Korea’s digital banks have two speeds: fast and faster

Few countries are as digitally advanced as South Korea.

Asia’s fourth-largest economy embraced the internet early and fervently, and the love affair endured. It is regularly voted the world’s most innovative nation, thanks in large part to the presence and power of firms such as Samsung, a voracious issuer of new patents.

The average internet speed in South Korea is 26.7 megabits per second, faster than anywhere else in the world, according to French virtual private network developer Le VPN.

Connectivity is a way of life, whether it is senior citizens trading shares on their tablets or taxi drivers who accept any kind of plastic card and can swipe and print a receipt in seconds.

But there is one realm of the digital world where South Korea is a follower not a leader. Put simply, when it comes to financial technology, South Korea is a laggard. Local lenders such as Shinhan Bank, Woori Bank and KEB Hana Bank have long offered perfectly good online banking services. But none is likely to set the world alight with their current offerings.

Euromoney’s award for best global digital bank is usually a contest between DBS, Citi, ING and BBVA, because these banks invest heavily and consistently in digital, using internal disruption to find new ways to serve corporates and citizens.

No Korean bank has ever been in the mix for this much-coveted prize. Nor did a single Korean firm appear in the latest Forbes rankings of the world’s 50 most innovative fintech companies. Indeed, it’s hard to identify a single well-known and home-grown fintech brand. There’s no Korean answer to, say, China’s Ant Financial, or Singapore-based ride-sharing-to-food-delivery service Grab.

The causes and forces that explain South Korea’s plodding approach to financial technology are many and varied. For one thing, it has never been a primary political objective.

“We are a highly IT-enabled country, but the government views finance as a supplementary industry, rather than as an industry that drives the economy,” says a senior banker working locally at an international lender.

That’s fair enough, but an aversion to disruption, digital or otherwise, runs deep here, and for good reason. The Asian financial crisis of 1997/98 nearly broke one of the world’s most exciting emerging economies.

Teetering on the edge of bankruptcy, the IMF swooped in with a $58 billion bailout package – at the time, the largest in its history. The swingeing austerity measures that the IMF imposed, designed to cut debt and prevent another crisis, shuttered banks and corporates.

Korea bounced back of course and is considered a world leader in industries from cars to electronics, but this period of collective trauma is still referred to locally as the ‘IMF crisis’. Rather than suggesting invention and advance, ‘disruption’ became a dirty word.

“Those events came to inform the culture of the financial regulator,” notes the senior international banker. “When there is financial disruption, there is the fear that it could lead to another crisis, so the banks are kept very tightly regulated.” 

Others point to the deleterious actions of Korea’s powerful and strike-loving unions. Sanjeev Rana, a senior technology analyst in Korea at CLSA, says union power “made the financial authorities reluctant to foster innovation that could disrupt the way the traditional banks work. That is why South Korea has been left behind in fintech. “We are good in areas like IT and smartphones, but these are not new technologies.”

The onward march of disruptive innovation could not be ignored for ever. Slowly but surely, Korea realized it had been left behind. Rana points to the shock of seeing a new generation of digital champions, from fintech insurer ZhongAn to micro-lender Qudian, emerge from the once-backward market on the other side of the Yellow Sea.

“China used to be mocked when it came to technology and innovation,” Rana says. “Yet over time, Korean officials found they had to visit the mainland to find out what is going on in machine learning, artificial intelligence and blockchain. Finally, they saw that in order to survive, they had to financially innovate.”

The cogs began to grind, slowly at first. In late 2015, the then-chair of the Financial Services Commission, Yim Jong-yong, granted preliminary approval for the creation of the country’s first two pure online banks. His successor, Choi Jong-Ku, predicted the pair would be lightning rods capable of “transforming conventional financial services”.

And so it proved. K Bank was the first to open its doors in April 2017 with W250 billion ($223 million) in start-up capital. It was followed three months later by kakaobank, which began life with W300 billion in start-up capital.

“We had 18 months to learn how to be a bank,” says Suyoung Lee, head of strategic operations at kakaobank: “It was a really crazy time.”

Office space was rented in the heart of Seoul – just a stone’s throw from the Blue House, home to South Korea’s president – with a digital incubator operating from the central city of Seongnam.

Despite being second off the grid, kakaobank quickly overtook its rival. A quarter of a million people opened an account within 24 hours of its launch. In its first week, it lent $232 million and took $245 million in deposits.

By the end of September 2018, the financial newcomer had disbursed $7 billion in loans to 6.8 million customers, taking $8.4 billion in deposits. It is already one of Korea’s biggest issuers of debit cards, distributing 5.6 million of them by the end of September 2018.

Its digital rival got off to a shakier start. K Bank did well on debut, opening 35,000 accounts on day one. But thereafter it was forced to watch as kakaobank raced by, and off into the distance. By the end of September 2018, the older bank had disbursed $1.18 billion in loans to 810,000 customers – or less than one eighth of kakaobank’s total – taking $1.72 billion in deposits.

