[Inbaeng 2.0]② Starting to Foster ‘Megi’…“Limits of Banking Industry” Also Pointed Out

As internet-only banks grow rapidly, criticism has emerged that they have not effectively challenged the oligopoly of traditional commercial banks, prompting financial authorities to consider related regulatory improvements. Various measures are being discussed, ranging from easing regulations such as mandatory loans to medium- and low-credit borrowers imposed on internet-only banks to licensing a fourth internet-only bank to enhance competitiveness. However, some remain skeptical, arguing that due to the nature of the heavily regulated banking industry, the effectiveness of these measures may be limited.

Licensing a Fourth Internet-Only Bank and Regulatory Relaxation: "Promoting Competition" vs. "Concerns over Soundness and Profitability"

According to the financial sector on the 13th, financial authorities recently reviewed the possibility of licensing new market entrants as one way to ease the oligopoly of commercial banks during the 'Banking Sector Management, Business Practices, and System Improvement Task Force (TF) Working Group Meeting.' The idea is to license a fourth internet-only bank following KakaoBank, K-Bank, and Toss Bank to increase competition in the banking industry.

During the meeting, opinions were raised that it might be necessary to allow the establishment and licensing of internet-only banks by banks, bank holding companies, or non-bank financial companies such as securities and insurance firms, or financial holding companies. For example, the former would mean establishing a separate internet-only bank under KB Financial Group or SC First Bank, while the latter would allow non-bank financial companies to operate internet-only banks.

TF members highlighted that permitting separate internet-only banks under existing banks or bank holding companies could diversify business models for each company and promote competition among large players. They also anticipated various innovations and increased consumer benefits in future competition with big tech platforms. For non-bank financial companies and financial holding companies, the entry of new players could enhance competition and induce diverse financial conglomerate business models combining their existing industries.

Calls for regulatory relaxation have also been made. The industry commonly points out that internet-only banks need relief from lending regulations to compete on equal footing with commercial banks. Currently, internet-only banks are subject to credit loan ratio regulations targeting medium- and low-credit borrowers (borrowers in the lower 50% credit score range) in line with their founding purpose. The year-end targets are 30% for KakaoBank, 32% for K-Bank, and 44% for Toss Bank.

The problem is that in meeting these regulations, internet-only banks are facing difficulties competing with commercial banks in the lending market. As they rapidly increased loans to medium- and low-credit borrowers, the onset of a rate hike cycle has led to rising delinquency rates and deteriorating soundness. Additionally, there have been frequent cases of suspending high-credit loans to meet the required ratios.

An official from an internet-only bank said, "It is natural to work hard to include medium- and low-credit borrowers in line with the founding purpose, but the loans to these borrowers have become a shackle." He added, "For a fundamental solution, it might be necessary for long-established commercial banks with extensive data to also participate."

Lee Bok-hyun, Governor of the Financial Supervisory Service, indicated on the 27th of last month during a meeting with representatives of the three internet-only banks and fintech companies that "If opinions on improvement measures based on reasonable grounds are presented, there is a willingness to actively consider them."

Lee Hyemin, CEO of Finda; Hong Mintaek, CEO of Toss Bank; Lee Bokhyun, Governor of the Financial Supervisory Service; Seo Hoseong, CEO of K Bank; Park Sangjin, CEO of Naver Financial; Kim Taehun, CEO of Bank Salad; Kim Youngjoo, Deputy Governor of the Financial Supervisory Service

"Concerns over Excessive Competition... Relaxing Medium- and Low-Credit Loan Regulations is Premature"

However, there are many doubts about whether such measures can actually be realized. Regarding the establishment of a fourth internet-only bank, concerns were raised about the recurrence of excessive competition.

The TF pointed out that simply increasing the number of operators could intensify competition due to excessive business activities, worsening the overall profitability and soundness of the industry.

In particular, from a soundness perspective, even if a new bank is established, problems may arise during phases of declining interest rates or deteriorating profitability. It was also advised to consider that internet-only banks are currently facing ongoing issues related to soundness and consumer protection.

There was also an assessment that even if new players such as new internet-only banks enter the market, they are likely to be absorbed into the current oligopoly. This suggests a high possibility of repeating the situation where the three major internet-only banks, despite rapid growth, have not been able to break the oligopoly structure due to the size gap with large commercial banks. The TF analyzed, "Rather than increasing the number of players, it is necessary to relax regulations on the scope of banking operations to reduce dependence on interest income and secure differentiation among banks."

Skepticism is also strong regarding regulatory relaxation for medium-interest loans. This is because it would go against the founding purpose of internet-only banks. Previously, internet-only banks showed a lukewarm attitude toward loans to medium- and low-credit borrowers, leading authorities in 2021 to set target ratios for such loans. An official from the authorities said, "When internet-only banks were launched, the issue of separation of industry and finance was set aside for financial innovation and consumer benefits," adding, "Relaxing related regulations would overturn the founding purpose."

There are also criticisms that due to the limitations of the banking industry, it is fundamentally difficult for internet-only banks to fully demonstrate the innovative DNA of IT companies. Being fundamentally categorized as 'banks,' they face many restrictions on investments for business expansion, and the business structure capable of generating non-interest income is also limited. An industry official said, "In the case of KakaoBank, although it carries the Kakao name, it is considered a completely different company even within Kakao," adding, "The overall financial industry is rigid, making it difficult to do much."

There is also a skeptical view regarding the dissolution of the oligopoly structure itself. A financial sector official who requested anonymity said, "Since the 2008 global financial crisis, regulations related to soundness have tightened worldwide, leading to a trend of bank consolidation that continues to this day," adding, "Even in the UK, where internet-only banks are active and challenger banks have been introduced, the oligopoly structure remains. It seems likely to be a storm in a teacup."