[Internet Banks 5 Years①] Inbaeng Used by Half the Population... Did It Show the 'Future of Banking'?

Subscribers Reach 25.44 Million
Growth Driven by Platform Business
Kabank Ranks First Across All Age Groups
Mobile Strategy as a Winning Move
Revenue Structure Similar to Banks
Innovation Needed to Overcome Industry Limits

It has been about five years since internet bank K Bank began operations in April 2017. Over these five years, KakaoBank experienced remarkable growth, and K Bank also succeeded in turning a profit and establishing its position. Toss Bank, which started operations last October, has joined the triangular competition, putting traditional financial institutions on edge. Have they shown the future of banking? How far and how much more can they innovate and grow? We look back on the achievements of five years of internet banking and imagine the future they should pursue. [Editor's Note]

A world where even mortgage loans, which used to require visiting a bank counter, can now be done via mobile has arrived. The financial sector began to change in earnest when KakaoBank appeared as a 'catalyst' in 2017. With the penetration of internet-only banks including KakaoBank, the era of digital finance opened over five years. However, there are criticisms that as internet-only banks gradually grow in size, their initially innovative image is fading. As traditional banks rapidly catch up by developing platforms, it is pointed out that internet-only banks need to show a 'Season 2' of innovation.

Half the Nation, Capturing the ‘MZ Generation’

As of the 22nd, the number of app subscribers for internet-only banks such as KakaoBank and K Bank reached 25.44 million. KakaoBank has 18.27 million, and K Bank has 7.17 million. In just five years since their launch, they have secured customers approaching half of South Korea’s population. In terms of digital finance, the growth rate of internet-only banks was overwhelmingly higher than that of traditional banks. The combined subscribers of KakaoBank and K Bank, which were 5.55 million at launch in 2017, surged by 353% to 25.16 million in 2021. In contrast, the four major banks?KB Kookmin, Shinhan, Hana, and Woori?saw their app subscribers grow only 39%, from 45.73 million in 2017 to 63.8 million in 2021. Although internet-only banks still lag behind traditional banks in asset size and profitability, they have surpassed them in user acquisition. Considering the platform business nature, where unlimited business expansion is possible once users are secured, continuous growth of internet banks can be expected. Yoon Ho-young, CEO of KakaoBank, said, "The core of growth is platform business," adding, "The primary management goal is how much more customers use the app."

Looking at the usage of banking service apps, KakaoBank ranked first across all age groups. According to Mobile Index, as of last month, KakaoBank’s app had 13.21 million monthly active users (MAU), accounting for a 36.7% market share. Following were KB Kookmin Bank’s Star Banking app at 29.5% (10.63 million) and Shinhan Bank’s smartphone banking app ‘Shinhan SOL’ at 24.93% (8.98 million). K Bank ranked 10th with 8.7% (3.13 million).

Especially, KakaoBank firmly captured the MZ generation, who are expected to be major customers in the future, as well as users in their 40s. Among users in their 20s, 44.8% (4.33 million) used KakaoBank, and in their 30s, 42% (3.25 million), creating a gap of more than 10 percentage points from the second place. Even in their 40s, although the proportion decreased compared to the 20s and 30s, KakaoBank’s app still ranked first with 34.9% (3.23 million).

On the other hand, in the 50s and 60s age groups, traditional banks’ apps still had more users. Among those in their 50s, KB Kookmin Bank’s Star Banking app ranked first with 27.9% (1.73 million), followed by NH Smart Banking and Shinhan SOL apps with 25.3% (1.56 million) and 22.9% (1.42 million), respectively. KakaoBank was fourth with 22.5% (1.39 million). The situation was similar for those in their 60s.

The Power of Developers Worked

KakaoBank bet on a ‘mobile strategy’ without offline branches and grew through bold innovations that broke the conventional financial sector formula. Half of its employees are developers who rapidly attracted the MZ generation with simple usability and fresh ideas. They made account opening and deposit/loan services possible solely through the mobile app and introduced AI chatbot consultations even for mortgage loans. They adopted the ‘Linux’ system by leveraging capable developers. Linux is an open-source system freely available online, known for fast processing speed and lower installation costs compared to other operating systems (OS). KakaoBank’s app is characterized by minimizing unnecessary steps and focusing on convenience. They also developed their own authentication system, winning over users tired of the complicated and inconvenient apps of traditional banks.

Above all, KakaoBank’s greatest growth driver is the free-spirited DNA of the IT company ‘Kakao.’ All employees freely share opinions via internal email, and those adopted receive rewards. KakaoBank uses the term ‘sharing’ instead of ‘reporting.’ They operate under a 100:0 principle, sharing all information internally while maintaining confidentiality externally. This is a way completely different from the conservative financial sector. Popular products such as the Group Account and 26-Week Savings were born from this system.

Criticism About Season 2

However, although they claimed to be ‘different’ from traditional banks, there are criticisms that their business structure has not escaped the large framework of interest margin between loans and deposits. While their start focused on mobile and accessibility, their revenue structure is still not much different from traditional banks. Among domestic banks that recorded record-high earnings last year, the proportion of non-interest income was around 20-30%, such as KB Financial (27%) and Shinhan Financial (30%). KakaoBank, the leader among internet-only banks, also had a similar non-interest income ratio of about 26%. K Bank, which turned a profit for the first time last year, had non-interest income of 19.6 billion KRW, only 9.9% of its net interest income of 198 billion KRW.

In terms of product composition, they have diversified loan products by offering mortgage loans and loans for individual business owners in addition to credit loans mainly for medium- and low-credit borrowers. However, the criticism remains that they have not truly transcended the paradigm of traditional banking.

In contrast, Nubank, which was spectacularly listed on the U.S. stock market, clearly showed a differentiated approach from traditional banks. It significantly lowered interest rates and started operations centered on credit cards, becoming the third-largest company by market capitalization in Brazil and the largest financial company by corporate value in South America. Germany’s Fidor Bank employed various strategies based on social media. Domestic internet banks face the challenge of not just surpassing traditional banks by simple non-face-to-face services and reducing branch personnel costs, but repeatedly innovating beyond the limits of the industry.