Even at this early stage, the newer bank’s finances look relatively healthier. It reported a net loss of $10.7 million in the first half of 2018, against a loss of $35.3 million over the same period for K Bank.

At first glance, the two look remarkably similar. Both are backed by strong corporate and institutional names.

In the case of kakaobank, the largest shareholder is Korea Investment Holdings, an investment management firm and Kospi index component, with a 58% stake. Other shareholders include local lender KB Kookmin Bank, eBay, China’s Tencent Holdings and Kakao, an internet group founded in 2014 by billionaire Kim Beom-soo.

Despite being the new firm’s parent and operator, Kakao owns just 10%, due to Korea’s quirky rules that prevent non-financial firms from owning more than one 10th of a banking affiliate.

K Bank’s tangle of investors include Woori Bank, Ant Financial, videogame developer Smilegate, steelmaker Posco and the national tourism federation. Its parent and operator – but again, not its chief shareholder – is KT Corporation, which owns 10%.

And this fact is important. KT and Kakao may not own K Bank and kakaobank outright, but when casting around for a responsible strategic partner to control and supervise each upstart lender, the financial regulator chose well.

Both overseers excel in the art of accumulating and then sifting through reams of personal data in search of indicators of a customer’s all-round creditworthiness.

Through its parent company, kakaobank is affiliated to KakaoTalk, the country’s dominant messaging app, used by 82% of Korea’s 51 million people.

And K Bank benefits from its ability to fall back on the thousands of terabytes of data carried daily by KT, the country’s largest telecommunications firm.

But this is where the similarities end and the differences emerge, as the gap between the two lenders is now a chasm, and the question has become impossible to ignore: how has kakaobank been able to trounce its rival so thoroughly?

Most bankers and analysts seem at a loss when the question is posed. But dig a little, and points of deviation emerge. From the start, K Bank set out with the principal aim of being South Korea’s leading online lender. 

Even in its latest promotional material, and despite the scorching performance of kakaobank, its vision is clearly outlined: to be the number one mobile bank.

By contrast, kakaobank branded itself as an auxiliary lender at the outset: a fall-back option for those curious about digital banking, but unsure whether or not to fully embrace it.

“Most customers have a main bank, but we thought it would be very hard to convince them to make us their main bank,” says Lee, its head of strategic operations. “Our aim from the start was to be a second bank.”

At first, the big hurdle to overcome was trust.

“There are still many people in Korea who don’t trust internet banks,” Lee adds. “They are worried about security.”

Only time could alter those perceptions, so kakaobank focused on developing services that distanced it from the crowd.

“We knew when we started that we had to give our customers something special,” says Lee. “Traditional banks in Korea don’t think about the customer. They only think about themselves [and] break-even points. We are always looking to add value, to give the customer something new. If we provide a bad service, it will hurt our brand; so we made service our top priority.”

Every company says this, of course, but the initial speed of evolution at kakaobank was impressive. Like K Bank, it started life offering services on cellphones and desktops, but when it saw that users favoured the former, it was quick to drop the latter.

It was the first to provide cash-back services and to issue debit cards that could be used overseas – a big draw for younger customers. It claims its overseas wire transfer fees are one/10th the average rate charged by traditional banks.

Of the two, kakaobank has also been better at tapping fresh sources of capital. Within two months of its launch, it raised W500 billion by issuing 100 million new shares to new and existing shareholders. In April 2018, it raised another W500 billion in a rights issue, boosting its paid-in capital to W1.3 trillion.

KBank’s capital-raising plans have been less successful. It raised W100 billion from 13 of its founder-shareholders in September 2017, although seven early-stage investors declined to take part in the capital-raising, leaving W20 billion unclaimed. In May 2018, it set out to obtain another W150 billion by selling a mix of common and convertible preferred stock to shareholders, but raised just W30 billion.

One analyst says the main source of discontent among shareholders was “K Bank’s poorer performance when compared to its only rival”.

But the older digital lender, he adds, has also been stymied by “its weight of shareholders. It has too many, and they already have a history of disagreeing over the bank’s best course of direction. This might make it hard ultimately for it to achieve its goals.”

At the end of the first half of 2018, K Bank’s total paid-in capital was W350 billion. Sources close to K Bank admit that its rival has benefited from having “fewer stakeholders and a simpler governance structure”, a fact that enabled kakaobank “to raise huge capital much faster”.

But perhaps the key weapon in kakaobank’s armoury – and the attribute that really sets it apart from its rival – is one that has little to do with banking and far more to do with our desire for connectivity and our longing to relate brands to emotions.

This is where its sister app again comes into play.

