Through a conference call about an earnings announcement in the second quarter, Kakao announced that the number of Kakao Bank application downloads exceeded 3.4 million, and customers that opened accounts and applied for a debit card reached 2.16 million and 1.5 million each. These are the numbers that have caused existing banks like Nonghyup, Kookmin, Shinhan, Woori, and Hana Bank to look over their shoulders. This shows us that Internet-only banking is really hotting-up in Korea. The Sungkyun Times (SKT) now looks at the emergence of Internet-only banks, the differences between Internet-only banks and offline existing banks, and their limitations and prospects.
The Appearance of Internet-only Banks
The Definition and Advent of Internet-only Banks
An Internet-only bank is a bank that does business through an online network without opening offline stores and belongs to the first financial institution. It is also a key issue in financial technology (FinTech) projects under government and financial authorities. K Bank which is operated by KT was the first Internet-only bank in Korea, and Kakao’s Kakao Bank was the second. Internet-only banking was actively introduced with the advancement of financial services through the convergence between the financial and Information and Communications Technologies (ICT) sectors. Legal easing of regulations on introducing Internet-only banks in Korea discussed in the open seminar on Introduction of Internet-only banks in April 2015. At the end of the year, K Bank and Kakao Bank obtained preliminary accreditation, and finally Internet-only banks were authorized to launch at the end of 2016.
Overseas Internet-only Banks
Internet-only banking was first introduced in the United States (US) in 1995. Now, there are about 20 in the US, 30 in Europe, and eight in Japan, which are open for business. China also recently approved two Internet-only banks. Japan Net Bank is the largest Internet-only bank in Japan, and it actively utilizes Yahoo Japan, the largest shareholder of the bank.Japan Net Bank attracts new members by offering various benefits to customers such as fee exemptions and saving up points when customers pay through a Japan Net Bank account. In addition, Monzo Bank is an Internetonly bank in the United Kingdom (UK). It is growingat 5% per week by providing convenient card services such as free overseas fees, analysis of real time spending habits, as well as stopping applications when losing a card and quickmobile transfers.
The Difference Between Internet-only Banks and Existing Banks
Easy Accessibility
Existing banks normally have strict opening hours from 9 a.m. to 4 p.m., but the Internet-only bank is available anytime and anywhere, 365 days a year. Additionally, customers can get counselling from K Bank 24 hours a day and Kakao Bank from 6a.m. to 10p.m. and can get answers about all incidents from 10 a.m. to 6 p.m.. K Bank is available through mobile applications and their homepage, and the Kakao Bank is available only as a mobile application.
Ease of Opening Accounts and Transferring Money
Consumers can open new accounts and purchase products anytime, anywhere, without having to access any public security certificate or security media. K Bank goes through cell phone certificates, ID card certificates and other bank certificates when signing up. Consumers can easily authenticate themselves with a video call. Kakao Bank can be joined through Kakao Talk immediately or through a cell phone number. The transfer process through Internet-only banks is also substantially simplified. Kakao Bank only requests a password, remittance, and a Kakao Talk friend who will receive the money through the Kakao Talk linkwithout the account number. Kakao Bank has even simplified the tricky process of submitting documents for overseas remittance.
Affordable Service
Since Internet-only banks do not have offline stores, it can save rent, labor and electricity costs. The cost is lower than that of a basic bank structure, so it can provide low-cost services in terms of commission and lending rates. People can access K Bank without feesatGS 25 convenience stores, and the statement and account transfer transactions services are also supported with account numbers and password entry without requiring a debit card. Though using an Automatic Teller’s Machine (ATM) for depositing can incur a fee, K bank provides customers a 1,000 gift card five times per month. By the end of 2017, Kakao Bank will allow customers be free from commission through the ATM of a bank, convenience stores, and subway stations and the Short Message Service (SMS) will also be free. In case of overseas remittance by forming a partnership with the American City Group, Kakao Bank can export overseasremittance and overseas payments with a fee that has been lowered by one tenth.
Low Loan Rates and High Savings Rates
Internet-only banks offer lower loan rates and higher interest rates compared to existing banks. Loan rates of office workers’ negative balance account are 2.67% for K Bank and 2.86% for Kakao Bank. They are much lower than the loan rates of existing banks which are more than the average of 3%. K Bank and Kakao Bank provides an average of 1.2% saving rates which is higher than others’. Furthermore, the credit line is 100 million at K Bank, and 150 million at Kakao Bank which are much higher than those of the existing banks.
