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Online Startup KakaoBank Challenges South Korea’s Traditional Banking System

Jonathan Walker
Jonathan loves talking politics, economics and philosophy. He carries unique perspectives on everything making him a rather odd mix of liberal-conservative with a streak of independent Austrian thought.
Published: July 21, 2021
(L to R) New co-CEOs of Kakao Corp Joh Su-yong and Yeo Min-soo attend a news conference in Seoul, South Korea, on March 27, 2018.
(L to R) New co-CEOs of Kakao Corp Joh Su-yong and Yeo Min-soo attend a news conference in Seoul, South Korea, on March 27, 2018. (Image: Chung Sung-Jun/Getty Images)

South Korea’s traditional banking sector is facing stiff competition from emerging digital banking platforms. The biggest challenger in this sector is KakaoBank. Founded in 2017, the virtual bank has risen from being an offshoot of social media giant Kakao Corp. to becoming the eighth largest retail bank in Korea.

KakaoBank’s growth has been significant. According to a report by Asian Banking and Finance, the virtual bank had amassed over 10 million customers and KRW 20 trillion ($17.8 billion) in deposits as of September 2019. It had issued more than nine 9 million debit cards and extended KRW 13.6 trillion ($11.68 billion) in loans. By March 31, 2021, customer volume had exceeded 14.2 million. 

South Korea has an early-adopter tech-savvy consumer demographic. Kakao already had a strong brand value established through its messaging app within that target group. Consumers were quick to adopt KakaoBank as a feasible banking solution. This inevitably set the example for many more identical digital banking services to launch their offerings in the nascent market.

“Kakao Bank’s assets rose rapidly in unsecured personal lending by attracting the largest number of users among Korea’s mobile banking apps through a seamless digital banking experience. It has lower costs than most local bank peers in 2020, by using advances in technology and operating without physical branches,” Tae Jong Ok, a senior analyst with Moody’s, said in a research announcement on July 12. 

Challenge to traditional banks

Traditional banks will face tougher competition when KakaoBank starts expanding its loan portfolio and capital base. Currently, KakaoBank’s product lineup includes prime credit loans, housing deposit loans, microloans, and secured and unsecured credit loans for customers with mid-to-low credit scores.

Kakao will be launching merchant loan products as well as mortgage solutions moving ahead.  This would automatically open it up to a much larger share of the KRW-denominated loan market, potentially allowing the virtual bank to capture an expected 65% stake over the next 12 to 18 months. 

Additionally, KakaoBank’s initial public offering (IPO) is slated for the second half of 2021. This could increase its capital by 76 to 90 percent.

Customer convenience is what gives KakaoBank a major head-start over the conventional banking experience. The internet-only bank has no physical branches, which keeps its operational costs much lower than traditional banks. Much of the virtual bank’s investment then goes into building the app experience to attract new customers and to keep existing ones on the platform.

Presently, Korea’s traditional banks face the challenge of increasing their presence in the online market. This could be partially achieved by setting up their online-only lending platforms. However, such digital investments must be backed by a strong purpose, says Kim Joo-wan, director at US consulting firm AlixPartners. 

“Digital transformation must come with a purpose. An end to it? Automated work process to save time and cut costs of manual efforts, improvised customer experiences, an increase of revenue with a wider online product distribution channel or a foray into a new realm of business,” Joo-wan said in an interview with The Korea Herald. The business executive added that digital innovation is a means to an end and “not an end in itself.”