South Korean internet company Kakao added internet banking to its mobile platform empire last week, with South Korean financial regulators on Sunday having given a preliminary OK to the internet-only Kakao Bank.
While details still need to be teased out and approval must be finalised by a formal act of the National Assembly -- sometime in the first half of 2016 at the earliest -- Kakao Bank is expected to shake up South Korea's sclerotic financial sector.
The group behind Kakao Bank is one of two consortiums given permission by regulators; the other, K-Bank, was led by South Korea's second-largest telecommunications corporation KT.
Tentative approval means the introduction of new commercial banks for East Asia's third largest economy in more than two decades, and the country's first ever internet-only banks.
Banking shake up
Kakao said it will introduce a new, much more refined type of credit rating system that will incorporate "other online purchase data and possibly social media data".
Web-based banks could make credit easier to access for individuals, startups, and small businesses and offer a wider range of customer services from existing commercial banks.
South Korea's financial sector is one of the least competitive in the OECD and opening it up to innovative "FinTech", or financial technology services, including online banking, could stimulate a long-slumping banking industry.
Internet-only banking emerged in the 1990s with the advent of online banking, but the 1997-1998 Asia Financial Crisis intervened, and risk averse regulators shunned innovations since.
Local analysts cite legal restrictions as reasons for a lack of innovation and competition in South Korea's financial sector, including a real name account regulation aimed at preventing money laundering and fraud, as well as ownership restrictions. Those rules made sense in the 1970s and 80s, but now they appear long in the tooth.
Non-banks are prohibited from holding greater than a 4 percent stake in a financial institution, and must have less than 2 trillion won in assets. South Korean regulators are expected to do away with those rules in 2016.
Kakao Bank will operate with an open architecture which will facilitate FinTech ventures to provide financial services through the bank, including financial management, a Kakao spokesperson said.
"As long as they have the security as a baseline and they can provide an innovative service that users want, then they will be able to offer them through Kakao Bank," he said. "Banks in Korea right now are enormous and have a set infrastructure where it is hard to bring in new technologies."
The consortiums led by KT and Kakao must now lay out their proposed corporate structure and risk management system and map out customer privacy protections and financial security details before South Korea's Financial Services Commission (FSC) gives them final approval. The FSC said it expects the country's first ever direct bank to start operation in June next year.
Kakao Bank has a lot to bring to the banking sector with broader customer lists on KakaoTalk, which has more than 39 million monthly active users. Kakao is already running mobile payment services Kakao Pay and Bank Wallet Kakao.
South Korean credit worthiness is rated on a scale of 1 to 10, 1 being best and 10 worst. People with a rating of 4 to 10 are basically unable to obtain funding from commercial banks. Instead, they rely on credit cards and short-term loans at annual rates as high as 100 percent.
Kakao could launch a whole new credit rating system for South Korea. "It could be 1 to 100 but that is not set in stone yet," the Kakao spokesperson said.
Kakao Bank is backed up by close to a dozen big players inside and outside of the country, including South Korea's third-largest financial group Kookmin Bank, Netmarble, an online game developer, eBay Korea, and Korea Investment Holdings. Tencent Holdings, the operator of China's WeChat service, is affiliated with one of Kakao's partners.