ed First Internet-only banks

For the first time in 23 years, the financial regulator has issued preliminary licenses permitting the establishment of new banks. This time, the licenses are intended to launch the nation’s first Internet-only banks amid harsh criticism of the slow progress of financial reforms in Korea.

The Financial Services Commission said Sunday that they had approved two consortiums, led by Kakao Corp., a leading mobile messaging app operator, and KT Corp., the nation’s No. 2 telecommunications company, to launch web-based banking services. The two banks, which will have no brick-and-mortar offices, will begin providing most of the financial services provided by existing banks but without face-to-face contact, probably in the first half of next year.

Expectations are high for the differentiated services to be offered by the new online banks ― Kakao’s Kakao Bank and KT’s K-Bank.

First of all, they will be able to attract customers by offering higher deposit rates and lower lending rates thanks to lowered personnel expenses and operating costs. Users of "middle-interest loans,’’ in particular, which usually refer to the annual lending rate of 10 percent, could be their cash cow. The online banks can also provide a better credit appraisal of borrowers based on the data they collect from hundreds of millions of mobile and web users.

There will be other innovative services that are currently out of the reach of existing banks, such as “digital interest,’’ which can be used as cash in cyberspace. Internet-only banks are also expected to provide most of their services free of charge.

More importantly, the launch of the Web-only banks is part of a drive to spur innovation in the financial industry, as Korea is lagging behind other industrialized countries and even China in the development of web-based financial services. Financial authorities expect online-only banks to stimulate competition and thus prompt some banks to go abroad, expressing hope that a big conglomerate such as Samsung Electronics will emerge in the financial sector.

The prospects are not always rosy though. The Internet-only banks might have to suffer deficits for years because of initial difficulties in expanding deposits. If not properly administered, they might trigger a fresh economic debacle.

So the government’s role must not be underestimated. It’s critical for financial bureaucrats to take the lead in removing red tape so that the wind of change can blow through the Korean financial industry, which so far has inherently lacked innovation.