Asia’s virtual banks need to redefine “MVP”

Korea’s model

The closest model for new Asian VBs is Kakao Bank, an arm of Korean internet company Kakao Corp. Launched in mid-2017, Kakao Bank began 2019 by reaching the 10 million-customer mark, nearly one in five Koreans, and it makes a profit.

Its success comes from three things. First, Kakao boasts an already successful social-media and e-commerce site. Second, it has leveraged its lower operating costs and its brand into free accounts, free interbank transfers, cheaper loans, and cheaper forex rates. Its convenience has made customers start to look at it for more complex products, and to broaden its reach to older people. Third, Korea’s traditional consumer banks are not very sophisticated compared to those in Hong Kong and Singapore, so there was a better-defined customer need that Kakao Bank could meet.

But it’s not all smooth sailing. Kakao Bank and its local rival, K-bank, have seen customer growth level off. The big commercial banks have continued to grow their deposit assets, largely off mortgages, which remain off limits to internet banks. And local regulation around ownership (Kakao Corp. and Korea Telecom only own a minority of their respective banks) limit their ability to raise new capital to keep extending more loans.

If Korean regulators free up digital banks to offer mortgages, and enable them to clean up their shareholding structure, they will resume their rapid growth; authorities may also grant one or two more licenses to digital players, further boosting the sector. But if regulators don’t, then internet banks’ pricing strategies will have to change.