The Limitations and Solutions of Internet-only Banks
The Limitations
① Uncertainty of the Competitiveness
Existing banks are already offering most of the financial services including deposits, loans, and remittances through Internet and mobile banking. Compared to the situation in the US, UK, and Japan, where Internet-only banks were introduced about 20 years ago, the financial infrastructure is so well constructed in Korea that there is not much need for Internet-only banking. There exists a limit to the power of Internet-only banks in Korea unless more innovative business models appear. In the case of Japan, low growth has set in and they are virtually in a zero-interest rate period as a result. Therefore, the profitability of the Internet-only banking is declining because the attractiveness of differentiated interest is gone.
②Security Problems
Internet-only banks attract customers with the benefit that there is no need for a public security certificate or security card entering process, which means that customers just need to log in and enter transfer information when they transfer money. Since transferring money is available with a password only, it is easier for customers to have issues when they lose cell phones or cell phones are hacked. According to Kakao Talk, there were some cases where accounts have been opened and someone has received a small loan by illegally using false names.These cases show that there are some security weaknesses.
③Others
There are also other problems that Internet-only banking has. Internet-only banks are tied down by the Banking Act’s “Separation of banking and commerce” article. The separation of banking and commerce article is where industrial capital (non-financial contributors) cannot owe a voting share over 4%. Therefore, K Bank and Kakao Bank are now having difficulty in securing funds through additional capital gains. Internet-only banks can also trigger a digital divide. A digital divide is an information gap which is made by the difference of accessibility to IT devices. Certain groups of people who are not able to utilize technology conveniently, such as the disabled or senior citizens, can have trouble with using Internet-only banks.
Solutions
①Differentiate Business Model
Korean Internet-only banks have almost the same functions as exiting banks which are already running Internet-banking. Internetonly banks should try to develop other services that we cannot get with exiting banks. In order to set up a specialized business model
of a Korean Internet-only bank, companies should compare and analyze the examples of various Internet-only banks abroad and find models suitable for Korea. Charles Schwab Bank, for example, which has successfully created profits in the US, has partnered with Charles Schwab Fund to deliver real-time asset management services.
②Heavy Security
Internet-only banks should establish security systems through their own security solutions and network firewalls. K Bank and Kakao Bank have joined the Financial Security Institute, an institution that specializes in financial security, to prepare for cyber attacks. According to K Bank, they carried out measures for a so-called physical detachment to PCs used by employees. They used two PCs per employee byseparating the Internet network and local networks. They replicated firewalls and solutions, implementing realtime monitoring. According to Kakao Bank, about 39 % of the total workforce is filled with employees of ICT. They also encoded personal identifications including resident registration numbers, password, and biometric information, while strengthening security levels based on the Bank Act or relevant regulations. For customers who are anxious, the Kakao Bank is additionally providing security cards.
③Policies for Internet-only Banks and the Improvement of Services
Financial authorities are pushing ahead with the deregulating separation of banking and commerce article. Moreover, with the problems of digital divide, they can find a solution to improving multiple services, including telephone counseling and artificial intelligence.
The Prospect of the Internet-only Bank
Additional Finance Services Connected to Mobile
According to Kakao Bank, convenient and cheap overseas transfers and credit assessment based on big data called Financial Bots, and the artificial financial secretary will increase competitiveness in the financial markets and accelerate development and distribution of new FinTech.
Creating Jobs
In addition to the financial sector, it is expected that the next generation of young people will benefit from the favorable quality of decent work creation. Kakao Bank has a plan to allocate 1.2 billion into Information Technology (IT) and research and development investments for three years, and about 1,800 new jobs are expected to open in the IT field.
Better Quality of Service Through Competition
①Competition between Internet-only Banks
There have only been two Internet-banks that were allowed to start businesses in Korea. To prevent K Bank and Kakao Bank from monopolizing the market and giving up to provide a better quality of services to customers, there should be other Internet-only banks to boost the market so that consumers can benefit from their competition. The government also intends to expand Internet-only banks as K Bank and Kakao Bank are well established in the market. If the competition between the Internetonly banks is intensified, the Internet-only banks will have a new task to create new profits. Interpark’s I Bank which could not obtain preliminary accreditation previously is now mentioned as the third Internet-only bank.
②Competition between Internet-only Banks and Existing Banks
With the advent of the Internet-only bank, existing banks will compete to offer better and convenient services. According to the Bank of Korea Convention on August 23rd, the average monthly lending rate of eightmajor banks last month dropped by 0.09% points compared to that of the end of June.
With the introduction of internet only banks, consumers can do financial tasks relatively easily. Since the seriousness of the problems that have occurred through internet-only banks are obvious, however, it is important to develop proper alternatives. With internetonly banks, people will be able to lead a more convenient life.