Internet Banks Attracting Funds... 'Mid-Interest Rate Loans' Battle Expected

Unlike Commercial Banks, Deposit Balances Continue to Grow
Mid-Interest Rate Products Expected to Flood Market in Second Half of This Year

[Asia Economy Reporters Kiho Sung and Wondara] Money is flowing into internet-only banks armed with high interest rates and convenience. As the interest rates on regular deposits at commercial banks have dropped to the 0% range, switching savings and deposits has gained momentum. In the second half of this year, the launch of mid-interest rate loan products is planned, which is expected to trigger a ‘mid-interest rate war’ not only among internet banks but also including savings banks and credit finance companies.

According to the financial sector on the 24th, K Bank’s deposit balance as of the end of January was 4.5 trillion KRW, an increase of 750 billion KRW compared to the previous month. This increase is the largest monthly growth on record. Kakao Bank also saw its savings and deposit balance increase by about 112 billion KRW during January.

On the other hand, as of the end of January, the regular deposit balances of the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?stood at 626.892 trillion KRW, down by 5.5156 trillion KRW (0.87%) from the previous month. Regular installment savings also sharply declined by 672.2 billion KRW (1.62%) to 40.6488 trillion KRW.

The reason money is flowing into internet banks is attributed to their higher interest rates and convenience compared to commercial banks. According to the Financial Supervisory Service’s integrated financial product comparison disclosure site, while commercial banks maintain interest rates in the 0% range for 12-month pre-tax (simple interest) deposits, K Bank’s CodeK regular deposit interest rate is 1.3%, the highest among domestic banks. Kakao Bank also operates a 1.2% regular deposit.

Additionally, with Toss Bank applying for official internet bank approval, a ‘Three Kingdoms of Internet Banks’ is anticipated in the second half of the year. The main battleground is expected to be ‘mid-interest rate loans.’ Mid-interest rate loans refer to loan products targeting middle-credit borrowers with credit ratings between 4 and 6, typically classified as loans with interest rates between 5% and 10% at first-tier banks.

Competition to Expand to Credit Finance Companies and Savings Banks with Launch of Mid-Interest Rate Products

Internet banks are developing credit evaluation systems for mid- and low-credit borrowers and those with insufficient financial history to launch mid-interest rate products. Kakao Bank plans to combine data held by Kakao affiliates for mid-interest rate loans. K Bank intends to launch mid-interest rate loans in the second half of the year using its own credit evaluation model enhanced with KT’s transaction data. Toss Bank also plans to conduct sophisticated credit evaluations using data from 18 million customers on the Toss platform.

Accordingly, there is growing interest in whether internet banks will bring changes to the loan market with this new business model. Until now, the mid-interest rate loan market has been concentrated in savings banks and credit finance companies. However, with the full-scale advent of the personal credit information management business (MyData) era, mid-interest rate loans by internet banks, armed with powerful data, are expected to become more active.

However, there are also concerns that challenges will arise. Although internet banks are entering a full-fledged competitive phase, the financial environment remains challenging for generating profits. Already, due to tightened credit loan regulations by financial authorities, internet banks’ profits are declining.

Professor Donghyun Ahn of Seoul National University’s Department of Economics pointed out, “It is undesirable for certain types of loan products to be concentrated in specific industries as it can lead to defaults.” He added, “Diverse competition is needed even in mid-interest rate products.” He further stated, “The key for internet banks’ mid-interest rate products will be whether they can develop expertise. Especially in areas like loan screening, know-how is essential, and rushing in prematurely could lead to the bank itself becoming insolvent, so thorough preparation is necessary.”