Mountains of Cash
Three Internet bank consortia were found to have deeper pockets than expected by many financial experts. Many thought that the consortia will have little initial capital, since Internet banks are based on information and communication technologies. The three consortia’s strong desire for investment implies hotter competition to get an Internet bank business license.
The KT Consortium handed in a preliminary application form about the establishment of K Bank (tentative name) with capital of 250 billion won (US$221 million) to the government on Oct. 1. Its capital is 2.5 times more than suggested by financial regulators and 10 times the amount of capital required for an Internet bank in a revised draft of the proposed Banking Business Act.
The KT Consortium will raise capital in accordance with participating companies’ stakes. The two largest shareholders – KT and Woori Bank – have an 18 and 16 percent stake each.
The Interpark Consortium set its capital for its Internet bank, I Bank (tentative name) at 300 billion won (US$265 million). The figure is 3 times the amount suggested by financial regulators and 12 times the required capital in the revised draft of the proposed Banking Business Act. The Interpark Group will deliver one third of the capital itself. The remaining 200 billion won (US$177 million) is to be funded by SK Telecom, GS Home Shopping, BGF Retail, IBK, NH Investment & Securities, and Hyundai Marine and Fire according to their stakes.
The Kakao Consortium, consisting of Kakao, KB Kookmin Bank, and Korea Investment Holdings will also found Kakao Bank (tentative name) with capital of about 300 billion won too.
The market expected that an Internet bank will not necessitate big initial capital, since it will not open offline branches, instead providing services based on information technologies. But it turned out that the three consortia prepared more capital.
Financial experts predicted that it will cost a minimum of 60 billion won (US$53 million) to build basic infrastructure such as a remote banking system, automation equipment, and a call center.
In addition, even taking into consideration marketing costs in the beginning of the Internet bank business, capital of about 300 billion won is more than expected, according to them.
According to a representative at a commercial bank in Seoul, Internet banks established in the U.S. in the early 2000s spent a huge amount of money on marketing to attract customers. But the Internet banks could not last more than two years due to liquidity crises. Therefore, it is not bad for an Internet bank to start with a lot of capital, since it can enhance its business stability and play a positive part in the preliminary review.
With reference to capital, financial regulators are planning to lower the capital requirement from the current 100 billion won. They aim to promote competition by easing the entry barriers of the Internet banking business.
At the moment, the revised draft of the Banking Act sets capital at 25 billion won (US$22 million). The consortia decided to make a big investment in capital against the National Assembly’s and financial regulators’ basic plan to lighten the burden of capital on Internet bank business operators. Thus, there will be hotter competition among Internet banks.