Four contenders vie to become Korea's new internet bank in a struggling market

The logos of of internet banks in Korea [JOONGANG ILBO]

Competition to become Korea's fourth internet-only bank is growing fierce with four consortia having already filed to gain regulatory approval.

A new internet-only bank could play a key role in expanding services for the financially vulnerable and leveraging advanced data and technology to create new tools. But experts are concerned about whether such a bank can maintain financial soundness.

Those contending to become the next internet-only bank — Douzone Bank, U-Bank, KCD Bank and Soso Bank — vowed to target customers with average and low credit ratings, like the self-employed, startups and older adults.

The three internet-only banks currently operating in Korea are KakaoBank, Kbank and Toss Bank.

Douzone Bank includes Douzone Bizon, a local IT solutions provider, and potentially Shinhan Bank, which is considering joining the consortium. The U-Bank consortium includes Hyundai Marine & Fire Insurance, peer-to-peer service provider Lendit, a medical artificial intelligence startup Lunit and Jobis & Villains, a tax and accounting management platform.

KCD Bank is backed by the unicorn firm Korea Credit Data, while Soso Bank includes ICT companies and a coalition of small merchants nationwide.

“To win regulatory approval, a new internet bank will have to propose a differentiated business model from the existing internet banks, which are primarily focused on deposit and loan services like the commercial banks,” said Lee Sung-bok, a senior research fellow of the financial services industry at the Korea Capital Market Institute.

“Targeting the self-employed is a differentiated business model as they are often neglected by existing banks. Providing capital management and loan services to the self-employed as well as to workers of the small and medium-sized companies are potential services that can be primarily provided by the fourth internet bank,” Lee added.

Self-employed workers face high barriers to using services at existing banks and are largely limited to policy loans and mortgages.

“Having a fourth internet bank is beneficial for customers as they will be able to take out loans at a lower cost due to intensified competition,” said Professor. Lee Jeong-hwan, who teaches in the division of economics and finance at Hanyang University.

“But managing its financial soundness and whether it will develop into a successful business model are different matters.”

The delinquency rate at KBank in the fourth quarter was 0.96 percent, up 0.11 percentage points from a year earlier. The rate at Toss Bank rose 0.6 percentage points to 1.32 percent over the same period.

Both rates are higher than the average commercial bank delinquency rate of 0.29 percent.

The Financial Services Commission (FSC) is expected to bring out new guidelines for the approval of an internet bank later this year.

“To promote the entrance of new players, we will push for policies of converting regional banks into commercial banks and giving approval to a new internet-only bank,” said the FSC Chairman Kim Joo-hyun in a meeting with chiefs of commercial banks on April 1.

A model that can properly evaluate a borrower’s credit will be key to gaining the greenlight, according to an FSC official, as it will affect the bank's financial soundness.

“Servicing the self-employed is the part where banks suffer losses,” said Kim Sang-bong, an economics professor at Hansung University. “That explains why internet banks need the capital of commercial banks.

“Just as information technology companies are jumping into finance, financial companies also need a platform where they can diversify services,” he added.

KB Kookmin Bank owns 4.88 percent of Kakao Bank, Hana Bank owns 8.99 percent of Toss Bank and Woori Bank has a 12.60 percent stake in Kbank.

One of the primary benefits of internet banks is their potential to modernize to the legacy banking system — but those effects may be limited.

“Even if the fourth internet bank manages to successfully develop an innovative financial service, commercial banks will likely copy and expand the service,” said an industry official who spoke on the condition of anonymity.

“That makes it possible for the new internet bank to pioneer a new market and eventually die out.”

BY JIN MIN-JI [jin.minji@joongang.co.kr]