Conventional banks are slashing their interest rates on loans to individuals and households in response to the rapid rise of mobile banks, particularly Kakao Bank.
Kakao Bank is not going to make a noticeable impact on the business of commercial lenders in the short term.
However, analysts say the competition between them and the internet-only bank to lower rates and fees for customers will get fiercer.
Even if this eats into the lenders' income, such a move has become more inevitable as Kakao has become the top lender in recently released records.
Also, the mobile bank decided to raise capital of 500 billion won from its shareholders as it needs to expand its loan portfolio to be a profitable bank within three years.
As a countermeasure to Kakao Bank's 2.84 percent interest rate, 17 commercial and regional lenders slashed borrowing rates by 0.11 percentage points on average last month, according to the Korea Federation of Banks (KFB).
Like other lenders that are seeking to offer rates in the low 3 percent range, K bank, Korea's first internet-only bank, has also lowered its rate from 3.17 percent to 3.06 percent. K bank, a part of KT, has raised capital of 100 billion from its shareholders to expand its branchless banking service.
Kakao Bank started business on July 27. It has already become the top lender as its loans extended to households increased by 540 billion won in the first two weeks of the month, according to the Financial Supervisory Service (FSS). The closest second was Shinhan Bank with a household loan increase of 400 billion won.
"Kakao does not pose a threat to commercial lenders in terms of size. But what we can expect to see is a change, which is already happening, in the way the lenders offer their services through fee cuts, and making them more easily available online without authentication processes," said Baek Doo-san, analyst at Korea Investment & Securities.
Kakao Bank appealed to the people as a mobile bank that can be easily accessible and offer low rates and fees.
Besides this promotion, it offered loans up to 150 million won in five minutes mostly to salaried workers with a monthly pay of over 3 million won. They accounted for 77 percent of all who downloaded the bank's application on their smartphones.
This enabled it to keep credit risks in check, which is necessary for financial companies to gain public trust, analysts say.
The size of Kakao Bank is relatively small, albeit its fast growth. It will most likely to remain that way for the time being.
Kakao Bank is expected to post losses in the first three years of its business. But its capital increase is expected to offset the losses, and will not affect its capital adequacy ratio. As a mobile bank, it has to maintain a BIS ratio at above 8 percent.
"As seen from the cases of internet-only banks overseas, they took an average of three to five years to become profitable," said Eun Kyung-wan, an analyst at Meritz Securities.
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