South Korea: Let the app wars begin

South Koreans can start deleting some of the banking apps that clutter up their mobile phone screens. 

Under the country’s new open banking system, customers no longer need a plethora of icons representing different banks and payment systems, but can access their accounts with a single tap.

Thanks to new open-banking regulations, customers can monitor all their bank accounts and financial products through one app, regardless of whether their accounts are held at the bank whose app is being used. 

The effect is that South Korea’s banks are now in a race for app users and, ultimately, for customers.

Open banking was launched as a pilot in South Korea at the end of October with 10 banks (BNK Kyongnam Bank, Busan Bank, Jeju Bank, Jeonbuk Bank, KEB Hana Bank, KB Kookmin Bank, IBK, NH Bank, Shinhan Bank and Woori Bank); eight more, including online-only banks, joined in December. 

Financial technology firms can join too. All firms must pass security checks. 

The regulators are considering expanding the eligibility scope of service providers to include securities companies, savings banks and mutual financial institutions that support transfer of funds between accounts.

“Open banking is not just about a redistribution of the pie, but also about expanding the pie,” says Kristi Swartz, managing partner at Swartz, Binnersley & Associates.

Open banking may be new to South Korea, but it has precedent: the UK and the European Union both mandated open banking in 2018; countries including the US, Australia and Singapore are working toward open banking and data sharing as well. 

At its simplest, open banking is used by regulators to describe a system that frees customers’ data, allowing third parties to provide services to customers through the use of application programming interfaces (APIs). 

Customers need only go to one place to access their accounts and financial services, including loans and other products. For example, a customer of Woori Bank could access their account through Shinhan Bank’s platform.

An important aspect of South Korea’s programme is that transaction fees will be reduced from between W400 to W500 (34 cents to 42 cents) per transaction to W40 to W50 for large service providers, and W20 to W30 for small and medium-sized firms.

“In order to enhance competitiveness of the financial industry and facilitate innovation in financial services, countries are finding it necessary to set up an easily accessible payment system and an infrastructure to create and use big data,” says Young-Hee Jo, a partner at LAB Partners in Seoul. “Open banking can be an important means to achieve this.”

The implementation of open banking is a response to evolving banking technology and customer habits.

“A big reason [why countries are implementing open banking] is probably due to the fact that the face of their average client has changed,” says Swartz. 

Millennials have embraced technology in all parts of their lives, and young bank customers want easy, digital access to their banks.

“Capturing these customers at an early age could mean value for all stakeholders,” says Swartz. “However, in order to cater to these millennials, banks need to adjust their approach to fit consumer sentiment.”

The change puts control in the hands of the consumers and destroys any concepts of loyalty that may have previously existed. Customers pick the apps that they like best and abandon those that are frustrating, clunky or bug-filled.

“Obviously, customers could have full and easy control of their money spread out in several banks from just one of the banks they use,” says Hyo sub Kim, relationship manager for financial institutions in Shinhan Bank’s global business division.

“Banks may benefit as the account activity could also be concentrated,” he adds. “The challenge would be how to attract more customers, as they will be drawn into a bank that is the most efficient, dynamic, user-friendly, innovative, invest-worthy and so forth.” 

While that may put certain banks at a disadvantage, the benefits for the customer seem obvious. 

“Banking customers will enjoy greater convenience in using financial services with a lower cost,” says Jo of LAB Partners. “Fintech service providers are able to enter the payment industry at a lower cost.”

Hawon Han, a 26-year-old product manager at an IT startup, says that she first learned about open banking through a pop-up on her Shinhan bank app. Han has accounts at four different banks, but she has primarily relied on apps from Shinhan and Toss, a payment platform, to manage them. 

Han says she began using Toss in 2016 because it provided an easy and convenient platform that was similar to open banking, allowing her to list her accounts and make transfers. But with the introduction of open banking, Han says she is moving back to using the Shinhan app more than Toss. 

“One good thing with open banking is it automatically registers all of your accounts, whereas other apps, you have to do it individually,” says Han.

She has checked out apps from other banks, such as Busan Bank, but she wasn’t happy with the user interface and the hindrance of a lengthy password. For the time being, she plans to stick with Shinhan’s app. 

