Internet-only banks shake up the industry

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Internet-only banks shake up the industry



Ms. Jang, a 29-year-old office worker in Seoul, opened an account with K bank in early July after hearing it provided loans at a decent rate even for someone with a poor credit rating.

Then when she found out K bank had suspended its loan service, she waited until Kakao Bank opened. She was able to borrow 10 million won ($8,880) at a 5 percent rate from Kakao Bank, far better than the savings banks she visited over the past few months that offered her interest rates exceeding 10 percent.

The emergence of internet-only banks - K bank in April and Kakao Bank in late July - has opened doors for Koreans with so-called middling credit like Jang, who has a credit score of six, to borrow money from financial institutions at reasonable rates. Previously, people with scores between four and six on a scale of one to 10 - with 10 being the worst - were rejected by commercial banks when they tried to take out loans.

They were eventually forced to turn to savings banks, which in Korea are more like consumer finance companies that often charge interest rates far above 10 percent on consumers with middling credit. Kakao Bank and K bank, the first new players in the local banking industry in over two decades, are similar in this regard, but they boast unique features that set them apart not only from conventional banks but also from each other.

“Inconvenient banking services [such as some people unable to borrow money at reasonable rates] is what started this bank,” said Lee Yong-woo, co-chairman of Kakao Bank. “We had to reinterpret banking as a whole while we were preparing for our service, such as incorporating information and communications technology [like data analysis] into finance.”

The reason why Kakao Bank and K bank can offer loans at such reasonable rates is because they analyze not just credit information provided by credit rating bureaus but also a wide spectrum of personal data like people’s online shopping history and even mobile phone bills. Their services are also available 24 hours a day because everything is done on mobile phones instead of in brick-and-mortar branches like conventional banks, whose business hours usually end at 4 p.m.

Internet-only banks have proven popular with the Korean public. K bank, which entered the race first on April 3, gained more than 150,000 subscribers in less a week. This far exceeds the number of accounts created with commercial banks that allow people to open accounts through mobile phones. According to data from the financial industry, 155,000 accounts were opened in 2016 at commercial banks.

Kakao Bank, which launched its service on July 27, far outpaced even K bank. As of Aug. 3, a week after its launch, 1.5 million accounts had been opened on the app.


Such explosive success was possible for Kakao Bank because “it is highly accessible through the KakaoTalk platform and Kakao Friends characters,” said Oh Dong-hwan, an analyst at Samsung Securities. KakaoTalk is Korea’s most popular messaging app.

In addition to its connection to KakaoTalk, Kakao Bank offers a loan product that allows qualified people to borrow more than 100 million won. “We had someone taking out a 150 million won loan on the morning of opening day,” said Hwang Eun-jae, a manager at Kakao Bank. In comparison, the limit on loans from K bank was set at 100 million won.

Kakao Bank lent out nearly 500 billion won in just a week, while K bank issued 630 billion won up to early August. Unable to handle the skyrocketing demand, Kakao Bank reportedly lowered the upper limit on loans, though it is unclear by how much. K bank was forced to suspend its most popular loan service on July 1.

A spokesperson from K bank said it would reopen the service later this year and launch more loan products, including mortgages.

Another service that Kakao Bank promoted even before its launch was international money transfers, which are currently unavailable with K bank. A customer can send up to $5,000 overseas for a 5,000 won fee, a tenth of the average fee charged by local commercial banks. For an amount exceeding $5,000, Kakao Bank charges 10,000 won.

Despite the rivalry between K bank and Kakao Bank, they share a common enemy: the banking act that makes it difficult for them to receive equity investment from KT and Kakao, the IT companies that led the consortiums which created their respective banks. The current version of the banking act limits the ownership of banks by non-financial companies like KT and Kakao, which means there is also a limit on how much they can contribute in terms of capital. Right now, the major shareholders of each bank are Woori Bank for K bank and Korea Investment Holdings for Kakao.

“To maintain a healthy BIS capital ratio, [Kakao Bank] needs at least 700 billion won in equity capital,” said Oh of Samsung Securities. “To recapitalize, it needs more equity investment from Kakao, but there remains political uncertainty as to whether regulations separating financial and industrial capital will ease.”

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