Korea’s Internet-Only Banks: Lessons from only bank korea_prof... · In 2013, Chinese Government also approved Internet-Only Bank by ICT companies to uplift the growth of stagnant

Korea’s Internet-Only Banks: Lessons from

Korea’s Experience

Sukgeun Lee

Professor

Sogang Business School

Sogang University

2

1. Emergence of Internet-Only Banks in South Korea

2. Experiences and achievement of Internet-Only Banks in South Korea

3. Challenges

4. Key Lessons

Content

3

Korean financial industry is in a weak position relatively considering the size of

Korean economy that is 10th-12th in the world


Tier 1 Capital Comparison

0%

5%

10%

15%

20%

25%

30%

35%

40%

2014 2015 2016 2017

China Thailand Indonesia

Hongkong South Korea

Source: The Banker, “Top 1000 World Banks 2018”, 2018.02.07

Ranking of Financial Industry (WEF 2017)

4

Japan and China have approved ICT companies to run Internet-Only Banks in 2000

and 2013 respectively


Differentiated competencies Shareholders Internet-Only Banks

Jibun Bank

Rakuten Bank

My Bank

We Bank

• ID registration and bank account

opening by mobile

• Mobile money transfer using mo

bile number

• E-mail money transfer

• Financial products recommendation

• Credit rating using big data

analysis(Taobao purchase data)

• High interest loan using consumer

data analysis

• KDDI(50%)

• Mitsubishi UJF Financial

Group(50%)

• Rakuten(100%)

• Ant Financial(30%)

• Fusun Group(25%)

• Wanxiang Group(10%)

• Tencent(30%),

5

In 2000, Japanese government has approved Internet-Only Bank to boost growth of

financial industry through new technology and capital from ICT industry


-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

ROA ROE

Profitability of Japanese Banks Seven Bank Total Balance and Number of Accounts

63 108 163

225 331

466 580

688 775

885 971

1066

1214

1405

1562 1690

1827

-150

50

250

450

650

850

1050

1250

1450

1650

1850

0

50

100

150

200

250

300

350

400

450

500

balance of time deposits

outstanding balance of ordinary deposits

number of individual accounts

Source: Seven Bank IR, 4Q 2018 Source: Statistics in Japan

6

In 2013, Chinese Government also approved Internet-Only Bank by ICT companies

to uplift the growth of stagnant financial market


Profitability of Chinese Banks WeBank Operating Income and Asset [Bn RMB]

Source: We Bank IR, 4Q 2018 Source: Statistics in China

36.33%

18.96%

14.48%

9.30% 7.80% 7.70%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2011 2012 2013

Net Profit Growth Rate in Banking

GDP Growth Rate

2.26 24.49 67.48 100.2984 96.21

519.95

817.04

2200.37

0

500

1000

1500

2000

2500

2015 2016 2017 2018Operating Income Total Asset

7

Korean government has decided to leverage strength of internet infrastructure to

stimulate the growth of Korean financial industry via fintech and Internet-Only Bank


Annual Global Fintech Deals and (Bn USD)

8.34

16.3

19.29 18

39.57

885

1153

1254

1480

1707

-50

150

350

550

750

950

1150

1350

1550

1750

0

5

10

15

20

25

30

35

40

45

2014 2015 2016 2017 2018

financing deals

Source: “2019 Fintech Trends to Watch”, CB insights , 2019

Internet Penetration/ speed by country

Source: World Fact Book, Eurostat

Source: OOKLA SPEEDTEST, 2017

8

While Korea FSS has tried to introduce Internet-Only Bank, there were 2 major

regulatory obstacles to overcome for the approval of the Internet-Only Bank


Separation of industrial and financial capital 1

Real-name financial system 2

‘Financial Real Name Act’

article 3-1

Financial companies are

obliged to check the real name

of the trader only by face to

face verification

Non-financial companies are allowed to own 4% (or 10% non voting right) of bank‟s shares to

keep conglomerates out of banking industry and to prevent misuse of consumer deposits

> “Execution Plan for Internet-Only Banks” of FSC in June 2015 suggested that non-financial

shareholder limit be lifted from 4% to 50%, which enables ICT companies to enter into

banking industry

Existing law: Visit off-line branches when opening new

bank accounts

Changed law (Dec 2015)

- Verification with copy of identification card

- Video call

- Confirmation while direct delivering (etc. credit cards)

- Use existing bank accounts

9


2. Experience and Achievement of Internet-Only Banks in South Korea

3. Challenges

4. Key Lessons

Content

10

FSC (Financial Supervisory Commission) has set the basics of establishment for

Internet-Only Bank through „Special Act for Internet-Only Banks‟


Comparison of Banking Act and Special Act for Internet-Only Banking

Non-financial

Shareholding

Limit

Lending to major

shareholder

Minimum Capital

Internet-Only Bank Act Banking Act

4% 10% including non-voting

shares

34%*

25% of Equity Prohibited

25 million USD 1 billion USD

* It was 10% in 2015 at the launching of Internet-Only Bank, yet amended to 34% in 2018

