Internet-only banks should spur financial innovations: The Korea Herald

An employee of mobile messager Kakao Talk displays the mobile game Anipang on a smartphone.
An employee of mobile messager Kakao Talk displays the mobile game Anipang on a smartphone.PHOTO: REUTERS

In its editorial on Dec 01, 2015, The Korea Herald argues for more leeway for internet-only banks to encourage them to offer better services.

Kakao Corp. and KT Corp. have emerged as winners of the heated race to launch Korea's first Internet-only banks.

Consortiums led by the two information technology service companies obtained preliminary licences to operate online-only banks from the Financial Services Commission on Sunday. They beat out another participant in the bidding, a consortium led by Interpark.

Kakao Corp., the operator of Korea's largest mobile messaging app, has teamed up with 10 other companies, including Korea Investment Corp. and Kookmin Bank, to set up Kakao Bank.

The K-Bank consortium led by KT Corp., Korea's second-largest mobile service provider and No. 1 broadband Internet service provider, consists of 21 companies, including Woori Bank, GS Retail and Hanwha Life Insurance.

The two consortiums are expected to open their online-only banks in the first half of next year at the earliest.

They are likely to vie fiercely to earn the distinction of becoming the nation's first Internet-only bank.

An Internet-only bank is one that offers financial services online without operating brick-and-mortar branches.

Such banks are already in service in many other countries, including the United States and the United Kingdom.

Compared with traditional banks, Internet-only banks have advantages and disadvantages.

One big advantage is the lack of overhead costs, which enables them to offer higher interest rates on savings and levy lower rates on loans.

Based on cost advantages, these banks are expected to come up with differentiated services, spurring competition in the banking industry and prompting existing banks to improve their services.

The two consortiums are expected to focus primarily on providing medium-cost loans to people with low credit standings.

Currently, self-employed people and operators of microenterprises are forced to use high-cost loans offered by shadow banking institutions as they cannot access low-cost bank loans.

To serve these people, the two Internet banks should be able to analyse their creditworthiness. For this, they are planning to rely on their big data skills.

In preparing to win a formal licence, the two consortiums need to endeavour to introduce innovative services based on information technology.

In fact, the main motivation for licencing Internet-only banks is to spur IT-based innovations in the financial sector.

Korea is widely known for its advanced IT, but the financial sector lags in terms of using IT for service innovations.

The two consortiums should catalyse sweeping changes in the financial industry.

But for Kakao Corp. and KT Corp. to play the role expected of them, the present law on bank ownership should be amended. Under the law, non-financial companies are not allowed to own more than 10 percent of a bank.

So Kakao and KT each now have a 10 per cent stake in their consortiums.

But with such small stakes, they cannot become majority shareholders and exercise managerial rights. The ownership rule needs to be revised.

* The Korea Herald is a member of The Straits Times media partner Asia News Network, a grouping of 22 newspapers seeking to promote coverage of Asian affairs.