[Market Close-up] War over digital financing looms as traditional banks jump into online-only services

Faster than anyone could have imagined, South Korea’s IT platforms, which have had no banking experience at all, have quickly become a dominant force in the nation’s retail banking scene. 

The COVID-19 pandemic has been defining moment for digital transformation, according to industry watchers, with the rising number of consumers preferring non-face-to-face banking services. 

According to the Bank of Korea, the volume of money transfers and loan applications carried out online, surged 11.9 percent and 20.6 percent on-year in 2020, respectively.

For conventional players, the rise of Big Tech is a massive threat, but banks say they still have a fighting chance.

While shutting down their brick-and-mortar branches, financial giants, some even with business history of nearly a hundred years, are scrambling to develop next-generation financial solutions through their in-house digital innovation team and seeking to forge ties with fintech startups.

On behalf of the nation’s four major financial groups -- Shinhan Financial, KB Financial, Hana Financial and Woori Financial -- the Korea Federation of Banks plans to submit a policy proposal to the Financial Services Commission as early as this week. It will include the banking giants’ plans to enter the internet-only banking sector, according to the representative body of commercial banks. 

Currently, there are only two internet-only banks in the country -- Kakao Bank, run by Korean mobile messaging giant Kakao, and K bank, led by telecommunications conglomerate KT, that were both launched in 2017. 

Toss Bank, steered by Viva Republica, operator of the popular payment platform Toss, will make its debut as the nation’s third internet-only lender in July. The FSC granted an operational license to the company in late 2019. 

The introduction of internet-only banks by financial groups will be a catalyst for fiercer market competition, which would force market players to improve services to attract customers, according to market experts. 

"Possibilities remain that financial groups’ online-only banks, if launched, could arouse the so-called ‘catfish effect’ in the local banking industry," said Sung Tae-yoon, an economics professor at Yonsei University. 

"To gain an upper hand in the market, both traditional banks and internet-only lenders are likely to compete over price, offering lower interest rates or commission fees," he said.

In addition, consumers could benefit from the financial groups’ attempts to foster business innovation amid the increased competition. 

"With their long-standing expertise in the banking industry, the financial holding firms will continue to innovate their services by cooperating with other industries. This industry convergence will expand their business portfolios, while diversifying consumer options,” said Kim Jung-sik, an economics professor at Yonsei University. 

Boon or bane?

Market competition may erode the overall profitability of traditional banking groups if the battle mode continues in the long term. 

“If price competition between banking groups and their tech rivals becomes fiercer than expected, there is a possibility that traditional financial companies, which already faced the upheavals generated by the COVID-19 pandemic such as the ultralow rate environment, might suffer from increasing management risks,” said Lee Joon-young, an economics professor at Sangmyung University.

Banks going digital also means less physical branches and less human resources.

"Branch closures are inevitable once banking groups begin to launch digital-only banking services, as part of their restructuring of business strategy. The subsequent reduction in the number of staff could arouse intense backlash from the companies’ labor unions," said Yun Min-seop, a researcher at the Korea Financial Consumers Protection Foundation.

"Also, branch downsizing could marginalize senior citizens, who lack access and knowledge to use digital-only banking services."

The number of physical branches of commercial banks here have already been on the decline. 

More than 304 offline stores closed down last year, with 6,405 remaining as of December, according to data from the market watchdog Financial Supervisory Service.

"How different financial groups’ internet-only banks are from their current mobile-based financial services will determine the success of their new ambitious goal," said Kim of Yonsei University. 

"They should closely review their advantages over Big Tech rivals and develop business models to provide differentiated digital products before jumping into the internet-only bank market."

According to the KFB’s survey conducted on its member companies, a majority of respondents said they are willing to set up a wholly owned subsidiary for online-only banking businesses.

Amid the contactless boom, Kakao Bank’s annual net profit for last year spiked eightfold on-year to reach 113.6 billion won ($101.1 million), industry data showed. 

Under current laws, there are no legal restrictions placed on financial groups having their own internet bank subsidiaries. 

The financial regulator will reportedly consider allowing additional internet-only banks during the second half of this year after its evaluation committee looks into competitive conditions in the banking sector in July to decide whether the banking industry has lost its competitive edge amid tech giants’ foray into the financial services space.

By Choi Jae-hee (cjh@heraldcorp.com)