11

In 2017, first Korean Internet-Only Banks, K Bank and Kakao Bank, have launched


First Internet-Only Banks in Korea

K Bank Kakao Bank

Initial Capital (M USD) 250 300

Staff Number 142 140

CEO Shim Sang Hoon Yoon Ho Young, Lee Yong Woo

Main Stakeholder

Woori Bank(10%), GS

Retail(10%), Hanwha Life(10%),

KT(8%)

Korea Holdings(54%),

Kakao(10%), KB Kookmin

Bank(10%)

Banking System KT DS, Woori FIS LG CNS

Request for Permission September 30th, 2016 December 2016

Beginning of Business April 2017 July 2017

12

Since launching, both Internet-Only Banks over-achieved their target in customer

acquisition while Kakao Bank acquired customers by 9 times more than K bank

Customer Growth of Internet-Only Banks

19

327

444 499

546 585 618 641 700

764

891

35.8%

12.4% 9.4% 7.1% 5.6% 3.7%

9.2% 9.1%

16.6%

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0

800

1600

4 25 36 45 56 62 68 73 76 79 84 89 98

44.0%

25.0% 24.4%

10.7% 9.7% 7.4% 4.1% 3.9% 6.3% 6.0%

10.1%

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0

800

1600


13

The successful customer acquisition was possible thanks to the innovative products

and services of Internet-Only banks

Innovative Services and Products

Customer Services

Fund transfer with telephone number, name, without full authentication

Biometric Security system for enhancing securities

24/7 Customer Services Representatives(CSR, K Bank Only)

Banking Services

Banking Products

Simplified Opening for a new account

Commission exemptions for withdrawal, transactions with other

banks

Micro-loaning services (5.5% upto 5K usd regardless of credit rating)

Quicker credit loan (2.67% up to 100K usd 24 hr)

Daily interest payment account (1.2% annual deposit rate for checking a/c)

Parent company linked products (not available for traditional banks)


14

-50%

Kakao Bank K Bank

-100

-50

0

Kakao Bank K Bank

However, both K bank and Kakao bank are making loss due to heavy initial

investment and aggressive offerings for lower margin such as fee exemptions

Operation Profit (loss) (M USD)

2017 2018

Capital Impairment Ratio

2017 2018 0


15

Cost structure of Internet-Only Bank also shows clear inefficiency compared with

those of traditional banks in terms of fee expenses and SG&A

Shinhan KEB Woori Kookmin Kakao Bank K Bank

Profit before allowance

accumulation per employee 0.207 0.198 0.171 0.173 (0.012) (0.182)

Deposit per employee 17.6 18.0 17.3 16.6 17.9 4.64

Loan amount per employee 14.1 14.3 13.8 13.5 15.1 3.36

Total employees(#) 13,639 12,795 13,683 16,729 414 299

Efficiency Analysis (M USD)

Shinhan KEB Woori Kookmin Kakao Bank K Bank

Interest expenses 1 1 1 1 1 1

Fees expenses 3.8% 4.8% 4.1% 7.6% 115.5% 62.5%

S&GA 55.1% 75.7% 88.5% 99.6% 117.4% 346.6%

Extra cost 2.8% 0.6% 10.9% 5.0% 12.7% 0.0%

Efficiency Analysis (Interest Expanses = 1)


16

The inefficient cost structure expect to be improved as Internet-Only Banks extend

product/ services which currently covers only partial of incumbent banks‟


K Bank Kakao Bank Traditional Banks

General Commission fees Exemption (**) Available Available Not Available

24/7 CSR Available Not Available Not Available

Public Authentication required Not Required Not Required Required

Biometric Security System Available △ △

Simplified account opening Available Available Not Available

Comparison of Available Services of Internet-only banks with Traditional Banks

K Bank Kakao Bank Traditional Banks

Micro-loans serviced within an hour Available Available Not Available

Quicker loans Available Available Not Available

Daily interest-paying account Available Available MMF Account only(*)

Parent Company linked product Savings

- reward linkage

Savings

- reward linkage

-

Comparison of Available Products of Internet-only banks with Traditional Banks

17


Intrinsic Business K Bank Kakao Bank

Retail deposits & savings Available Available

Retail loans △ △

Corporate deposits Not Available Not Available

Corporate loans Not Available Not Available

Issuance of securities and other debt certificates Not Available Not Available

Bill discount Not Available △

Foreign exchange △ △

Intrinsic Banking Business – Defined by the South Korean Banking Act (2017)

