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'Innovation drive uninterrupted due to stable shareholding loop'
By Lee Kyung-min
KakaoBank, a banking subsidiary of IT giant Kakao, is being exempted from a regulation governing "separation of industrial and financial capital," in what traditional financial group-affiliated lenders consider an "undue favor" exploiting its status as an internet-only bank, industry sources said Tuesday.
By law, non-financial organizations are prohibited from owning stakes larger than 10 percent in banks ― and voting rights of no more than 4 percent, a measure put in place to prevent large conglomerates from acquiring shares of banks and using them to exert influence and power.
But the rule set up to keep large conglomerates in check and accelerate competition in the financial market is not currently applied to the internet-only bank, despite the fact that Kakao has a 27 percent stake in KakaoBank, nearly triple the legal upper limit. The majority of shares of Kakao are owned by its founder Kim Beom-su.
This has many of its traditional competitors displeased, since the internet-only bank has an owner with a stake large enough to insulate the bank's business plans from unwanted external shocks, unlike most banking affiliates of financial groups prone to management uncertainties due in part to shareholder demands for stock price growth.
The internet-only bank, they added, is granted stable governance and management, an ideal business condition to mobilize and allocate undivided corporate resources for service quality improvements uninterrupted by politically motivated financial regulations due to orders from those in power.
Kakao has the third-largest market capitalization of over 65 trillion won ($57.9 billion) as of Tuesday (Aug. 10) market closing. KakaoBank's market cap was over 33 trillion won.
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| Kakao founder Kim Beom-su Korea Times file |
Sole winner
Another point of contention is loose screening for internet-only banks in determining the eligibility of "their investors as major shareholders."
Under the law governing the organizational structure of a financial firm, an individual who holds the largest stake in a brokerage or insurance firm should be subject to government review over whether they are eligible to remain a major shareholder. Eligibility will be denied if the individual has a record of criminal conviction for fraud among other financial crimes or violation of antitrust laws.
"Requirements and punishment are less stringent for non-internet-only banks, as inferred by a pending legislation that prohibits insurers from owning stakes over 3 percent in their affiliates," an industry watcher said.
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| KakaoBank CEO Yun Ho-young Korea Times file |
The most recent controversy involving the internet-only bank concerns accounting fraud allegations of over 1.1 trillion won, raised by Specwatch, a local anti-speculation financial advocacy. The group submitted a petition on Aug. 6 to the Financial Services Commission, asking for the cancellation of the bank's stock listing, to no avail.
Kakao, the major shareholder of KakaoBank, was involved in alleged accounting irregularities when it merged with domestic web portal operator Daum back in 2014, in what the group says constitutes a violation of the Capital Markets Act.
The group said Kakao inflated the merger value to over 2.1 trillion won and goodwill of Daum to over 1.4 trillion won, up from 251 billion won. Goodwill in finance refers to an intangible asset that accounts for the excess purchase price of another company. Items included in goodwill are not easily quantifiable. Examples are proprietary or intellectual property and brand recognition.
The group says the per-share value of Kakao should have been 72,910 won, the price on May 22, 2014, a day before Kakao's board approved of the merger. However, per-share price was set for 157,700 won, the price on Sept. 30, 2014.
By law, a merger's value should be measured by per-share value of the previous trading day of either the board's approval of the merger, or inking of the merger, whichever comes first. The merger was inked Oct. 1, 2014.
Kakao's 2014 financial statements were miscalculated including the firm's capital among other figures and it continued to manipulate financial statements until 2020, the group claimed. Kakao has since denied the allegation saying Seoul Central District Prosecutors' Office dismissed related charges March 22, 2019, about five months after it was filed in October 2018.
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| Members of Specwatch, a local anti-speculation financial advocacy, hold a press conference in front of the Financial Services Commission in Seoul, Aug. 4. Yonhap |
Some say the law set up four years ago to help the Kakao affiliate easily earn a banking license to facilitate IT growth, can be considered discrimination against existing banks in hindsight.
Criticism was mostly about whether it was appropriate to grant internet-only banks a set of different, far less stringent standard requirements to run a banking business.
But the law passed without major hurdles, because few believed that internet-only banks would become large enough to threaten the entire banking industry, long dominated by traditional lenders with decades of business experience and successful profit models.
Meanwhile, Kakao Mobility, a mobility subsidiary of Kakao, said it will raise the per-minute fare for Kakao T Bike, Sept. 6, to up to 150 won, up from the current 100 won, only about a week after it hiked the surcharge for the Kakao T "smart call" service fee from 1,000 won up to 5,000 won. The move to offset operating losses over the past four years ahead of an initial public offering next year is criticized by many small businesses as a "rapacious" business model, defined as providing free services as a new, cash-abundant entrant only until it has market dominance strong enough to force or buy competitors out.
