The curse of the negative spread

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The curse of the negative spread


Direct banking is one of the best products in the history of finance. Dutch multinational financial corporation ING Group came up with the idea when it advanced to the U.S. market in 1997. How is direct banking different? “When a salesman cannot explain the product in 20 seconds, don’t sell it.” “Don’t wait for customers to come to you, you should approach directly,” the company says.

ING reduced the number of offered products and let anyone sign up easily. It also offered higher rates. The result was a great success, with more than 15 million customers in nine countries, including the United States, the United Kingdom and Canada.

Benchmarking the success of ING, HSBC began a direct banking operation in Korea. In February 2007, then-CEO Simon Cooper introduced “HSBC Direct” and held a press conference at the Hilton Hotel, Seoul. They pledged to approach the customers directly and offer 1 to 2 percent higher interest rates than other banks. It seemed like good business, but the result was catastrophic. HSBC stopped selling the direct banking products less than a year later because offering such high interests created a larger negative spread than expected.

When KDB Financial Group CEO Kang Man-soo introduced “KDB Direct” two years ago, the market had mixed forecasts. Kang seemed to focus on success and snapped at the concerns of a negative spread. He claimed that KDB’s good rating allowed the bank to bring funds at cheap rates. When other banks offered a mid-3 percent interest rate on average, KDB Direct offered 4 percent. He personally explained the business structure to the reporters. It may have been an inevitable choice for KDB, which has only 60 branches. It was a way to prepare a foundation as a commercial bank and enable privatization. One year and four months later, KDB Direct amassed 9 trillion won ($8.07 billion) in deposits.

The public servants’ asset disclosure last weekend confirmed the popularity of direct banking. KDB Direct was the choice of banking services among the heads of public financial corporations who are knowledgeable in the field. Kang made a new deposit of 350 million won last year, and the CEO of the Korea Deposit Insurance Corporation, the director of the Korea Credit Guarantee Fund, and the CEO of Kamco deposited 70 to 190 million won. But excessive popularity often attracts jealousy, and in the end, commercial banks who lost potential customers complained. They criticized that the government was virtually involved in the banking industry, and the direct banking would ultimately collapse because of the negative spread.

Perhaps because of the industry’s criticism, the Board of Audit and Inspection named KDB Direct as a “negative spread product” when it released the public financial corporation inspection report last month. The timing is also interesting, as it came right after the president’s remark on the reshuffle of public corporation heads. Last weekend, Kang tendered his resignation. He would never have dreamed that the hottest product for KDB would end up being the reason for his departure.

*The author is an editorial writer of the JoongAng Ilbo.

by Yi Jung-jae
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