KakaoBank tops the Asian Digital Banking race

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…business 😀 

Today’s Publisher’s Parmesan talks about Kakao Bank, a digital bank based in South Korea, which has experienced an impressive growth story since its launch in 2017.

Exciting, right? 👏

Will come to that, but let’s first start with the curation.

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Publisher’s Parmesan 🧀

KakaoBank tops the Asian Digital Banking race

KakaoBank, the rebellious renegade of Asian digital banking, stands out as a rare gem—growing at lightning speed and actually making money. While others are still searching for their wallets, KakaoBank has already plucked the low-hanging fruit and is now reaching for juicier, higher-fee offerings. And when it comes to investor confidence, their 2021 listing was a showstopper, proving that this story is one that's worth believing in.

In a surprising twist of events in 2021, KakaoBank, the new kid on the banking block, actually became the largest bank in South Korea in terms of market value. For a few months after its IPO in August, this six-year-old digital lender managed to surpass the likes of long-established banks such as Woori Bank (which has been around since 1898) and even Shinhan Bank (with roots going back to 1897). It even outpaced KB Financial Group, a financial powerhouse with a colossal W663.9 trillion ($543 billion) in assets, which is about 20 times larger than KakaoBank.

While the tech industry's valuation frenzy may have cooled off, the passion for KakaoBank remains remarkably steadfast. One reason, its business has stayed resilient is that, from an early point in its history, KakaoBank has had numbers to back up its digital vision.

Its Q1 CY23 numbers show that it has 21 million customers – the national population is around 52 million – and turned a W136.4 billion operating profit, up 50% vs Q1 CY22.

Unlike many fintech startups around the region and the world, KakaoBank can give numbers on its return on equity, deposits, capital adequacy and so forth, because those things actually exist and are positive (7.16%, W40 trillion and 35.65% (BIS) respectively, as of December 31). This is not given in Asia-Pacific digital finance, where so much is about what a business might be rather than what it is today.

“The number of KakaoBank customers accounts for 64% of the economically active population in Korea,” says Yun Ho-young, the bank’s chief executive, who also goes by the English name Daniel.

His vision – that South Korea, with its digitally savvy and affluent young population, was ripe for a truly digital offering rather than just a mobile-based adjunct to conventional service – is being validated.

“What is the most important thing here is that people have started using banking services in a contactless and digital way, not face to face," he says. And this shift is being accelerated.

As with many digital banks around the world, Covid came as both a proving ground and an accelerator for KakaoBank. It had momentum well before anyone had ever heard of Covid, gaining a million users to its native app in its first five days of launch in 2017. But the real impact of the pandemic was demographic.

“In the past, younger customers were the main customers for us, but we have seen the growth of the middle-aged and senior customers joining digital banking,” Yun says.

In 2021, 60% of new customers were over 40, and the highest single growth segment is for those in their 40s. The sense is that Covid pushed them to take a step they might otherwise have delayed or never taken.

Young and mobile

The very idea of KakaoBank’s mobile-only app, without even a desktop service, is clearly something that resonates most with the young; so too does the level of comfort with opening a bank account on a mobile device by scanning personal identification and, for some products, giving access to income, job information and pension.

The bank’s popular 26-week instalment savings product, which has more than 11 million accounts, requires the user to select a favourite character and a savings goal, with these virtual characters accumulated over time and with the savings screen shareable through social media.

A group account, which allows shared savings among several people for a vacation or a restaurant or just managing living expenses, has become popular as a dating expense-sharing account by those in their 20s and 30s.

And there’s a piggy bank product that collects spare change from the account, using AI technology to identify spending patterns, and just like a real piggy bank the app doesn’t tell the user how much money is inside it, instead shows the amount as something that can be purchased with it.

Kakao ecosystem

All of this is in keeping with the bank’s origins, coming out of the Kakao group whose ecosystem’s most famous property is KakaoTalk, a truly ubiquitous messenger app in Korea. KakaoBank is the only banking app compatible with KakaoTalk, although these days Yun is keen to stress that the bank stands on its own two feet.

“We didn’t really rely on the Kakao ecosystem,” he says. “We only used its brand. We believe that KakaoBank should be a separate app from KakaoTalk for finance, and should achieve success on its own.”

The bank app in isolation has the 13th-largest rate of traffic among all Korean apps, he points out.

The priority of KakaoBank is acquiring customers and maintaining their activity on our app, which is the opposite of existing banking institutions who prioritise loan products

In any event, KakaoBank is growing up. The colourful characters and quirky gimmicks still serve a purpose, but at the same time, KakaoBank has gravitated to more than just wallets. You can now get mortgages, housing deposit loans, check your credit score, and buy foreign securities; there are 16 affiliated lenders linked to the platform, and there are also partnerships with five domestic securities firms (4.2 million such accounts have been opened through KakaoBank over the last two years).

