By Nam Hyun-woo
Korean banks are striving to draw in more individual savings accounts (ISAs) customers, after the retail investment service was opened up to them, amid growing concerns over their overheated competition.
After the country’s top financial regulator allowed lenders to tap into a sector previously the domain of only securities firms, banks are considering ISAs as a new revenue stream for their businesses, engaging in various promotional marketing activities.
An ISA is a type of savings account where tax is not collected from interest earned or gains from investment up to a certain value, allowing account holders to accumulate more money. Brokerage houses will start offering the accounts on March 14 and banks will follow in late March. More than 100 trillion won is expected to be poured into the ISA market over five years.
“Since ISA customers can open only one account per person and the service has a required term of five years, banks are doing their best to attract more customers in the early stage,” said an official at KB Kookmin Bank. The bank set 500 million won ($404,000) as its marketing budget to attract new ISA customers.
KEB Hana Bank will offer gifts worth 920 million won. Woori Bank is also gearing up its marketing pitch, offering gifts amounting to some 40 million won.
“To increase our customer base, preoccupying customers is the key right now,” said an official at KEB Hana Bank. “Each bank and even securities firms are engaging in a fierce competition because there are a limited number of customers.”
As banks’ marketing efforts become fiercer, however, concerns are growing that this may cloud customers’ decisions.
ISAs not only involve deposits and installment savings products but also funds, equity-linked securities and derivatives-linked securities that have risks of losing money. Industry insiders say that such a fact could be overshadowed by banks’ excessive marketing efforts even though most banks are yet to release specific ISA products.
According to multiple bank workers, financial institutions “ordered” each branch to garner 100 customers to make preliminary reservations for ISAs.
“As ISAs come up as a new path for creating revenues, each bank pushes its branches to meet quotas,” said an industry insider. “However, it is difficult to pitch a product which is not even released yet and even bears risks of losing their money,” he said, adding that the customers’ interest in ISAs is not as huge as that of the financial industry.
To this regard, there are voices that the introduction of ISAs should be reconsidered or postponed.
“From the KIKO fiasco, customers have been misled and even suffered losses because of excessive competition by financial institutions,” said Kim Moon-ho, head of the Korean Financial Industry Union, referring to a financial derivative called a knock-in knock-out (KIKO) currency option which resulted in a combined loss of some 3.2 trillion won to invested firms in the early 2000s.
“Customers should think about various factors of ISAs,” said Kim Kyung-su, solidarity department director of the Korean Finance and Service Workers’ Union. “ISAs can be regarded as risk-weighted assets, while banks need more time to educate specialists and other infrastructure. There must be a commission charge also.”
Unlike other countries having ISAs, holders whose annual incomes surpass 50 million won can enjoy tax benefits on up to 2 million won of interest and investment gains from the accounts that have been maintained for at least five years. For those who earn less than 50 million won a year, the period is three years and the amount of interest subject to tax exemption is 2.5 million won.
The official at KEB Hana Bank said: “Now is the period of each bank preparing for best services for customers,” adding that the bank is trying its best to fully inform customers of the functions of ISAs.