DGB Daegu Bank, a regional institution, is poised to transition into a commercial bank as early as next month, coinciding with the growing momentum surrounding the emergence of the fourth internet-only bank. This development prompts speculation about the potential disruption to the dominance of South Korea’s five major banks – KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup. The banking landscape in South Korea has been influenced by mergers, such as Hanil Bank and The Commercial Bank of Korea in 1999, Kookmin Bank and Housing and Commercial Bank in 2001, and Shinhan Bank and Chohung Bank in 2006, solidifying an oligopolistic structure for over 20 years, since the 1997 Asian financial crisis.
Since the inception of South Korea’s first internet-only bank, Kbank, in 2017, followed by KakaoBank and Toss Bank, these digital institutions have driven innovation in the banking sector. However, despite their introduction of user-friendly apps and new financial products, the five major banks continue to maintain a firm grip on the market. As of September 2023, these major players held 74% of deposits and extended 62% of loans in the banking sector, totaling 1989 trillion won and 1631 trillion won, respectively, out of a total of 2684 trillion won in deposits and 2615 trillion won in loans across 20 domestic banks.
In July last year, South Korean financial authorities unveiled plans to promote competition in the banking sector by permitting regional banks to convert into commercial banks and issuing licenses for new internet-only banks. Consequently, the banking industry is poised to witness the arrival of new players after a considerable period.
DGB Daegu Bank, in particular, applied to the Financial Services Commission on Feb. 7 for approval to transition into a commercial bank. It intends to rename itself ‘iM Bank’ and aims to become a “New Hybrid Bank Growing with Customers Nationwide,” capitalizing on the digital accessibility and cost-effectiveness of internet banking while leveraging its expertise in SME finance typical of regional banks. Analyst Ahn So-young of Hana Investment & Securities remarked, “If DGB Daegu Bank transitions into a commercial bank, it could expand its branch network to broader areas,” adding, “Leveraging the title of a commercial bank, it could expand its business profitability.” Given that DGB Daegu Bank already meets the prerequisites for commercial bank status, the transition is expected to proceed smoothly, marking the first establishment of a new commercial bank in 32 years since the founding of Peace Bank of Korea in 1992.
Simultaneously, three consortia are competing to establish the fourth internet-only bank, each emphasizing its unique strengths. The consortium led by Korea Credit Data, tentatively named ‘KCD Bank,’ aims to offer optimized financial services for small business owners by leveraging data from ‘Cashnote,’ a management service utilized by 1.3 million small businesses. Another consortium, spearheaded by the Korea Federation of Micro Enterprise and tentatively named ‘SOSO Smart Bank,’ intends to introduce specialized products for small business owners through a dedicated credit evaluation model. Lastly, the consortium ‘U-Bank,’ composed of traditional financial companies like Hyundai Marine & Fire Insurance, alongside fintech startups such as Lendit, JOBIS & Villains, and TravelWallet, seeks to prioritize underserved groups such as small business owners, SMEs, and foreigners.
South Korean financial regulators and the banking industry anticipate that internet banks will play a disruptive role in the market, drawing on examples such as KakaoBank, which gained popularity upon its launch with its user-friendly app, significantly influencing the digital strategies of traditional banks. A source from a major bank remarked, “Previously, bank apps were often criticized for being slow and inconvenient,” adding, “However, with the emergence of internet-only banks, extensive overhaul efforts have been undertaken, leading to significant improvements.”
Kbank and KakaoBank also outperformed the five major banks by nearly twice the performance in a service known as ‘switching apartment mortgage loans.’ This service, introduced last month with competitive low-interest rates, enables consumers to conveniently compare and search for interest rates online and seamlessly transfer their housing mortgage loans to financial institutions offering lower rates.