Incidental Services – Defined by the South Korean Banking Act (2017)

Subsidiary Business K Bank Kakao Bank

Debt guarantee Not Available Not Available

Acceptance of draft Not Available Not Available

Factoring Not Available Not Available

Syndicated loan Not Available Not Available

RP - Government/Public debt transaction Not Available Not Available

Stock lock-up Not Available Not Available

Safe deposit box Not Available Not Available

FX transactions Not Available Not Available

Payment agent Not Available Not Available

Financial task intermediary – for other institutions Not Available Not Available


product/ services which currently covers only partial of incumbent banks‟ (Cont‟d)

18


Business K Bank Kakao Bank

Trust Not Available Not Available

Credit Card Not Available Not Available

Check-Card (Debit Card) Available Available

Wealth management corporation task/Sales intermediates △ Not Available

Concurrent Business – Defined by the South Korean Banking Act (2017)


product/ services which currently covers only partial of incumbent banks‟ (Cont‟d)

19

1. Emergence of Internet-Only Bank in South Korea


3. Challenges

4. Key Lessons

Content

20

Legal and Regulatory – Deregulation of separation of industrial and financial capital

3. Challenges

Arguments against the separation

1) Although it was necessary for government to control capital for optimal distribution for industrial

development in early „60s and „70s, such need for government intervention became weak as capital

is overflowing in most of conglomerates

2) There is also insufficient need for conglomerates to raise capital via their own bank as capital

market grow bigger and more efficient for direct funding

3) If regulation of separation of industrial and financial capital restricts 10% of bank shares and 4%

voting rights, this will not only block capital infusion from ICT companies into internet-only banks but

also discourage entering of ICT firms in banking industry

4) Limitation of capital infusion will affect BIS maintenance of Internet-only bank, which then directly

relates to the operation of banks in both lending and deposit

On Oct 16, 2018, the National Assembly finally amended

the Banking Act only for internet-only banks and passed the

“Act on Special Cases Concerning Establishment and Operation of Internet-Only Banks”,

which allow the limit of industrial capital shares increase up to 34%

21

Legal and Regulatory – Bank Major Shareholder Qualification Issue

Eligibility check by FSC and violation of the Monopoly Regulation Fair Trade Act

Act on Corporate Governance of Financial Companies regulates qualification of major shareholder in

any kind of bank and FSC must confirmed that there is no eligibility issues under following checklists

3. Challenges

Eligibility

checklist

Disqualification of major shareholder; in case of following violation

- Banking Act

- Capital Market and Financial Investment Business Act

- Act on the Aggravated Punishment of Specific Economic Crimes (e.g.

Seizure, Breach of duty, Money Laundering)

- Monopoly Regulation and Fair Trade Act

- Punishment of Tax Evaders Act

KT Charges KT has a record of violation related to the ‘ Monopoly Regulation and Fair Trade Act ’

Kakao Charges President of Kakao’s board was convicted on suspicion of the ‘ Monopoly Regulation

and Fair Trade Act ’

While Kakao Bank‟s eligibility issues has been resolved, which enabled capital infusion

from the kakao bank‟s parent company up to 34%, KT eligibility issue has been pended

so far, which blocked capital injection by KT, parent company of K Bank and hampered

banking service seriously

Regulation by the Act on Corporate Governance of Financial Companies

22

Legal and Regulatory – Privacy law vs Big Data based CSS

Privacy Law blocking the access of Internet-Only Bank to BHC (Bank Holding Company)‟s data

Korean privacy law states, “Private information with individual identification code should not be

transferred into other firms unless customers granted it so”

The National Assembly could not pass deregulation of the privacy law in 2019

Parent

companies Internet

Only Bank Can’t access

BHC’s data

KT(Tele-communications)

Kakao(Social Networks)

Distributors

Existing Banks

Investment Banks, Etc..

3. Challenges

Privacy law as obstacle for big data based CSS of Internet-Only Banks

23

Operations – Complicate Governance Structure

Governance Structure of Internet-Only Banks

0 10 20 30 40 50 60 70

Yes24

Nermarble

Seoul Guarantee Insurance

Korea Post

Ebay Korea

Skyblue(Tencent)

Kakao

KB Kookmin Bank

Korea Investment Holdings

0 5 10 15 20 25 30 35 40

Woori Bank

KT

NT Investment & Securities

Hanwha Life Insurance

GS Retail

KG Inicis

Danal

Others

Kakao Bank‟s 11 shareholders K Bank‟s 19 shareholders

“Complicated governance structure can cause delay of decision due to the potential

conflict of interests among shareholders, which will be issue especially when

the banks need to make major decision quickly”

* K Bank has history of failure in relation to raising capital twice. (2018 02, 2018 07)

