By Hwan Kang
Kakao Bank launched its internet-only banking service on Thursday, July 27, meeting unprecedented enthusiasm from Korean users. Within first 8 hours of its unveiling, customers created more than 100,000 bank accounts. After only five days, the number of accounts surpassed the one million mark and then further broke the record by reaching two million thirteen days after the launch. That is approximately 6,400 new accounts per hour. The bank’s cute Kakao Friends debit cards are also said to be out of stock, with one million users applying for their favorite character cards.
The bank’s popularity naturally led to massive active transactions, with 653 billion won ($579 million) being deposited and 497 billion won ($441 million) being loaned to users in just one week. Kakao Bank’s power as a new challenger in Korea’s financial market is so strong that other major banks are quickly rectifying their services to keep up.
Why the sudden popularity? After all, Koreans are probably the most IT-accustomed people in the world. Another internet-only bank, K-Bank, launched earlier this year and it took 100 days for them to gather 400,000 account users. It also took four months for the bank to achieve similar amount of deposits and loans as Kakao Bank. Convenience is the key to the bank’s runaway success – Kakao Bank focuses mostly on providing user friendly mobile services by reducing the hassle of having to go through rigorous procedures to open an account or borrow money. To create your first account, all you need to do is log in with your Kakaotalk ID and confirm your identification with your phone number via text message. Considering that about 84 percent of the population in Korea uses Kakaotalk daily, almost anyone with a smartphone can create an account without additional effort.
This process eliminates the painful procedure of dealing with Active X, an outdated way of installing security programs that only Windows users can download, and then having to get a special financial certificate issued, which takes another half-hour. It is also much easier to get immediate cash if you have an account with Kakao Bank. The bank boasts that it takes only 60 seconds to borrow up to 3 million won ($2,655) without any paperwork. The cash will be available on your debit card with daily interest of up to 273 won, less than a quarter a day in U.S. dollars. All of these services are something that internet banking services like K-Bank could not provide before in Korea.
However, that does not mean that the bank is giving up on price competition. It currently offers a higher interest rate for deposit accounts (2.0 percent per year), which is 0.2~0.9 percent more than other major banks. Its loan interest is relatively lower than other competitors as well with a 2.84~9.80 percent rate and no prepayment penalty, which is 0.5 to 2.7 percent lower than other major competitors. In terms of fees, they do not charge anything to send money regardless of the bank, and wiring fees are cheaper than other similar services (5,000 won, or $4.40). Kakao Bank also decided not to charge any withdrawal fees from all ATM machines until the end of the year as a promotional event.
Kakao Corporation’s recent efforts to expand into the fintech area mirror similar moves by Tencent and Alibaba in China. Both companies are pioneers in the mobile payment system in China, implementing QR codes to make daily transactions with smart phones easier and ironically driving the communist society to develop the most advanced electronic monetary system. The two companies competitively increased their market dominance almost to the point that QR code payment is quickly replacing conventional methods of payment such as cash or credit cards.
In the case of Tencent’s WeChat Pay, WeChat messenger was the catalyst for increasing its user base in China, while its internet-only bank WeBank supported users with easier access to bank accounts. The two Chinese fintech giants are now turning their eyes toward other countries, investing in Southeast Asia and the U.S. while striving to support other currencies and expand their services.
It is safe to say their ventures have now reached Korea. Tencent and Alibaba each has major shares in Kakao Bank and Kakao Pay, Kakao Corporation’s payment service. It is no coincidence that both companies are backing Korea’s biggest mobile platform as it launches Kakao’s equivalent of WeBank and Alipay. This way, Tencent and Alibaba can recreate their success in China and perhaps connect China and Korea in a ubiquitous QR code system. With such support, Kakao Bank will have great power in the consumer market, maybe even more so than in than China considering that Korea has a denser population that is already familiar with smartphones.
Of course, behind Kakao Bank’s success is skepticism that the hype will only be temporary. One of the most critical shortcomings that the bank has to overcome is its lack of verification system for foreigners living domestically and abroad. Foreigners usually use alien registration cards or passports for identification in Korea, but Kakao Bank, along with other banking services, does not provide means to confirm it online. While it is hard to confirm whether the problem lies in the bank itself or with government regulation, it will definitely raise questions for the bank, whose strongest appeal is its ease and convenience. This obstacle is particularly unfortunate given that it can ease transactions for foreigners who are not yet accustomed to spoken Korean.
Another shortcoming that is causing doubt is the bank’s financial stability. Because it is so convenient to borrow money, users are actively getting loans from the Kakao Bank up to the point that its loan-to-deposit ratio has reached 94 percent. If people decide to borrow more money than they have deposited, the bank might face a shortage in capital. A report from the Korea Institute of Finance noted the reason some other internet-only banks failed was because of riskiness in managing their assets. They may have had the advantage in attracting customers, but poor investments and unreliable deposits ultimately undermined their long-term profitability. Kakao Bank claims that it has no plans to stop their loan services, but they have set new limitations on the total amount of money customers can borrow. Meanwhile, Kakao Bank is also trying to avoid this kind of situation by raising more capital through new shares.
Although it is still unclear whether Kakao Bank will remain a major contender against Korea’s conventional banks, Koreans are no doubt drawn to it because of Kakao Corporation’s reputation of going against the norm. It has already proven other banks wrong by providing better service and accessibility with reasonable interest rates. It has in turn driven its competitors to follow Kakao’s example and reminded them that tech complacency will not be an option in the future.
Hwan Kang is currently an Intern at the Korea Economic Institute of America as part of the Asan Academy Fellowship Program. He is also a student of Seoul National University in South Korea. The views expressed here are the author’s alone.
Photo from badtaste64’s photostream on flickr Creative Commons.