A shift from traditional finance to digitalized finance can help promote financial inclusion by lowering the costs for financial services even in highly regulated financial environment like that of the Republic of Korea, where two new internet-only banks are challenging incumbents for the first time.
Other countries keen to boost competition in the financial sector or expand financial services to underserved areas and people unable to travel to physical buildings could learn lessons from the Korean experience with this type of banking.
An internet-only bank makes all of its financial transactions online or in a mobile environment free of local branches or ATMs. Based on cost advantages, these banks come up with differentiated services, prompting existing banks to improve their services.
Hoping to revise the Banking Act in Korea, allowing all non-financial firms to own stakes up to 50% in internet-only banks, Korea’s financial regulator has approved on a preliminary basis two consortiums: Kakao Bank, led by the mobile messaging firm KakaoTalk, and K-Bank steered by the mobile telecommunication firm KT.
These two new banks will change the Korean financial industry by providing innovative solutions—including mobile messaging, telecommunication services, and Big Data analysis on a wider user base—to the outdated Korean banking industry.
Developing countries should pay attention to Kakao Bank’s focus on middle-interest loans for the self-employed and micro-enterprises. Currently, top-tier banks in Korea offer an annual interest rate of 3-5%, while secondary financial institutions such as mutual savings banks or capital services firms charge 15% to 34%. According to NICE Credit Information Service, loans to mid-level borrowers account for $45 billion or about 30% of the total unsecured retail lending market. Kakao Bank will rely on Big Data skills rather than external credit ratings agencies to manage credit risk and assess credit ratings for borrowers.
K-Bank, meanwhile, will introduce easier, faster services such as one-touch mortgage loans, real-time wire transfer to foreign countries, and banking at convenient stores that will provide new financial experiences in Korea but could also be applied by others elsewhere.
Despite the country’s tremendous ICT infrastructure and technological capabilities, the financial regulatory environment has not been conducive to supporting innovative financial technology business models, which the Korean banking industry needs to become a new growth engine for the economy.
And beyond Korea, developing Asia and the Pacific, despite being the world’s fast growing region, is still saddled with a relatively backward financial system, where small, medium-sized and micro enterprises are a huge source of employment, economic dynamism, competition and innovation but lack access to easy capital funding from traditional banks.
The entry of fully digitalized banks can help improve financial services and support the emergence of innovative financial solutions, as competition will force traditional financial institutions to create new offerings and services to keep up. To create this new internet-based financial environment, Asian regulators should remove all unnecessary entry barriers to the new financial wave.