Internet-only banks strives to be game changers

By Nam Hyun-woo

Internet-only banks are gearing up their final preparations before their launch in the first half of the year.

With a pledge to bring a seismic change to the banking industry, K bank and Kakao Bank are building up unique features to take market share from conventional banks.

The concept of the country's internet-only bank is similar to that of direct banks, which offer banking services online, mobile or via telephone. Since they do not have branches, it can save costs and pass this on to clients via higher savings interest rates and lower service fees.

Since June 2015, when the government announced its plan to introduce internet-only banks here, consortiums were formed to set up such banks and five month later two consortiums -- each led by Kakao, the provider of mobile messenger Kakao Talk, and KT, the second largest mobile operator here -- were named as operators of the banks.

Setting the pace is K bank. After forging a preparatory corporation in January last year, it received a regulatory approval from the Financial Services Commission (FSC) in December and is seeking to launch its business as early as next month.

Kakao also set up its preparatory corporation for Kakao Bank in January last year and applied for a regulatory approval on Jan. 6 this year. The FSC and its executive arm the Financial Supervisory Service are now reviewing Kakao Bank's application and the bank expects to roll out its services within the first half of this year.

Accessibility attracts clients

Both K bank and Kakao Bank have in common as a strength is 24/7 operation, meaning clients can open accounts, send or receive money or even get loans at any time and at any place.

That could be a huge strength as more financial consumers are craving for easier access to financial services.

"K bank distinguishes itself from existing commercial bank by being the real mobile bank," said a K bank official. "Not only remittance and account opening but also loans and other financial services are available 24/7."

Though conventional banks provide internet or mobile banking services, their primary services are still provided by tellers and staffers at branches, while their "non-face-to-face" channels are limited to serving supplementary roles.

On the other hand, K bank and Kakao Bank say they are seeking a full banking service requiring no visits to branches, having a "completion of services in the mobile environment." Also, officials at both banks said their understanding of consumer needs, such as simpler authentication processes, as an ICT-based bank will be superior to that of existing lenders.

Another common strength of the banks will be medium-level interest rate loans based on credit ratings using big data.

On average, lending rates here hover around 25.9 percent at savings banks, 21.6 percent at capital firms, 15.5 percent on card loans and 4.9 percent at banks. K bank and Kakao Bank believe the bracket between 4.9 and 15.5 percent is a niche and focus on providing loan products with such rates. Also, by using big data to rate a client's credit, the banks can lower risks of insolvency and the client also can receive loans with lower interest rates.

According to the FSC, the banks plan to provide 3.6 trillion won ($3.09 billion) of loans with medium-level rates for the next 10 years.

Kakao Bank has a more detailed explanation of its plan.

For example, a taxi driver surnamed Kim, whose credit score is six in the country's one-to-10 scale rating system, has to pay 19 percent interest when he gets loan from a savings bank. When he turns to Kakao Bank, its credit rating system will find that Kim had bought a book on financial knowledge at online bookstore Yes 24 and done shopping for groceries at cheaper prices on a regular basis at online shopping portal G-Market, dropping a hint that he is interested in financial matters and trying to save expenses through online shopping.

Also, Kim's Kakao Taxi records may show that he has been a hard-working driver and other data compiled from other Kakao affiliates or Kakao Bank shareholder companies provided an assessment that Kim seems to be a diligent man and his risk of insolvency is not that high. Based on this, Kakao Bank will provide him a loan with a 10 percent rate.

"Based on such a mechanism, Kakao Bank will have an innovative credit scoring system and provide reasonable interest rates to those who have lower credit scores," said an official at the bank.

K bank also says big data will be "key" to its loans with medium-level interest rates. It plans to add a current credit scoring database to its own scoring system comprised of data from telecom, settlement and other shareholder companies. By doing so, the bank believes risks would be lowered and profitability would increase.

Banking at convenience stores?

What distinguishes the two primary internet banks is their ownership structure. Kakao Bank has a relatively simple one. Korea Investment Holdings has a 54 percent stake in the bank, while Kakao and KB Kookmin Bank each have 10 percent. Seven others have a combined 26 percent.

With Kakao taking a leading role in the bank, Kakao Bank's biggest strength over its rivals is the very existence of Kakao Talk, the mobile messenger service boasting 420 million monthly average users. According to the preparatory corporation, the Kakao Bank application will fully utilize user's Kakao Talk friends list when it comes to remittance.

"This will remove many annoying steps of sending money, such as asking account numbers and copying that into bank applications and sending messages to the receiver," said the Kakao Bank official.

As Kakao Bank has the powerful Kakao Talk network, K bank will also take advantage of the network of its shareholder company GS Retail, a leading convenient store chain here. The bank said it will use ATMs at more than 10,000 GS stores across the country as its offline network. Those ATMs will be replaced or upgraded with ones which even issue credit cards. Among 27 companies, GS Retail, Woori Bank and Hanwha Life Insurance are major shareholders of K bank with a 10 percent stake each, while KT has 8 percent.

"K bank's ownership structure allows it to tap into various fields," NICE Investors Service said in a 2016 report. "Especially, information from various shareholder companies will be a huge strength for the bank."

Questions down the road

Though the two rookie players in the bank industry here dream of being a game changer in the domain, they do agree that their services will not likely replace existing banks in the short term.

"Given most financial consumers have their main bank, which provides various benefits that are even linked to their salary accounts, we don't believe that Kakao Bank will become their main bank in a short period of time," said a Kakao Bank official.

"However, strength coming from greater accessibility, convenience and customer satisfaction will help the bank to increase its market share in the mid- to long-term."

The act separating banking from commerce is also a challenge they have to tackle.

The Banking Act separates banking from commerce, restricting commercial capital from holding more than 4 percent of common shares, or those with voting rights, in a bank. Both KT and Kakao's shares with rights in their banks remain at 4 percent.

"As a bank which will launch its services soon, the concern over the governing structure of the bank may hamper its business," said a K Bank official. A capital increase is a due process and a responsible shareholder company should lead the process for stable management of the bank. However, the act hampers ICT firms from making aggressive investments," he said adding that such a practice goes against the reason for internet-only banks.

So far, revised bills and special case acts have been tabled at the National Assembly for a revision of the act at issue, but none is showing noticeable progress as the unicameral parliament is haunted by a massive corruption scandal involving President Park Geun-hye and her friend Choi Soon-sil.

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