The race between K bank and Kakao Bank, the two frontrunners in South Korea’s online-only banking sector, is heating up, with the firms competing to offer better incentives for customers.

K bank, the first bank in operation without a brick-and-mortar branch, has decided to extend its higher interest rate offer for its time deposit products in response to its tepid performance over the last four months, while the second mover Kakao Bank is addressing customer service malfunctions.

K bank said Wednesday it raised the interest rate for fresh one-year time deposits -- which allow users to deposit from 10,000 won ($8.82) to 50 million won per account -- by 0.1 percentage point. So far, the interest rate had been offered at a range of 1.8 percent to 2.0 percent.

Customers can create accounts for time deposits dubbed “Code K” with up to 2.1 percent interest rate starting Wednesday, up from the previous 2.0 percent. “Code K” account applicants that put in codes -- offered via websites such as search engine Naver and e-commerce platform 11st -- can benefit from an additional 0.2 percentage point on their interest rate from 1.9 percent to 2.1 percent.

This is the first rate increase by the internet-only bank since it opened in April.

“Code K” accounts with the increased rate will be offered until it finishes attracting 30 billion won in deposits, the bank said.

“Code K” is one of the two time deposit products by K bank. Those holding the other, dubbed “Plus K,” is able to get rates ranging from 1.6 percent to 2.2 percent with one-year time deposit, depending on how many requirements the account holder meets. They include transferring 500,000 won of income into the account, spending more than 300,000 won a month through its debit card and registering a profile picture of the account holder.

Kakao Bank offers a 2.1 percent interest rate to those holding three-year time deposit accounts and 2 percent for one-year time deposits. The bank said it does not plan to lift rates for deposits at present.

As of Wednesday, the average interest rate of all one-year time deposits by commercial banks, provincial banks and cooperative banks came to 1.34 percent.

The rate increase came a day after Kakao Bank said it had drawn nearly 1 trillion won in deposits and extended 770 billion won through over 2 million bank accounts as of 2 p.m., 13 days after the launch. Out of the 2.03 million account holders, 1.41 million applied for debit cards, which feature characters of Kakao Friends as the design.

This outsized those of K bank from April to July. It generated over 500,000 accounts, through which customers deposit 690 billion won and borrow 630 billion won.

Due to the heavy influx of users, many Kakao Bank customers expressed inconveniences from delays in service, which the bank explained was caused by high online traffic.

In response, the bank on Tuesday said it had decided to beef up customer service by creating a second customer service center with up to 500 employees, in addition to the first customer center with 340 employees.

By Son Ji-hyoung (consnow@heraldcorp.com)