members to maintain the neutrality of the organization and some non-profit organizations as institutional members. Guests consisting of business representatives, other interest groups, or non-members may attend conferences or be invited as speaker, but lack voting rights.
The first journal of the IAFICO has been successfully published after more than a year’s work, mainly thanks to our respected editor, professor Man Cho, and eminent authors across borders. The journal, an official venue to share our research and opinions, is going to serve as a knowledge base and a symbol of the IAFICO, and is growing with an increasing number of paper submissions and journal subscriptions. In addition to theoretical and empirical research, cases, notes, reviews and other financial consumer related surveys can be included in the journal, either in the regular issue or in special issues. As the journal targets an internationally recognized or listed audience, keeping an eye on the rules and principles adopted in other journals, the editorial board or authors may have to follow somewhat strict or ethical rules in writing, submission, reviewing, editing or publishing. Hopefully, nevertheless, that differential burden can be compensated by becoming an eminent journal in the near future.
Professor, SKK University, Seoul, Korea