Internet-only banks are neither more competitive nor innovative

Customers of internet banks are switching to commercial banks as traditional banks start introducing financial products with higher interest rates and internet banks lack a full range of services.

Chun Yeong-eun, an office worker, recently terminated her term deposit product at Kakao Bank and switched to a financial product from a commercial bank.

"I signed up for a Kakao Bank term deposit because I mainly use this bank, but I decided to switch to a commercial bank because of Kakao Bank's low interest rates," Chun said.

Customers of internet banks are switching to commercial banks as traditional banks start introducing financial products with higher interest rates and internet banks lack a full range of services.

The interest rate on a Woori Bank one-year term deposit is 3.6 percent, higher than Kakao Bank's 3.1 percent. A Shinhan Bank term deposits has an interest rate of 3.4 percent, and one from Hana Bank is paying 3.3 percent.

Some are using both internet banks and commercial banks for different purposes.

"I began using Toss instead of other commercial banks, but still use commercial banks for financial products, such as installment deposits," said Park Kyu-jin, a university student.

"It's still concerning to deposit a large amount of money into internet banks, and because I am one of the main customers at commercial banks, I receive a lot of benefits."

"Internet banks, which have been operating for five years, do not have a special core business different from the existing commercial banks," said Jun Sung-in, an economics professor at Hongik University.

"There are no special reasons to use internet banks as no better services or conditions are provided compared to other banks," said Sung Tae-yoon, a professor of economics at Yonsei University.

"Internet banks should raise their product competitiveness, and if they don't, financial authorities should raise the issue."

Commercial banks are aggressively chasing users to increase their monthly active users (MAU) metric, a significant index used to evaluate the competitiveness of internet banks.

Toss Bank has the highest MAU, at 13.92 million, followed by Kakao Bank's 13.19 million and Kookmin Bank's 11.50 million, according to Mobile Index's data on financial applications last month.

The MAU of commercial banks is rising at a faster pace compared to internet banks.

The figure for Kookmin Bank's mobile application rose 12.9 percent on year last month, compared to Kakao Bank's 1.7 percent and Toss's 0.2 percent.

The figures raise questions on whether internet banks have already reached their limits.

"There are definitely positive effects as internet banks have added competition to the financial market, but it is difficult to say that they have actively improved convenience and led digital innovation," said Sung Tae-yoon.

"Over 80 percent of financial transactions were made through non-face-to-face means before Kakao Bank was introduced to the market," said Lee Tae-kyu, a research fellow at Korea Economic Research Institute (Keri).

"It is acceptable to say that it has accelerated digital innovation, but difficult to say that it has caused a major change to the bank industry."

One of the main purposes of introducing these internet banks to the market was to provide loan systems for those with low credit ratings. But questions are raised on whether these services have successfully done so.

High-credit borrowers were 83.8 percent of new borrowers from internet banks in the first quarter of last year. Customers with mid to low credit ratings were 16.2 percent.

All three internet banks — Toss Bank, Kakao Bank and K bank — were not able to reach their target by the end of last year, which they had suggested in the first half of last year.

"The tightening of household lending last October had caused the halt of credit businesses, which may have caused these banks not being able to reach their goal," said a spokesperson for an internet bank.

"If internet banks were to lead the financial industry, commercial banks should have expanded the percentage of loans for those with mid to low credits," said Jun Sung-in.

The main reason that had led internet banks to face the current crisis is that they are not much different from commercial banks.

Internet banks also rely on loan-deposit margins and offer products mainly centered on loan services. The total amount of loans of the three internet banks surged 18.9 percent, while saving and deposits rose 33.9 percent in June compared to the end of last year.

But the total assets of these banks are only equal to 4 percent of the assets of Kookmin Bank, Shinhan Bank, Woori Bank and Hana Bank.

"All those that internet banks offer can also be found at commercial banks, and there are much more we can provide to customers, including installment savings, funds and loans," said a spokesperson for a commercial bank.

"Internet banks have also not been able to catch up with commercial banks when it comes to asset management and company-related matters."

Credit evaluation is another weakness.

"It is hard to say that credit evaluations are being done properly when looking at the net profit of Kakao Bank in the second quarter," said a spokesperson for the banking industry.

"If evaluations were done right, the amount of allowance for the bad debt should have decreased, but instead, it increased along with the loans for those with mid to low credit ratings."

New profit models and services to differentiate these internet banks from the traditional banks will be needed for internet banks to compete and survive.

"Internet banks should reduce costs by offering digital services and use this to offer a wider range of services and better services to customers," said Yonsei's Sung.

"Financial authorities should also think of ways that could help these internet banks differentiate themselves from other commercial banks."

BY SHIN SU-MIN [cho.jungwoo1@joongang.co.kr]