When kakaobank was launched, it was consciously marketed to young people who loved the colourful emoticons developed and popularised by KakaoTalk. The bank found that anyone who loved the bouncing, dancing cartoons was far more likely to open an account.

It drew on that knowledge, allowing users to download the much-loved emoticons, which range from crooning penguins to gentle lions and piano-tinkling crocodiles.

Customers loved being able to personalise their in-app services, or apply for a debit card adorned with an image of Neo, a sleek and suave urban cat, or the afro-toting secret agent Groovy Jay-G.

Simple stuff, but reflective of Apple co-founder Steve Jobs’ tactic of figuring out what a customer is going to want before they ask for it. And in its own way, it has democratized finance by letting KakaoTalk users send money to one another via the messaging app, without needing to be a bank customer.

It’s hard to overstate the importance of these jolly little emoticons.

“Research shows us that 40% of new customers join kakaobank just to be able to use them,” says Kim Hyo-sub, head of financial institutions at Shinhan Bank.

Lee, kakaobank’s strategy chief, downplays the findings.

“That figure is true and it’s also not true,” he demurs, before adding that being allowed to use the emoticons was “very important” for its development.

In June 2018, the bank rolled out a new video-based customer service chatbot that also works on KakaoTalk, and that aims to cut costs by resolving 80% of customer enquiries digitally.

Even K Bank bows to the influence and power of kakaobank’s sister messaging app.

For all its impressive initial success, kakaobank knows it is still at the start of a very long journey. It will surely be challenged and tested in the digital stakes by resurgent traditional lenders irked at having lost so much ground to a mere upstart.

Shinhan Bank’s Hyo-sub says the two online lenders have forced it to “focus more on digital banking. We are scared of losing all of our young customers who use their smartphones all day. Young people trust kakaobank.”

K Bank is also unlikely to give up on its dream of being the digital number one. Unlike its rival, it declined to sit down and talk on the record with Asiamoney. But in November 2018, its chief executive Shim Sung-hoon promised that the bank would shed its conservative image, once a revised law governing digital banks comes into effect in January 2019. If approved, the rule change will allow KT to boost its stake in K Bank to 34%, from 10%.

“The revised law is about to breathe life into the bank,” Shim said in a public statement, adding that after becoming K Bank’s biggest shareholder, KT would boost the bank’s paid-in capital to more than W1 trillion. Sources close to the digital bank, which employs 300 staff, say that a fresh injection of capital from KT and other big shareholders in the new year would enable K Bank to launch more innovative and productive services.

The financial regulator also plans to issue banking licences to at least two new purely digital lenders, although neither is likely to open for business before 2021.

By then, if events go to plan, kakaobank will have completed its initial public offering – and could even be included in the Kospi index – with K Bank expected to follow suit.

Also on kakaobank’s agenda is expansion into new markets.

“We definitely want to go overseas,” says Lee, a message that is regularly reinforced by the bank’s co-chief executive Daniel Yun.

“We will settle down in Korea first,” Yun says. “But later, there are some very good, very big markets with a thriving Korean diaspora, many of whom use KakaoTalk and know about kakaobank.”

While Yun didn’t name those markets, the largest Korean diaspora are in China, the US and Japan.

K Bank’s chief executive, Sung-hoon, has also targeted several markets for expansion, including Indonesia and Vietnam – where it is eyeing a partnership with BC Card, Korea’s leading payment processing company, whose largest shareholder is KT – as well as Japan.

The telecoms firm sees K Bank as an ideal conduit through which to export its financial technology. In August 2018, K Bank signed a five-year, $5 million deal to provide internet banking technology and a credit-scoring system to Mongolia’s MCS Group, which has applied to set up a digital bank in its home market.

All of which means kakaobank cannot rest on its laurels. It is still adding customers at a furious rate, while introducing new services and products, including term deposits and unsecured loans for prime and sub-prime customers.

Even though it already thinks and acts like a high-functioning and well-run lender, kakaobank is keen to retain its underdog status, allowing it to continue to hide in plain sight for as long as possible.

“We are still weak and small,” strategy head Lee insists, despite ample evidence to the contrary. “The traditional banks are Goliath; we are David. We need to avoid competition and focus on areas where we are strong and where the traditional banks are weak.”

Looking back, the reticence felt by the financial regulator when allocating new digital licences was perfectly understandable.

This is a thrillingly vibrant economy with a tendency to fervently embrace any new idea or concept, as long as it guarantees customers the divine troika of entertainment, connectivity and convenience. It was all but inevitable that both new financial institutions would prove popular, although few could have foreseen the speed of kakaobank’s ascendancy.

Even Lee looks a touch surprised at the bank’s speedy success.

“I was the fifth person to join,” he says. “Now we have 500 people and counting. When this project started in 2015, our traditional lenders knew that digital banking was the way forward, but they didn’t know how fast the future would arrive.

“The pace of change over the past five years has been so rapid, but the next five will be faster still.”