Rapidly Growing Internet Banks... 'Mid-Interest Rate Battle' Expected in the Second Half (Comprehensive)

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 fixed deposits at commercial banks have dropped to the 0% range, switching deposits and savings accounts has gained momentum. In the second half of this year, the launch of mid-interest rate loan products is planned, leading to 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 deposit and savings balance increase by about 112 billion KRW during January.

On the other hand, as of the end of January, the fixed 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. Fixed savings also sharply declined by 672.2 billion KRW (1.62%) to 40.6488 trillion KRW.

The number of users is also rapidly increasing. Kakao Bank had 13.81 million users as of the end of last month. K Bank surpassed 3 million users recently, gaining 1 million users in just two months. K Bank, launched in April 2017, reached 1 million customers about two years later in April 2019. It then exceeded 2 million customers in early December last year. While it took 2 years for the first million and 1 year and 8 months for the second million, the third million was achieved in less than two months.

The reason money is flowing into internet banks is analyzed to be due to 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 fixed deposit interest rate is 1.3%, the highest among domestic banks. Kakao Bank also operates a 1.2% fixed deposit.

Additionally, with Toss Bank applying for official internet bank approval, the ‘internet bank Three Kingdoms’ are anticipated in the second half of the year. The main competition stage is expected to be ‘mid-interest rate loans.’ Mid-interest rate loans are 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 Expands 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 new business models. 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, they face a challenging financial environment before turning a profit. Already, due to tightened credit loan regulations by financial authorities, internet banks’ profits are decreasing.

Professor Donghyun Ahn of Seoul National University’s Department of Economics said, “It is undesirable for certain types of loan products to be concentrated in specific industries as it can lead to defaults,” adding, “Diverse competition is needed even in mid-interest rate products.” He continued, “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.”