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SEOUL, South Korea — Few anticipated South Korea’s first online lender, Kakao Bank, to stand shoulder to shoulder with the country’s traditional banking heavyweights in just four years after opening its digital doors in 2017. However, on June 28, a subsidiary of Korea’s second-largest internet business, Kakao, filed an initial public offering with the finance authority, hoping to raise up to 2.6 trillion won ($2.3 billion) on the Kospi stock exchange in August. If the listing goes as planned, Kakao Bank’s market capitalization could reach 18.6 trillion won, propelling it to third place in the banking industry, behind heavyweights KB Financial Group, which includes Kookmin Bank, at 21.6 trillion won, and Shinhan Financial Group, which includes Shinhan Bank at 20.3 trillion won. Furthermore, Kakao Bank is outpacing its competitors in terms of growth, and it is only a matter of time before the internet lender overtakes them. It reported deposits of 25.4 trillion won and loans of 21.6 trillion won in March, representing a compound annual growth rate of 67.1 percent and 63.8 percent, respectively, greatly outperforming domestic lenders, which experienced rises of 9% and 8% during the same period. Kakao Bank plans to invest 350 billion won from its IPO proceeds in hiring, improving customer service, advancing credit evaluation models, expanding customer protection infrastructure, research and development, and “acquiring fintech firms,” according to a news release issued after the IPO registration was filed. “We intend to reach the worldwide market in the mid- to long-term through joint ventures and other means.” Traditional banks in the country are facing increasing competition, according to analysts, as Kakao expands into numerous loan areas. In a report released last week, Ok Tae-jong, a vice president and senior analyst at Moody’s Investors Service, stated, “Kakao Bank’s assets rose rapidly in unsecured personal lending by attracting the largest number of users among [South] Korea’s mobile banking apps through a seamless digital banking experience.” “By utilizing breakthroughs in technology and operating without physical branches, it will have lower costs in 2020 than most local bank peers.” According to Ok, incumbents are at a competitive disadvantage against major internet firms because they lack platforms for attracting clients and collecting data from non-financial activities. They also spend more money on maintaining physical branches, according to him. In comparison to its traditional competitors, Kakao Bank has lower costs in human resources and branch management, according to SK Securities. As of March, Kakao has hired 952 people, with assets per employee totaling 30.1 billion won, greater than the average of the four main lenders (27.1 billion won). “In comparison to other commercial lenders, Kakao Bank might save money on human resources by investing in business infrastructure,” said Koo Kyung-hoe, an analyst at SK Securities. South Korea has long been known for its technologically adept population, which clearly advantages Kakao Bank. According to Moody’s, its mobile app had more than 10 million monthly active users in November of last year, accounting for 21% of the country’s population over the age of 15. The coronavirus pandemic also spurred elderly individuals to adopt digital banking more than before, and to demand it from traditional institutions. According to Kakao Bank, people aged 50 and over have been signing up at a higher rate in the past year, accounting for 30% of new customers.
In South Korea, the pandemic has boosted demand for online banking.
On July 8, people queue at a coronavirus testing location in Seoul. Associated Press

The launch of Kakao Bank comes at a time when South Korea’s banking industry has been consolidating over the last decade. After Hana Financial Group bought a 51 percent share in Korea Exchange Bank from Lone Star Funds for 3.9 trillion won in 2012, Hana Bank merged with Korea Exchange Bank in 2015. Due to fierce competition from local lenders, foreign lenders are also exiting the industry. After announcing a plan to focus on its major markets in April, Citibank is in talks with South Korean banks to sell its consumer banking operation in the country. Traditional lenders claim to appreciate the importance of having robust platforms in order to compete with digital rivals. “We realize that if we are left behind in the race for a platform, we would perish,” a Kookmin Bank spokesperson said, adding that the bank is working on numerous improvements and will continue to do so. “This isn’t a one-time thing.” Kookmin restructured its organization to better respond to market needs, putting bankers and technicians on the same team, he said. By introducing a full app and simplifying an existing one for quick payments, the bank is diversifying and strengthening its mobile capabilities. Traditional banks’ migration to platform-based services, while potentially saving money in the long run, is expected to need significant investment and is far from guaranteed, according to analysts. “Incumbents’ initiatives to enhance their platforms could result in increased expenses and operational concerns,” according to Moody’s analyst Ok. “More fundamental adjustment risks include possible changes in these banks’ existing loan pricing and underwriting procedures, which might put their asset quality, profitability, and capital in jeopardy.” Local lenders are likewise hedging their bets by putting money into their biggest internet competitor. Kookmin Bank is the third-largest shareholder in Kakao Bank, with an 8.02 percent stake. With 27.26 percent, internet business Kakao, which owns the popular messaging app KakaoTalk, is the largest shareholder, followed by Korea Investment Value Asset Management with 23.25 percent. While Kakao Bank is the most well-known, it is not the only digital lender in town. Another is K Bank, which is owned by the KT telecommunications corporation. Toss, a third digital bank, will debut services in September aimed at clients whom traditional lenders overlook, including as students, homemakers, small company owners, and non-Koreans. However, there will be difficulties ahead. According to analysts, digital banks must demonstrate to investors that they are viable and lucrative. For instance, K Bank reported an operational loss of 105.4 billion won last year, up from 100.8 billion won in 2019. “Whether Kakao Bank can build its own business model by expanding its platform business and producing synergy effects in the Kakao ecosystem is the main problem to keep its value above the IPO price,” said Jun Bae-seung, an analyst at eBest Securities. “As the lender grows its lending operations to mid-tier customers, Kakao Bank will also need to establish its own credit evaluation process and improve risk management abilities,” Jun added. Kakao Bank is banking that it can ride the country’s current wave of IPOs this year, but risks have surfaced, as game creator Krafton has pointed out. It slashed its IPO price by more than 10% earlier this month after South Korea’s finance regulator questioned its valuation and ordered a re-pricing, putting a damper on the boom. Kakao Pay, Kakao’s online quick payment affiliate, will also list next month, with a target market capitalization of 1.6 trillion won. Kakao Pay is set to make its Kospi debut on August 12, exactly one week after Kakao Bank. Kakao’s aggressive IPO strategy, according to analysts, is undermining shareholder value. Kakao Games was listed last year, and Kakao Entertainment will be listed next year. “We need to underline the harm to existing shareholders and the market,” said CLSA’s Korea research head, Paul Choi. “The parent’s existing shareholders are left with a cash-rich holding company with a widening discount and little reason to purchase it now that the most intriguing elements of its business can be held directly,” says one analyst. Kakao, on the other hand, is unconcerned about such a viewpoint. “After listing some of our communities, we don’t worry about Kakao’s corporate value,” CEO Yeo Min-soo stated during the company’s earnings conference call in May, citing predicted sustained high revenue and operating profit growth lead by KakaoTalk. “We will continue to develop new growth engines and add future businesses in diverse sectors to our portfolio.”/nRead More

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