3. Challenges

24

Operations – Slower growth of customer

3. Challenges

Growth of Kakao Bank‟s customer Growth of K Bank‟s customer

Both Internet-Only Banks are experiencing problem of slower growth of customers,

which is causing problem of BEP (Break Even Point) management

19

327

444499

546 585 618 641700

764

891

35.8%

12.4% 9.4% 7.1% 5.6% 3.7%9.2% 9.1%

16.6%

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0

400

800

1200

Source: Kakao Bank Source: K Bank

4 25 36 45 56 62 68 73 76 79 84 89 98

44.0%

25.0% 24.4%

10.7% 9.7% 7.4% 4.1% 3.9% 6.3% 6.0%10.1%

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0

400

800

1200

25

Competition – Traditional Banks‟ reaction against Internet-Only Banks

New Mobile Services Platforms of Traditional Banks

New Mobile Banking Service Platforms introduced by traditional banks narrow gap

between offerings of traditional banks and Internet-only banks‟

Main

Benefits

Mobile

Services

Platforms of

Traditional

Banks

Shinhan KEB Woori Kookmin

User-friendly (customized) platforms (Common)

Provide personal-customized banking systems

Robo-Advisor to recommend services (KEB)

Provide special benefits relating the bank‟s products & services

FX transaction fees discount (KEB, Shinhan, Kookmin)

Providing higher deposit rate (Woori, Shinhan, Kookmin)

3. Challenges

26

Competition – Increasing efficiency of traditional banks

Offline branch reduction of traditional banks

End of 2016 June, 2017 End of 2017 End of 2018

Kookmin 1061 1066 996 981

Woori 862 887 826 819

KEB 867 819 767 726

Shinhan 854 899 834 805

Total 3604 3671 3423 3331

Change 27 -248 -92

K Bank launch Kakao Bank launch

Traditional banks have reduced branches substantially (92 in 2018, 66 until 3Q 2019)

after launch of Internet-Only Banks, which decrease costs and increase investment for

digitalization of the banks including mobile channel and new services that neutralize the

differentiated products/services of Internet-only banks.

Such impacts on the incumbent banks by internet-only bank are called „CATFISH‟ effect

3. Challenges

27

Competition – New Entries

New Entries

“FSC announced that they would license 3rd and/or 4th Internet-Only Bank in 2019”

Main Candidate Industry Reason for Rejection in 1st round

Fintech

(Mobile Transfer)

Investment Bank

Capital financing adequacy issues

Main partner, US VC(Altos Ventures)‟s

adequacy as bank shareholder is questioned

Feasibility of initial capital injection for bank is

questioned

Innovation issues

Innovative feature of BM is questioned

Simple summation of Investment bank and

Commercial bank is not innovative enough?

3. Challenges

28

1. Emergence of Internet-Only Bank in South Korea

2. Experience and achievement of Internet-Only Banks in South Korea

3. Challenges

4. Key Lessons

Content

29

4. Key Lessons

• 120 days to acquire 1 million customers

(K Bank)

• 2 days to acquire 1 million & 8 days for

2 million customers (Kakao Bank)

Positive Influence on traditional banks

Customer Acquisition

What Worked Well What needs to be Improved

• Competitive rates (higher deposit, lower

lending rates) offers benefit to

customers and lowered rates of

traditional banks

• Continued off-line branch reductions

increases cost efficiency of traditional

banks

• Digitalization of traditional banks

triggered

• Better alignment of new policy with

existing regulatory framework could

mitigate uncertainty to the management of

Internet-Only banks and bank customers

Differentiated products/servicies

Regulatory alignment

• Insufficient introduction of innovative

products/services

• Customer profile, product portfolio, mobile

channel is not differentiated enough

Improved CSS

• No clear advantages from CSS that is

supposed to be developed on big data

• Privacy law banned customer information

access within BHC

Key Lessons – What worked well and What needs to be improved

30

4. Key Lessons

• Internet-only banks with various non-financial shareholders will be able to

collaborate with various shareholders and fintech firms more easily than traditional

banks

• Collaboration with fintech firms and formation of open innovation with them will

provide source of innovation

More market entries

More Collaboration with fintech firms

• As number of Internet-only bank increases, it will stimulate competition among

banks and bring more capital to financial industry and more benefits to financial

consumers

Continued innovation: techfin vs fintech

• More innovative technology will be available, which will lead more innovation for

financial products/services that will attract more customers and go beyond scope

of regulation and business domains of financial industry

More opportunities for Internet-Only banks, consumers, and financial industry are

coming for win-win

Documents

Korea’s Internet-Only Banks: Lessons from only bank korea_prof... · In 2013, Chinese Government also approved Internet-Only Bank by ICT companies to uplift the growth of stagnant