SEOUL, April. 7 (Korea Bizwire) – K Bank, South Korea’s first internet-only bank that opened Monday after months of anticipation, is already off to a good start, leaving more excitement for the upcoming launch of the second bank of its kind, Kakao Bank.
Over 100,000 locals had opened a K Bank account as of Thursday, with the bank attracting 73 billion won ($64.1 million) in deposits. Over 8,000 customers were approved for loans totaling 41 billion won, and more than 90,000 debit cards have been issued.
Internet-only banks or direct banks, as the name suggests, mainly operate on the internet and over the phone without (or with few) brick-and-mortar branches. And because they can eliminate the costs associated with traditional bank branches, they have the leverage to offer higher interest rates (or lower rates on loans) and lower service charges.
As for K Bank, its services – so far including opening accounts, transfers, loans and deposits – are all offered 24/7 online, leaving customers free from the long-established bank hours of 9 a.m. to 4 p.m. on weekdays.
Although the initial numbers look promising for K Bank, there are a few elements that it still needs to overcome to continue growth and maintain its advantage over traditional competitors.
Ironically, some of the public reaction towards K Bank’s services involved its lack of unique offerings.
K Bank is offering up to 2 percent interest on time deposits, with its basic checking account entitled to a 1.2 percent annual interest rate. Interest on loans can also be as low as 2.7 percent depending on the borrower’s credit rating.
The numbers are better than most commercial banks, which offer time deposits at mid 1-percent rates and loans at roughly 4 percent, but not interesting enough to entice the bigger majority of the public. In fact, local savings banks have long been offering installment savings accounts or time deposits with rates almost equivalent to, or even higher than, K Bank’s.
K Bank’s mobile service also seems to fall short of its full potential, and the new bank has not significantly differentiated its mobile offerings from existing services offered by traditional institutions. Banks here have been quickly expanding the scope of their mobile banking services over the past few years to adapt to emerging financial technology and trends.
“Customers who found certain aspects of traditional banks inconvenient are flocking to direct banks, which gave K-Bank a promising start,” said Choi Gong-pil, director of the KIF Center for Finance and Technology. “But I’m not sure if the bank will maintain its upward trend, because it is not significantly different from existing ones.”
Traditional banks are already acknowledging the influence of their new rival by adjusting their interest rates. Woori Bank, for instance, introduced Thursday a new savings option dubbed the “Wibee Super Package 2” with a 2-percent rate on a time deposit and up to 2.2 percent on an installment saving account.
“Commercial banks are not significantly disadvantaged in terms of interest rates. We do have investment options with near 2-percent rates,” said an official from the banking industry, on condition of anonymity. “We’ll continue to monitor the performance of internet-only banks, and respond accordingly.”
Government regulations are, to a large extent, responsible for hindering K Bank’s innovation and expansion. The main obstacle is the local Banking Act that caps the percentage of shares owned by a conglomerate in a bank at 10 percent (and 4 percent for shares with voting rights). A pending bill to revise the law is struggling to pass in the National Assembly with lawmakers still divided.
Easing the regulations, some of them fear, would leave direct banks vulnerable to becoming the private treasuries of their corporate owners. This debate has made very little progress recently, especially with the ongoing trials of those involved in the political corruption scandal, in which more than a few conglomerates were implicated in.
Officials from the digital banks are hopeful, nonetheless, to see the regulations eased before the end of the year.
“Without additional capital, we will reach a point that threatens our entire business operations,” an unnamed official from a direct bank said.
K Bank was formed by a consortium of 21 stakeholders, including local telecom giant KT Corp., with 250 billion won ($220.42 million) in initial capital. With a credit target of 400 to 500 billion won within 2017, the company aims to raise 200 to 300 billion won in additional financing by the end of the year.
“Once the fallout from the political scandal settles, we expect to see a revision sometime after the presidential election,” the official added.
Kakao Bank, with a consortium including Korea Investment Holdings, Kakao, Netmarble and Tencent Holdings among the shareholders, will be offering similar services and products to K Bank’s. But industry watchers anticipate a greater appeal to even more customers than K Bank, as it will integrate its services with Kakao Talk, a mobile messenger with 42 million monthly active users.
Kakao currently has a 10-percent stake in the bank, again, due to government regulations, but it plans to step up as the main shareholder once the law is revised, said Yoon Ho-young, co-chairman of Kakao Bank, on Thursday. Korea Investment Holdings currently has a 58-percent stake in the 300-billion-won venture, which is expected to launch in late June.
“I’m hoping that the National Assembly passes the revision soon,” the co-chairman said.
Pundits say that direct banks will have to continue to distinguish themselves from traditional banks in order to thrive, and how they package services such as mortgage loans, which is the major market here, will determine their capacity to trounce existing competitors.
“The hype (over K Bank) might end up being just that – hype,” said senior researcher Kim Kun-woo at the LG Economic Research Institute. “What they need are killer services that really stand out if they want to keep the momentum afloat.”
By Kevin Lee (email@example.com)