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Will internet-only banks shake up Korea's banking industry?

High interest in online banks jitters traditional players amid mixed prospects

April 9, 2017 - 15:36 By Korea Herald
With a newly launched internet-only bank garnering higher-than-expected interest from consumers, expectations are growing that the market entrance of such banks could trigger a change in South Korea’s banking industry.

K bank, the country’s first branchless, internet-only bank, attracted more than 100,000 bank accounts in its first three days of operation, beginning April 3.

As of Thursday, the bank had 107,379 savings accounts with deposits totaling about 73 billion won ($64.2 million) and had approved 8,021 loans and 91,130 debit card issuances.

The subscription figures not only exceeded market expectations, but also the average monthly online subscriptions of 16 traditional commercial banks across the country.

FSC Chairman Yim Jong-yong (left) and KT CEO Hwang Chang-gyu demonstrate operation of K bank services at the bank‘s launch ceremony held at the KT headquarters in Gwanghwamun on April 3. (Yonhap)

The high interest in K Bank has raised an alarm for traditional brick-and-mortar financial institutions in terms of competitiveness in a mobile financial era, pushing them to digitalize their services faster, according to market insiders.

A primary advantage of an online-focused bank is that it saves costs by offering banking services through a mobile app without brick-and-mortar branches and with a minimum number of employees -- less than 2 percent of a local commercial bank.

With the cost savings, K bank aims to provide subscribers higher deposit interest rates and lower borrowing rates.

K bank currently offers savings accounts with 2 percent deposit interest, about 0.5 percentage point higher than primary banks. Loans are extended at an interest rate that is about 1 to 2 percentage points lower than existing commercial banks.

“We are off to a good start with higher-than-expected subscribers in the initial stage,” said a K bank spokeswoman. “The K bank app has a strong competitive edge in speed over other banks’ apps as it is designed to work on a single app.”

An on-screen fingerprint function enables customers to apply for microfinance loans, 3 million won at maximum, within a minute. The money is remitted in less than 10 minutes. 

Growth of branchless banking is expected to get a further boost with the launch of Kakao Bank in June. Kakao Corp., the operator of the country’s largest mobile messenger app KakaoTalk, was granted approval from the Financial Services Commission to start its mobile banking business. Kakao Bank said the bank will be mobile-only while K bank operates both on the internet and mobile devices.

In response to the appearance of online- and mobile-focused banks, conventional banks are bracing for possible losses of customers with enhanced digitalization strategies.

KB Kookmin Bank CEO Yoon Jong-kyu stressed swiftness in the bank’s decision making and faster customer service in the contest with the digital rivals.

“Digital rivals would target a niche market of customers who haven’t been served well at offline bank branches,” Yoon said. “We should be able to offer them better services.”

As opposed to K bank, Kookmin Bank is the commercial bank with the highest number of offline branches -- over 1,000.

KEB Hana Bank has launched a mobile branch app where customers can apply for credit loans and credit card issuances without membership subscriptions required by the bank’s existing online services. It is also contending with online rivals with a zero-interest rate overdraft account product that imposes no rate on 10 percent of a maximum credit line.

Still, some in the banking industry say it is too early to assess the internet-based bank’s fate.

“Rather than taking on traditional commercial banks, the online banks are expected to create their own market for customers who have been marginalized by primary bank services due to low credit levels and other strict qualifications,” said a senior manager at a commercial bank.

By Song Su-hyun (