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Two more internet banks coming

Gov’t likes how Kakao and K Bank added competition to market
Dec 24,2018
The government has decided to allow two additional internet banks to launch by the first half of 2020.

If all goes as planned, they would be the first new banks introduced to the Korean market for three years.

Both K Bank and Kakao Bank officially launched in early 2017.

On Sunday, the Financial Services Commission (FSC) and the Financial Supervisory Service announced their plans to start accepting internet bank applicants in March and select two businesses at most by May.

The details on the standards applied to the bidders will be announced in January.

The evaluation will include details on how these internet bank operators will be able to secure the necessary investments as well as their shareholders and business plans, including new fintech technology and how its business model would help low-income households.

The financial authorities said it hopes that the additional internet banks will usher in competition within the banking industry.

A study by a financial industry competition evaluation committee made up of private industry experts created by the FSC found that there’s a need to introduce additional competitors, as the household loan market lacks competition.

The study that was released earlier this month found that when Kakao Bank was first introduced, it helped average interest rates on households and unsecured loans in the local banking industry to fall.

The average interest rate fell from 4.56 percent in July 2017 to 4.39 percent two months later. The internet banks helped other banks lower their other commission rates, including ATM rates and prepayment penalties. Charges on overseas money transfers have also started to drop.

Despite the positive changes, the study has also found that the top six banks continue to dominate the market. This has led to worsening cost efficiency, which could be solved through greater competition. Competition among banks, when compared to other industries, is relatively low.

In August President Moon Jae-in raised the need to change internet banking regulations to further allow innovative changes in the banking industry to help boost jobs.

The main business of the new internet banks will be household loans. But the financial authorities said they will also be allowed to provide loans to small businesses like mom-and-pop shops and restaurants, as well as SMEs. Internet banks are banned from giving corporate loans.

“It will take at least a year for the selected businesses to prepare, from setting up their network to hiring the necessary workforce,” said Choi Hoon, head of the FSC’s financial industry bureau. “If the preparation process goes smoothly, the new internet banks will likely go into service in 2020.”

Next year, the IT companies Kakao and KT will undergo the government’s eligibility evaluation.

This may allow them to raise their stakes within Kakao Bank and K Bank to a maximum of 34 percent, becoming the largest stakeholders in each internet bank.

On Sept. 20, the National Assembly passed a reform bill that allows nonfinancial companies whose ICT business accounts for 50 percent of their assets to raise their stakes within the banks from the previous maximum limit of 4 percent to 34 percent.

Under the previous law, no nonfinancial companies were able to own more than a 4 percent stake in banks so as to prevent conglomerates from using banks for their own purposes, including lending loans at below-market interest rates or using the deposits that the bank has for illegal purposes, such as embezzlement and bribes.

The companies can currently raise their stake up to 10 percent and can only exercise voting rights on 4 percent of their stake.

Kakao owns a 10 percent stake in Kakao Bank and KT has also has a 10 percent stake in K Bank.

One of the biggest reasons behind the loosening of the law was to help these online banks secure additional financing that they need to grow.

The two companies have expressed their willingness to expand their shares in these internet banks. It is likely that Kakao and KT will immediately apply for approval to expand their share in online banks on Jan. 17, which is when the newly passed reform bill will go into effect.

However, the companies could face controversy, as both previously violated the fair trade act, which is one of the criteria of the evaluation. In order to gain approval to become a larger stakeholder, the applicant must not have violated any financial, fair trade or tax laws in the last five years.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]