South Korea’s banking industry is expecting its largest shake-up in decades as two Internet-only banks are to launch next year, becoming not only the first of their kind, but also the first new entries into the market since 1993.

The government’s decision to license two consortiums for the new business field triggered mixed reactions from conventional financial companies ― depending on whether or not they were part of the incoming picture.

The Financial Services Commission gave its preliminary approval Sunday for two consortiums, one led by Internet giant Kakao and the other by No. 2 telecom operator KT, to start the nation’s first Internet-only banks next year.

The two banks, respectively named Kakao Bank and K-Bank, are expected to start operations within next year, after reinforcing their current security measures and obtaining final approval. 



Nonparticipating banks geared up to expand their online banking platforms and increase their range of mid-interest rate loans to defend against the incoming Internet-only banks.

Shinhan Bank will launch this week its new mobile platform Sunny Bank, a system to help boost the bank’s mid-rate loan sector by offering customized solutions to potential clients, according to officials.

It is also preparing to open an automatic kiosk that identifies each customer through a vein recognition system.

While it stayed out of the initial race, Shinhan said it may join in the Internet-only bank sector at a later stage, should the current legal restrictions be loosened.

“We could consider establishing (a consortium for an Internet-only bank) if the banking act is revised,” Shinhan Financial Group chairman Han Dong-woo said last month.

“Under the current rules, it is difficult for banks to take the initiative in the consortium, as they may only own up to 10 percent of the total shares.”

KEB Hana Bank will upgrade its mobile banking application N Wallet to 1Q Banking, a comprehensive mobile platform, and add a series of mid-range loan products to it, according to officials.

NongHyup Bank will join hands with its lender affiliate NH Capital and launch a mid-range loan product for those with low credit ratings.

Banks are rushing to the mid-range loan market as the entrance of the two incoming Internet-only banks have made it clear they will be targeting the niche sector.

Currently, top-tier banks offer an annual rate of 3 percent to 5 percent, while secondary financial institutions, such as mutual savings banks or capital services, charge 15 to 34 percent. Mid-rate lending targets those with a mid-level credit rating.

According to NICE Credit Information Service, loans to such mid-level borrowers accounted for 52.5 trillion won ($45.4 billion), or 29.4 percent of the total lending market, as of the end of September this year.

Kakao Bank, in its bidding presentation, said that it would minimize the risks of mid-range loans by working together with consortium member Seoul Guarantee Insurance. It also claimed that given eBay’s customer database, it may create a whole new, detailed credit rating system fit for mid-range lending.

K-Bank, too, said it would combine KT’s telecommunications big data with the current banks’ credit appraisal system.

The banks holding a stake in the two winning consortiums, on the other hand, rejoiced at the FSC approval, but are also facing financial burdens, as well as possible power struggles within the consortium.

The Kakao Bank consortium comprises 11 entities, including Korea Investment Holdings, KB Kookmin Bank and Kakao ― with 50 percent, 10 percent and 10 percent of shares, respectively.

K-Bank is led by Woori Bank, Hanwha Life Insurance, KT and others, each holding 10 percent or less of the shares.

This structure is due to the current banking law that states that the total capital for an Internet-only bank should be 100 billion won or more and that nonbanking entities may only hold up to 10 percent of the shares.

By Bae Hyun-jung (tellme@heraldcorp.com)