[10 Years of Inbaeng]② Growing Big Through Interest Business and Neglecting Inclusive Finance... Innovation or Destruction?

'Interest Rate Hotspots' Are a Thing of the Past...
Internet Banks Have Profited More from Interest
Inclusive Finance for Middle- and Low-Credit Borrowers Neglected...
Most Borrowers Face High Interest Rates

Although internet banks initially emerged as disruptors in the traditional banking sector, by 2025 they have been criticized for becoming minnows. This is because they have failed to break away from the interest-driven business practices typical of conventional banks. In fact, recently, the situation has even reversed, with commercial banks offering lower loan interest rates and higher deposit rates. The prevailing assessment is that inclusive finance for middle- and low-credit borrowers has also fallen short of expectations.

'Interest Rate Hotspots' Are a Thing of the Past... Internet Banks Have Profited More from Interest

The three internet banks (Kakao, K Bank, and Toss Bank) all recorded their 'highest-ever' earnings last year. As a result, their net profits increased from 400 billion KRW in 2023 to 600 billion KRW in 2024. Among them, Kakao Bank, the industry leader, posted a net profit of 440.1 billion KRW last year, a 24% increase from the previous year. K Bank recorded a net profit of 128.1 billion KRW last year, a tenfold increase compared to 2023. The youngest, Toss Bank, also achieved a net profit in the 40 billion KRW range, marking its first annual profit since its establishment.

The main reason behind the record earnings of the three internet banks is attributed to 'interest-driven business.' During the recent period of rising interest rates, they increased loan rates while keeping deposit rates low, generating substantial profits.

In fact, the deposit interest rates offered by internet banks were found to be not significantly more advantageous compared to commercial banks. Kakao Bank's 'Kakao Bank Time Deposit' and K Bank's 'Code K Time Deposit' both offer interest rates of 2.90%, which is considered uncompetitive compared to the 2.90% to 3.30% deposit rates of the five major commercial banks. Toss Bank also lowered its basic deposit rate from 1.50% to 1.20%, and its installment savings rate (for 12 months or more) from 3.00% to 2.80%.

On March 28, Kakao Bank cut its deposit and savings interest rates by up to 2.0 percentage points, stating, "Although the Bank of Korea's base rate has dropped by 0.75 percentage points since October last year, this is the first time in about six months that Kakao Bank has adjusted its deposit rates." They explained that this was an unavoidable choice amid the falling interest rate environment.

Loan interest rates were also found to be cheaper at commercial banks. The housing mortgage loan rates at the five major commercial banks ranged from 3.69% to 6.32%. In contrast, K Bank's rates ranged from 3.74% to 6.73%, and Kakao Bank's from 3.69% to 6.63%, with both internet banks having higher upper and lower loan rates than commercial banks.

The interest rate spread (the difference between deposit and loan rates), which directly affects bank profitability, was found to be twice as large at internet banks compared to commercial banks. According to the Korea Federation of Banks, as of February this year, the average interest rate spread on new household loans at internet banks ranged from 1.41 to 2.28 percentage points. This is higher than the 1.24 to 1.83 percentage points range at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup), with both the upper and lower bounds of the spread being higher at internet banks.

Inclusive Finance for Middle- and Low-Credit Borrowers Neglected... Most Borrowers Face High Interest Rates

One of the original purposes of establishing internet banks was to provide inclusive finance for middle- and low-credit borrowers, but there are criticisms that this has been neglected.

Kakao Bank announced that it will stop offering new 'Mid-Credit Plus Loans' starting April 1. Since the second half of 2021, Kakao Bank has provided mid-credit loans and mid-credit plus loans based on its own credit evaluation, but from April, these will be consolidated into a single 'Mid-Credit Loan.' As a result, it is expected that the screening criteria for middle- and low-credit borrowers to obtain credit loans will become more stringent.

Similar to commercial banks, internet banks have focused on high-credit borrowers, and their interest rate benefits have not matched those of commercial banks. As of the third quarter of 2024, K Bank's most common credit loan borrower (unsecured, 1-year) had a credit rating of 2. This indicates that they have been targeting high-credit borrowers rather than middle- and low-credit ones. The interest rate was also about 1-2% higher than commercial banks, at 6.08%. For example, a borrower with the same credit rating of 2 at KB Kookmin Bank would receive a credit loan interest rate of 4.79%. The same applies to housing mortgage loans. For K Bank's installment repayment housing mortgage loans (with a contract maturity of 10 years or more), the most common borrowers had credit ratings of 2 to 3.

There are also criticisms that internet banks are neglecting funding for middle- and low-credit borrowers and instead expanding their size through housing mortgage loans. According to the Financial Supervisory Service, the household loan targets for the three internet banks this year increased by 3.3183 trillion KRW (4.8%) compared to last year. The household loan balances of the three internet banks surged more than twofold in three years, from 33.4828 trillion KRW at the end of 2021 to 69.5385 trillion KRW at the end of last year. In particular, the housing mortgage loan balance increased about threefold, from 10.3135 trillion KRW at the end of 2021 to 34.4783 trillion KRW at the end of September last year.