“I can now do what I did on Toss on the Shinhan bank app,” she says.

David Lee, head of strategy at internet-only bank kakaobank, says that it is hard to say how open banking will affect his business, but the bank, which is planning to implement open banking in early 2020, will use it as a chance to attract more customers.

Banks should be bending over backwards to keep their customers by creating cheaper, user-friendly banking products. Banks that are most willing to embrace technology and innovation will grab the biggest market share, says Swartz. 

“In the short term, there is a risk of losing customer base to fintech,” says Sung-Hwan Cho, digital banking head at Citi in Korea. But the shift need not spell disaster, he says. It could present opportunities. 

“It is also possible to provide convenient customer service and expand sales channels through collaboration with fintechs,” says Cho.

Ultimately, the competition isn’t about the apps. It’s about the customers and their money. 

“It can result in increased competition across banks and fintech in terms of pricing,” says Cho. “Customers will be able to enjoy better customer experience in the app for their day-to-day banking services, and they can get the financial products at a lower price.”

Banks could provide some of their unique services to the fintech companies that sport the sexiest apps in exchange for a commission or fee, says Cho, adding that there are many businesses and technical areas where banks and fintech companies could collaborate. 

Cho sees the fintech companies as aggregators that can show all banks’ financial products to customers. Banks can also use a fintech platform as the distribution channel, cutting down on a need for a vast branch network. For example, Citi cut 75% of its physical bank branches in South Korea in 2017. 

“If the bank app can provide more holistic information to the customer, with higher-level ease of use, then the bank can capture more market share,” says Cho.

Swartz agrees that banks will have to look beyond just the facilitation of transactions, turning instead to improving customer experiences and working with customers to manage their finances. 

There will be opportunities for new revenue streams and for apps to provide a sustainable service model for tapping under-served markets.

“Established banks will have to do things in new ways that they are not currently set up to handle, and spend money to adopt new technology,” says Swartz. “Open banking has the potential to transfer the banking experience from a monotonous, transaction affair to one of meaningful engagement with one’s own personal finances.”

If open banking is supposed to stir up competition and innovation from the banks, it seems to be working. Before open banking officially began, a number of South Korean banks scrambled to update their apps and services for customers in the latter half of 2019.

But there are already banks in Korea that are way ahead of the competition when it comes to retail banking apps. kakaobank’s app, for instance, is loved by 20- and 30-somethings in the country. Its colourful cartoon animal mascots, known as Kakao friends, originated on the popular mobile instant messaging app KakaoTalk. Now they permeate the bank’s app and decorate its debit cards. 

The characters are so popular, they even have their own website, which sells items such as plush pillows, patterned socks and travel accessories. 

The novelty mascots are only part of the bank’s appeal. Its app is sleek, bright and easy to use, and while the clean-cut look has sucked in millennials and Generation-Z customers seeking their first bank accounts, it’s not hard to imagine that it also appeals to older generations in need of something clear and intuitive.

Shinhan Bank’s SOL app also recognizes the power of appeal. Launched in early 2018, the blue and white app features cartoon animals, specifically a large-headed bear named SOL and his rotund purple mole friend. It streamlines six separate Shinhan apps into one. 

SOL stands for Speedy Optimised Leading.

Shinhan still plans to develop and roll out products including foreign exchange sales and depository products, says Kim.

International banks are also in the game, offering apps that are built and developed with all the resources at their disposal. Citi, for instance, offers an attractive, uncluttered app that is easy to use.

Tech-first companies are also moving in. K Bank launched around the same time as kakaobank, and Toss has established itself as a formidable opponent. 

But much of the hoped-for result rides on consumers: how ready are they to put all their money into one internet bank, as opposed to using the internet bank as a supplementary account as, for instance, kakaobank’s customers currently do? 

Customers may continue to rely on their current primary bank, or may be unaware of what options they have under the open-banking regime – indeed, they may find new options unattractive.

“Ultimately a system focused on giving the power and control to consumers will succeed or fail depending on consumer willingness to exercise those powers,” says Andrew Low, a lawyer at Gilbert+Tobin. “It will also depend in large part on whether the fintechs and challenger banks see any value in using the regime to develop their business models and woo customers.”