“The priority of KakaoBank is acquiring customers and maintaining their activity on our app, which is the opposite of existing banking institutions who prioritise loan products,” Yun says. “We have a strategy of a platform business. We sell our own products as well as the products of other financial institutions.”

As a rule of thumb, if there are already excellent products out there in the digital world, KakaoBank probably won’t compete with them, but if there’s a gap, it tries to fill it.

“If we believe that we are the one who can develop the best service, we develop it ourselves,” says Yun.

So, for example, there were no 100% mobile services for credit loans or mortgages, so KakaoBank made its own.

“But when it comes to credit cards or securities accounts, we cannot create much differentiation from existing services. So we decided to deliver the existing services of other financial institutions.”

Sometimes this means that both investors and banks have a hard time deciding what exactly KakaoBank is. Does the market see it as a partner or a competitor?

“We believe they are our partners and we are their partners, but they seem to believe we are their competitors,” says Yun.

Then, investors faced the question of whether to value it as a tech platform or a bank.

“Now, many investors believe that KakaoBank is a platform with a banking licence,” says Yun. “But I don’t believe we have to choose only one between the two, banking or platform. That kind of dichotomy is meaningless from the customer’s perspective.”

But certainly, the parallels Yun draws owe more to tech than banking, perhaps unsurprisingly since about 45% of the roughly 1,000 staff are in the tech sector.

“I think we can see a similarity with Netflix,” he says. “It develops its own content and at the same time delivers content created by other production houses. It doesn’t matter for the user whether the content is from Netflix or another content provider: as long as it has great content, Netflix can acquire more users.”

Mainstream lending

KakaoBank’s financials and reports look more like those of a classic bank. Analysts are divided on the impact KakaoBank will have on mainstream lending. “KakaoBank’s rapid growth underscores the threat that Big Tech poses to incumbent banks,” says Moody’s, which says incumbent banks must strengthen their online platforms as KakaoBank expands into multiple loan segments.

“It has lower costs than most local bank peers by using advances in technology and operating without physical branches,” says Tae Jong Ok, Moody’s senior analyst. “The burden has shifted to the incumbent banks to strengthen their platforms and make the customer experience similar to virtual banks.”

“All the major Korean banks have substantial resources available to deploy and are investing heavily in their technology offerings, systems and workforces,” the rating agency says. But Fitch, too, notes that the internet banks – K Bank, rather slower out of the blocks, is the other – “have nonetheless added a new dynamic to Korea’s already competitive banking market.”

In this context, Citigroup’s decision to wind down its Korean consumer banking operation rather than trying to sell it is interesting, it is perhaps a reflection of the difficult competitive environment.

Kakao Bank was actually the first internet-only bank to launch, in April 2017, but its early days were mired by challenges around its parent, the telco KT. After that sluggish start, it is underway, with a W22.4 billion profit in 2021 after a loss of W105.4 billion in 2020.

It is also worth pointing out that another part of the Kakao ecosystem, KakaoPay, which supports contactless payments through QR codes and near-field communications, is in some sense a competitor to KakaoBank.

KakaoPay is, unlike the bank, incorporated into KakaoTalk, the mobile instant messenger.

“When it comes to KakaoPay, I think it is our competitor and partner at the same time,” says Yun. “But the financial market of Korea is large enough for KakaoPay and KakaoBank to achieve success separately, and I believe one day both can be market leaders, with different roles in the market.”

Metaverse

So, what comes next? Technology is always changing and it will be incumbent upon KakaoBank to stay relevant as digital innovation moves forward.

“I think we need to start with a definition of innovation,” Yun says. “I believe innovation is about changing the long-term habits of many people. In the banking industry, that habit has always been face-to-face services, lagging behind the change in other parts of our lives which have already become mobile-based.”

That could encompass the metaverse, though the jury is still out on how this might impact financial services. Nevertheless, during a recent Credit Suisse event trying to imagine how the metaverse will look, analyst Soyun Shin, who covers Korean internet, online gaming and telecoms, named KakaoBank as a business that was likely to be ready.

“The metaverse is still in the early stage, and regulatory guidelines on NFT [nonfungible token] trading and tax on the gains on crypto trading have not been settled yet,” she says. But Kakao’s blockchain subsidiary in Singapore called Krust, is already looking at the sector (Krust is a subsidiary of Kakao, not specifically KakaoBank). Shin expects a clearer regulatory framework for digital assets now that the election is over.

KakaoBank also plans to expand globally, “shifting our focus from domestic to other countries, including the emerging countries in Southeast Asia,” Yun says.

Doing so, he believes, will require both technology and local knowledge – a similar calculation that Ant Financial made as it grew in Asia – and Yun says he is now exploring partnerships with local companies.

But ultimately, KakaoBank’s vision is driven by its simplicity.

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