[COVID-19 Transformation] Techfin Valuations Soar for KakaoBank, Toss, and Others... Digital Finance is Coming

Second Half IPO of Kakaobank, Corporate Value Expected at 5 Trillion Won
Acceleration of Environmental Changes Such as Expansion of Simple Payment Demand
Interest Business Is a Thing of the Past... Negative Interest Rates Approaching
Digital Transformation Ensures Sustainable Management

[Asia Economy Reporter Kwon Haeyoung] KakaoBank (Kabang), the largest internet-only bank in Korea, will conduct an initial public offering (IPO) in the second half of this year. The estimated corporate value in the securities market is about 5 trillion KRW. The corporate value of Viva Republica, the major shareholder of the mobile financial platform Toss that has challenged Kabang, is 2.7 trillion KRW. This is comparable to or about half the market capitalization of Woori Financial Group, one of the four major financial holding companies in Korea, which stands at 5.64 trillion KRW. As IT and fintech companies rapidly encroach on the territory of traditional financial companies, the market expects that the surge in 'Untact (non-face-to-face)' transactions due to the spread of COVID-19 will be a factor that further increases the valuation of digital financial companies in the mid to long term.

With the COVID-19 pandemic spreading untact transactions across all industries, the financial sector is accelerating its shift from traditional face-to-face operations to non-face-to-face operations. In particular, the expansion of non-face-to-face and contactless transactions is expected to accelerate changes in the digital financial environment, such as the growing demand for simple payment methods. Banks, whose profit-generating capacity is increasingly weakened by low growth and low interest rates, are recognizing the need for innovation throughout the banking industry with a digital focus to survive in the post-COVID era.

According to the financial sector on the 18th, banks have been rapidly reducing the number of branches since the spread of COVID-19 this year. Four major commercial banks?Shinhan, KB Kookmin, Hana, and Woori?have closed 75 branches and sub-branches as of last month this year. Since the emergence of internet banks in 2017, the number of branches was reduced by 182 that year, but only by 12 in 2018 and 38 in 2019. However, this year, the scale of branch consolidation has surged. This is because offline transactions have decreased as the number of mobile and internet banking users has increased, and the outlook for the banking industry has worsened, increasing the need to reduce costs.

In particular, the arrival of the first-ever zero interest rate (0% base rate) due to COVID-19 signifies the end of the era when banks made money through interest margin. According to the Financial Supervisory Service, the net interest margin (NIM) of domestic banks was 1.46% in the first quarter of this year, the lowest ever. This means that growth is no longer possible through traditional operations centered on existing loan-deposit margins. Like banks in Japan and Europe, the era of effectively 'negative interest rates,' where customers are charged account maintenance fees when depositing money, is rapidly approaching. In a situation where low growth and low interest rates have become the new normal, sustainable management and survival require not only expanding business areas such as global and investment banking (IB) but also a fundamental transformation of transaction methods centered on digital technology.

The financial sector is introducing various products and services under the digital transformation that has been continuously promoted in preparation for the post-COVID era. For example, Hana Bank has introduced video consultation services in the private banker (PB) market. They plan to analyze big data to understand customers' interests and characteristics and provide customized services. KB Kookmin Bank has also launched a non-face-to-face specific money trust subscription service via video call. Woori Bank has released a service that allows direct execution of trade finance loans through internet banking.

Although these are changes in work methods now, banks plan to expand in the mid to long term to a level where they can identify customer needs unknown even to the customers themselves based on big data and artificial intelligence (AI) and provide various financial products and services. As part of this, Shinhan Financial introduced a 'Digital Patron System,' where CEOs of affiliated companies take charge of core digital technologies one by one to discover new business models.

Lee Daegi, Senior Research Fellow at the Korea Institute of Finance, said, "Due to COVID-19, trade disputes, and political and economic uncertainties, the NIM of domestic banks is shrinking, and competition among banks, non-banks, and technology companies will intensify with the emergence of open banking and fintech companies." He advised, "The goal of digital transformation should be aligned with 'increasing customer utility,' and preparations are needed to build independent platforms and establish cooperation plans with big tech companies in anticipation of the entry of big tech companies such as Google and Amazon into the financial industry."