Korean lenders brace up for competition in AI pension management

[Photo by Yonhap]

South Korean banks are accelerating efforts to engage in artificial intelligence (AI) management of retirement pensions ahead of the commercialization of robo-advisors (RAs), or automated financial advisors, in the second half of this year.

According to sources from the financial industry on Monday, AI-based RAs will be introduced to the retirement pension market in Korea as early as November.

Currently, the non-face-to-face asset management services or RAs offered by banks can only suggest investment portfolios.

As part of the government’s service industry digitalization strategy, it allowed the commercialization of RAs in July as an innovative financial service for retirement pensions.

Once banks and other retirement pension providers apply for and pass the financial regulatory sandbox in the second half of this year, RAs will be able to buy and sell retirement pension assets based on individual investment preferences.

Shinhan Bank and KB Kookmin Bank, which rank first and second in terms of retirement pension reserve amounts, are the most active players.

Shinhan Bank is collaborating with Quarterback Investments Co. and Quantec Asset Management Co., which are well-known for their RA services, to discuss strategic products to which algorithms will be applied.

The bank also viewed the two companies’ RA return performance positively.

The average cumulative returns of Quarterback Investments and Quantec were 12.89 percent and 11.67 percent, respectively, as of the end of July.

“We expect that our RAs can satisfy the long-term investment and return needs of customers in their 30s and 40s, who still have a considerable period until retirement,” said a Shinhan Bank official.

KB Kookmin Bank recently selected two firms, including Mirae Asset Global Investments Co., as its retirement pension partners and concluded discussions on the direction of algorithm operation and portfolio design principles.

“We are discussing procedures for adjusting asset allocations to prepare for unexpected market fluctuations,” said a KB Kookmin Bank official.

The bank also launched a task force (TF) in the pension business division and is working on revamping its flagship KB Star Banking app to allow users to easily sign up for RA services and manage their reserves.

Hana Bank partnered with four companies, including fintech company Fount Co. It has the most partners among the commercial banks and is developing retirement pension-specific services by applying AI algorithms for each partner.

Woori Bank plans to select partners, including a fintech company, in August.

Banks are competitively introducing RAs as the share of performance-based products in retirement pensions is increasing.

The proportion of performance-based products in the total reserves of 394.29 trillion won ($288.14 billion) was 16.1 percent in the second quarter, up about 3 percentage points from the end of last year’s 13 percent.

“There is a growing demand for highly profitable investment products, especially among the young people, so banks could lose customers if they only emphasize safety, which is their strength,” said an official from a commercial bank.

Banks also believe that RAs will facilitate a transition from principal-guaranteed products to performance-based products.

”The advantage of RAs is that they allow people to grow their retirement pensions even if they lack investment experience, and they can also manage long-term returns stably without being swayed by market conditions based on big data,” said another industry official.

“If accumulated data show that AI outperforms humans in terms of returns, the range of applicable products and services can expand,” the official added.

For banks, introducing RAs is also a countermeasure against securities firms’ aggressive moves in the highly competitive retirement plan market, including developing their own RA-related technologies and investing in equity stakes.

“It is a service we must introduce if we do not want to lose customers,” said a bank executive.

Banks are hoping to attract new customers in the retirement pension sector, which requires lifelong management, and enhance the competitiveness of their banking apps.