"7% Annual Interest but Only 40,000 Won Interest on 3.5 Million Won?"... Angry at KakaoBank 26-Week Savings Plan

A Structure with Gradually Increasing Payments... Lower Interest Compared to Traditional Savings Accounts

[Asia Economy Reporter Minwoo Lee] “When I saw the annual 7% interest rate, I checked the expected interest on the maximum deposit amount of 3.51 million KRW per account and was very disappointed to find it was only around 43,000 KRW.”

According to the financial industry on the 3rd, consumer dissatisfaction is growing regarding KakaoBank’s recently increased 7% annual interest rate on its ‘26-week installment savings’ product. The expected returns are far from what consumers anticipated given the high 7% interest rate. Even considering that installment savings products have differences between the stated interest rate and actual yield, the gap is seen as excessively large and disappointing.

When subscribing to KakaoBank’s 26-week installment savings, the expected interest on the maximum deposit amount of 3.51 million KRW per account is 43,304 KRW (before tax). The yield relative to the total deposit at maturity is only 1.23%. This feels very different from the heavily advertised annual 7% interest.

This is due to the nature of the 26-week installment savings product. Unlike regular installment savings where the same amount is deposited at fixed intervals, the 26-week installment savings requires increasing weekly deposits over 26 weeks based on the initially chosen deposit amount. For example, if the initial deposit is 10,000 KRW, you pay 10,000 KRW in the first week, 20,000 KRW in the second week, and 260,000 KRW in the 26th week. If you successfully deposit for 26 consecutive weeks, the maximum interest rate of 7% applies.

However, since the deposit period is about six months (26 weeks), the actual interest applied is about half of the annual 7%, approximately 3.5%. Due to the nature of installment savings, only the first week’s deposit of 10,000 KRW fully benefits from this rate. The amounts saved afterward earn progressively lower interest. For example, the 260,000 KRW deposited in the last 26th week only earns one week’s interest of 0.13% (annual 7% divided by 52 weeks).

In fact, a competing internet-only bank, K Bank’s ‘Main Transaction Preferential Free Installment Savings’ offers up to 5% annual interest for one year. If you deposit 3 million KRW monthly, the expected interest before subscription is calculated at 975,000 KRW. This yields a return of 2.7% relative to the total deposit of 36 million KRW. Although this is lower than the maximum preferential rate of 5%, it is higher than KakaoBank’s 26-week installment savings yield of 1.23% advertised with a 7% annual rate. If you split the 3.51 million KRW deposit into monthly payments of 585,000 KRW for a 6-month installment savings product with a 7% annual rate like the 26-week installment savings, the interest would be about 71,663 KRW. The yield relative to the principal would be 2.04%.

Because the interest is lower when splitting deposits as in the 26-week installment savings, consumers who joined based solely on the advertised ‘7% annual interest rate’ are expressing complaints. Moreover, since additional deposits are limited to 3 million KRW per month starting this month, many seem greatly disappointed with the returns. Office worker Beomsik Kim (38) said, “I recently missed out on several high-interest special installment savings offers, so I paid close attention to KakaoBank’s 26-week installment savings and checked it on the first day of release, but I was shocked by the expected interest amount. I knew that the actual interest could be less than the stated rate, but seeing such a low expected interest made me angry because the product description said it would be satisfying and fun to see the money accumulate.”

A KakaoBank representative explained, “Since this product allows up to 30 accounts per person, if you subscribe to several accounts at certain intervals initially and then re-subscribe the matured amounts using a ‘windmill’ method, you can increase your deposit amount and also enjoy compound interest effects. Considering that about 1 million KRW of the total 3.51 million KRW deposit is paid only in the last 4 weeks, the interest rate relative to the deposit period is relatively high.”