[Internet Banks 5 Years⑤] Differentiation That Determined the Fate of Global Internet Banks... The Answer Is 'IT Finance'

US Focused Only on Fees and Interest Rates
14 Locations Disappeared by 2014

Companies Thriving with Differentiation Like SNS Promotion and ATM Rental

Targeting Support for Promising Young Companies
Need to Enter Overseas Markets Through IT

Kakao Bank made a dazzling debut as a ‘catfish,’ putting domestic banks on edge, but now that five years have passed, there are calls for a Season 2. Although it succeeded in initial popularity, a differentiated strategy is essential to survive competition with commercial banks, which have significantly larger asset sizes and loan/deposit volumes in the long term.

Internet Banks That Disappeared Due to Failure to Differentiate

According to industry sources on the 28th, internet-only banks began to appear overseas in the mid-1990s, about 20 years earlier than in Korea, but they were phased out due to failure to differentiate themselves. A representative case is the United States’ Security First Network Bank, known as the world’s first internet bank. Established in 1995, this bank competed with low fees and high interest rates on deposits. However, it failed to create a revenue model that differentiated it from traditional banks and mainly operated ‘loan and deposit services,’ eventually merging with Canada’s RBC Bank and disappearing.

NetBank, which launched around the same time, faced a similar fate. It competed with interest rates exceeding the banking sector average but had a simple business structure limited to mortgage loans. NetBank went bankrupt due to loan defaults caused by an economic recession. Price competitiveness and failure to diversify business were major causes of the crisis. According to a report by the Korea Capital Market Institute, by 2014, 14 internet-only banks in the U.S. had exited the market due to bankruptcy, acquisition, or voluntary closure, and their common trait was the lack of a differentiated customer base from existing banks. This is a case that domestic internet banks should learn from.

On the other hand, some overseas internet banks succeeded through differentiation. Germany’s Fidor Bank implemented a strategy using social networking services (SNS) such as Twitter, Facebook, and YouTube. It offered account opening via SNS and introduced a method of increasing deposit interest rates by 0.1% for every certain number of Facebook ‘likes,’ gaining popularity. Besides general banking services, Fidor Bank offered various services such as P2P lending, crowdfunding, stock trading, and precious metals trading.

China’s MyBank, operated by Alibaba, targeted merchants and farmers by providing medium-interest loans, addressing financial blind spots. It particularly focused on selling loan products to small business owners operating within Alibaba. Tencent’s WeBank connected the messenger ‘WeChat’ with banks located in rural areas or small cities, offering small personal credit loans such as microloans and cash loans through WeChat. By providing services for individuals and small and medium-sized enterprises, especially micro-enterprises, which were lacking in traditional Chinese banks, it secured over 200 million customers.

Japanese internet banks started from the beginning with a business model linked to finance and various industries, building asset growth and a revenue base with distinctive business models. In addition to interest income centered on loans and deposits, they prepared ways to secure various non-interest income. Seven Bank, a subsidiary of Seven & I Holdings, which owns the convenience store chain Seven-Eleven, has a business structure leveraging convenience stores as a strength. Fee income from ATM rentals and deposit withdrawals at Seven-Eleven accounts for more than 90% of operating profit. However, the domestic market environment makes it difficult to operate businesses such as fees. Lee Sun-ho, head of the Banking and Insurance Research Division at the Korea Institute of Finance, explained, “In the U.S., personal checks are widely used, and banks also earn various fee incomes such as ATM fees and account maintenance fees. Domestic commercial banks have even tried and withdrawn such fees because Korean financial consumers view fees coldly.”

Technology-Based ‘IT Finance’ Is the Answer

The next stage for domestic internet banks such as Kakao Bank, K Bank, and Toss Bank is expected to be the corporate finance market. In this market, fierce competition is expected with commercial banks that have massive asset sizes and networks built over years. Therefore, differentiation may be even more crucial than in the retail finance market.

Jung Yoo-shin, dean of the Graduate School of Technology Management at Sogang University, emphasized that technology-based ‘IT finance’ could be the solution. He said that internet banks should focus on technology-centered small and venture companies that have solid business structures and growth potential but lack the ‘numbers’ such as business history and performance that commercial banks use as loan collateral. Although there is already a product called technology credit loans, it still includes real estate collateral, making it difficult for early-stage ventures or startups to use. Dean Jung said, “The growth potential, business structure, and technological capabilities of promising companies with short business histories are intangible assets, so commercial banks find it difficult to set collateral. However, internet banks themselves have grown based on IT, become unicorns, and have the technical capabilities to analyze various big data. If they pioneer this area proactively despite some risks, it will benefit both internet banks and small and venture companies.”

He also predicted that such a business model would greatly help overseas market expansion. Yoon Ho-young, CEO of Kakao Bank, announced at an online press conference earlier this month that they would pursue overseas expansion starting this year. Toss partnered with Vietnam International Bank (VIB) to launch local credit card and small short-term loan services. Dean Jung explained, “Even if the outside world does not recognize Korean finance, they recognize Korean IT, so we must enter overseas markets with ‘IT finance.’ If the standard model created by Korean internet banks is exported to regions such as Southeast Asia and becomes a global standard, that will be the path for Korea to rise as a financial powerhouse.”