"Kakao is Coming" Securities Firms on Edge

The Korea Securities and Exchange Commission Approves Kakao Pay's Acquisition of Baro Investment & Securities

[Asia Economy Reporter Oh Ju-yeon] As Kakao's subsidiary Kakao Pay enters the securities business through the acquisition of Baro Investment & Securities, attention is focused on changes in the securities industry landscape. The securities industry expects the impact on the market to be limited due to Baro Investment & Securities' relatively small capital size, but it is anticipated that the retail sector should pay attention because Kakao's platform accessibility is extremely powerful.

According to the securities industry on the 23rd, the Financial Services Commission plans to make a final decision on Kakao Pay's suitability as a major shareholder of Baro Investment & Securities at the regular meeting scheduled for the 5th of next month. The Securities and Futures Commission under the Financial Services Commission passed this review at its regular meeting the day before.

Previously, in October 2018, Kakao Pay signed a contract to acquire 60% of Baro Investment & Securities' shares for 40 billion KRW. At the time of the acquisition contract, Kakao Pay revealed a blueprint to enable trading of various investment products such as stocks, funds, and real estate within the KakaoTalk platform.

However, the review by the Securities and Futures Commission was suspended as Kakao Chairman Kim Beom-su faced trial on charges of violating the Fair Trade Act. Under the current Capital Markets Act, major shareholders of financial companies must not have been fined or punished with a penalty of imprisonment or higher for violations of financial-related laws, the Fair Trade Act, or tax laws within the past five years. Currently, Kakao's affiliate Kakao Bank has been providing services such as simple payment, remittance, and authentication since receiving internet banking approval in 2017. With the completion of this acquisition of Baro Investment & Securities, Kakao can expand its financial business to include investment brokerage and direct sales of financial products.

The securities industry anticipates that Kakao Pay's acquisition of Baro Investment & Securities could intensify cutthroat competition in the securities market.

An industry insider said, "Even if Kakao enters, it is no longer a major threat. Banking services have high accessibility in terms of convenience in daily life, such as savings and overdraft accounts, but the population investing in stocks is not as large as the population using banking services," but added, "However, there could be an impact in terms of customer market share." With securities firms' commissions already lowered, losing market share would lead to a cannibalistic competition.

Kakao Pay is expected to pursue a business strategy based on individual consumers. With capital strength and cross-selling capabilities, attempts to sell bank products and financial investment products through KakaoTalk Gift could be possible. There is also analysis that Kakao Pay's transaction volume will expand further with its entry into the securities business. Kakao Pay's transaction volume recorded 10.6 trillion KRW in Q1 2019, 11.4 trillion KRW in Q2, and 12.9 trillion KRW in Q3, maintaining high growth. Sungjonghwa, a researcher at eBest Investment & Securities, explained, "The trading system linked with Baro Investment & Securities' CMA (linking Kakao Money accounts with securities CMA accounts for trading overseas stocks, bonds, funds, etc.) is technically ready to be launched immediately upon the acquisition of Baro Investment & Securities."

Some analysts suggest that if Kakao implements a low-fee policy, it could significantly impact securities firms with the largest individual investor market share. Utilizing the KakaoTalk platform, Kakao could implement sales strategies that were previously difficult to see, potentially bringing changes to the securities industry.

A securities industry official said, "Kakao's platform accessibility is so powerful that it could pose a significant threat in the retail sector," adding, "While investment products may not differ much from existing securities firms, in short-term financial products like repurchase agreements (RP) that are easily accessible, Kakao could demonstrate a different level of competitiveness."

An industry insider said, "It takes a lot of time and investment to establish a position in brokerage (commissioned trading). To increase profits, securities firms need to provide credit, but Baro Investment & Securities is not large enough for that," and added, "Since system development and building IT platforms require time and investment, it is expected that the initial focus will be on asset management that can be done with small amounts."

Another insider said, "Kakao's entry into the securities business is not expected to directly affect existing securities firms' profits, but it is expected to cause a significant reaction regarding the online strategy direction of securities firms," and forecasted, "Just as Kakao Bank's launch triggered a wave of simplified online banking among commercial banks, the securities industry will likely have to revise strategies depending on the direction Kakao Securities takes."