[Song Seungseop's Financial Light] Financial Companies Reviewing Internet Banks... How Good Are They?

Rapid Growth of Internet Banks Amid Non-Face-to-Face Finance Trend
Flexible and Efficient Organizational Management Provides Advantage
Some Predict Overlapping Tasks and Limited Impact

Finance is difficult. It is tangled with puzzling terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and to consistently follow the flow of money, a foundation of financial knowledge is essential. Accordingly, Asia Economy selects one financial term each week and explains it in very simple language. Even those who know nothing about finance can immediately understand these 'light' stories that turn on the bright 'light' of finance.

Kakao-KT Headquarters

[Asia Economy Reporter Song Seung-seop] South Korea has two internet-only banks: K-Bank and KakaoBank. Toss Bank is striving to become the third internet bank within this year. However, there are others who want to become internet banks as well. These are the domestic commercial banks. Why would large banks, which already boast massive scale, want to create internet banks?

According to the financial sector on the 18th, the four major financial holding companies (KB, Shinhan, Hana, Woori) are considering establishing their own internet banks. According to a recent survey by the Korea Federation of Banks, financial holding companies were positive about owning internet banks as 100% subsidiaries. They plan to soon request the financial authorities through the Federation of Banks to allow them to establish internet banks.

Internet banks can only operate with the approval of financial authorities. This means government permission is required. In this regard, Kim Kwang-soo, chairman of the Korea Federation of Banks, stated, "Under current law, there is no disqualification for financial holding companies to establish internet banks," and added, "It is not a significant financial burden, and if the Financial Services Commission has the will to approve, it can be sufficiently pursued."

The background for financial holding companies wanting internet banks lies in the accelerating trend of 'non-face-to-face finance.' According to the Bank of Korea, last year, financial transactions conducted via internet banking at 18 domestic banks and the post office averaged 58.6579 trillion KRW per day, an increase of 20.6% from the previous year. This means people no longer visit bank 'branches.'

This is also why internet banks have grown rapidly. They do not operate physical branches, so fixed costs are low. They do not need to pay rent and labor costs for branches, making them efficient. They are also subject to different regulations compared to commercial banks. Internet banks are relatively lighter. As a result, they have been able to establish flexible and agile organizational structures. When calculating the profit generated per bank employee, KakaoBank surpassed traditional banks last year.

[Image source=Yonhap News]

Light and Efficient Internet Banks... Can Financial Holding Companies Do the Same?

On the other hand, the situation is different for commercial banks. They cannot freely close branches just because they are inefficient. Since elderly customers who frequently use branches could be disadvantaged, financial authorities have made the branch closure process stringent. Also, their organizational culture is conservative and their size large, making it difficult to transform into new organizations that fit the changing financial market. Therefore, the argument has emerged that they need to create separate internet banks that can compete with existing internet banks.

There is also a difference when developing applications (apps). KakaoBank and K-Bank gained great popularity among the MZ generation with lightweight platforms that simply include specific functions. In contrast, large commercial banks must include various functions, resulting in relatively heavy and complex platforms. If they create new internet banks, they might launch lightweight apps similar to KakaoBank or K-Bank.

Of course, it is not all rosy. There are views that tasks may overlap and that there may be little impact. Financial holding companies have invested heavily in mobile app renovations for non-face-to-face financial services. If internet banks are established, these efforts would become meaningless. Moreover, the review and approval process by financial authorities usually takes several years. Existing internet banks will solidify their positions and secure loyal customers, so there is skepticism about how many customers financial holding company internet banks can attract.

The financial authorities have not issued any particular stance. On the 9th, at a meeting with reporters, Eun Sung-soo, chairman of the Financial Services Commission, said, "We have not received any discussions regarding the establishment of internet banks by financial holding companies," and explained, "If something concrete comes, we will consider it, but we have not thought about it yet."