This article first appeared in The Edge Malaysia Weekly on June 24, 2019 - June 30, 2019

KAKAO Bank’s launch as one of the first digital banks in South Korea almost two years ago turned out to be a major wake-up call for the nation’s traditional banks.

Built on the back of South Korea’s highly popular messaging platform Kakao Talk, it started operations as a mobile-only bank in July 2017, attracting a whopping 300,000 accounts within the first 24 hours.

It went on to clinch two million customers by the end of the second week — roughly 5% of the digitally savvy nation’s adult population.

The growing numbers made it hard for incumbent banks to dismiss Kakao as a flash in the pan.

According to Young-Suk Kim, EY Korea’s financial services advisory partner, incumbent banks were forced to take a long, hard look at themselves. Like most Malaysian banks, they too had mobile apps and online banking, having invested heavily in the digitisation of their operations over the years. 

“But their way of investing was not customer-centric — and that was the problem. They just invested a lot of money on a mobile app, but didn’t try to change the process or way of using it from the customer’s perspective. They only cared about [meeting] regulatory requirements. And that’s why the experience was not that [good or] convenient [for the customer]. After Kakao, they realised that that was the way they had to innovate themselves. They changed their attitude and they put customers first,” he tells The Edge in an interview in Kuala Lumpur.

Using Kakao as the benchmark, most of the incumbent banks in South Korea then renewed their mobile apps and processes, he adds.

EY has insights into the workings of Kakao as it advised the bank on its set-up and strategy.

Incumbent banks did two things after Kakao came onto the scene, says Kim. “Apart from providing better-quality mobile apps, products and services, they also focused on creating new value out of branches and employees. For instance, Kakao cannot do complex products and financial advisory. So, the banks trained their employees to provide better advice and more complex products for consumers.”

A retail bank, Kakao offers mainly unsecured loans like personal loans and overdrafts.

Kim believes the main reason Kakao is such a hit is its way of making things simple and convenient for the customer.  It’s all about the quality of customer experience, he says. 

For instance, Kakao managed to cut in half the number of steps customers needed to take to open online accounts while maintaining compliance with regulators’ anti-money laundering and know-your-customer (KYC) requirements.

It takes just seven minutes to open a Kakao online account, using a mobile phone number and an ID card photo.

“South Korea actually had e-KYC in place one year before Kakao
tional banks to buck upcess usually took 20 to 30 minutes. But Kakao’s teams revisited the process and re-designed it in such a way that it was beneficial to both the banks and consumers, and then proposed this new way to regulators. The regulators approved it and now, it only takes seven minutes. After Kakao applied that process, other banks followed suit,” says Kim.

Kakao’s low-cost model was also a factor in its success. It decided from the start that it would not get into PC-based banking as this would require double the resources. Its focus on mobile-only offerings resulted in substantially lower operating costs.

This enabled it to launch highly competitive offers, according to EY. Kakao reduced the overseas remittance commission to one-tenth of that charged by existing lenders and offered much-better prices for deposits and loans.

Initially, it was thought that Kakao would break even only in the fourth of fifth year of operations. However, it surprised the market by posting its first quarterly net profit — in the January-March period of this year — of 6.6 billion won (RM23.58 million).

Whether it will remain profitable for a full year remains to be seen. This is because Kakao had early on adopted a model based on “activation first, monetisation second”.

Interestingly, for a digital bank, Kakao did not target the 20-to-30-year-old customer segment.

“This is not a profitable segment. Instead, they targeted the 30-to-50-year-old segment. And, it was found that the older the customers, the more they liked Kakao,” explains Kim.

He says Kakao’s net promoter score — a gauge of customer perception of the bank — for 40 to-50-year-olds was higher than the younger group.

“You know, even if Kakao provides slightly better pricing, it is not a cheap bank. Its net interest margin, at over 2%, is higher than that of other banks. There is a perception that a digital bank is a cheap bank. But sometimes, a digital bank can be a premium bank if it provides a better experience,” he remarks.

So far, Kakao’s asset quality has remained stable. Its non-performing loan ratio stood at 0.18% as at March 31 — a slight increase from 0.14% a year ago, but still much lower than commercial banks’ average of 0.55%.

“This is because it targets urban employees from the 30-to-50-year-old segment, who are considered better educated and with better incomes, hence, more likely to repay the loans they take,” Kim explains.

As at end-April, Kakao had 9.3 million customers, 16 trillion won in deposits and 10 trillion won in loan balances.

In South Korea, digital banks come under the same regulatory requirements as traditional banks with the exception of two small “favours” — they get a waiver from having to apply Basel III rules until two years after launch, and easier credit card licence approval.

“From my perspective, there is very little favour for digital banks in terms of regulatory requirements,” Kim remarks.

Kakao, whose largest shareholder is Korea Investment & Securities, is one of only two digital banks in the country.

The other is K Bank, which was launched three months earlier than Kakao but has struggled to gain similar strides. Observers say this is likely because it is perceived to be staid and less innovative than its rival. K Bank’s largest shareholders are Woori Bank and telecoms company KT Corp.

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