'Catfish Effect' Has Yet to Be Observed
The author is an analyst of NH Investment & Securities. She can be reached at michelle.cho@nhqv.com. -- Ed.
Admittedly, the emergence of Internet-only banks providing new financial services has had some impact on traditional banking players. But, a so-called catfish effect (a term describing how groups are motivated by the addition of a strong competitor), which was anticipated when Internet-only banks were first established, has yet to be observed. Effects from Internet-only banks’ aggressive pricing strategies have lasted shorter than expected, dispelling concerns that the emergence of Internet-only banks might lead to margins deterioration for traditional banks.
While Internet-only banks initially planned to provide loans with mid-level interest rates, they have ultimately turned to credit loans targeting high-income office workers, for which risk management is easier. Meanwhile, having enjoyed sharp loan growth driven by a low-interest environment in their early stages, Internet-only banks might see higher risks of asset quality deterioration (ie, increase in credit costs) as they grow.
In order to significantly differentiate themselves from traditional banking players, Internet-only banks would have to diversify their business portfolios (currently focused on deposit and loan services) and devise new strategies to attract customers (other than aggressive pricing policies).
Established in 2017, Kakao Bank has enjoyed stable loan growth, helped by strengthened capital power on a series of rights issuances.
In contrast, K Bank had to halt its lending services for about a year due to delays in shareholders’ investment decisions. Backed by beefed up capital power following a recent rights issuance of around W400bn, the bank has launched non-face-to-face mortgage products for the first time in the banking sector.
Despite rapid growth, assets and loan balance at Internet-only banks remain far lower than those at traditional banks. That said, the launch of products exclusively offered by Internet-only banks or a rise in price competition might bring meaningful changes to the banking sector landscape.
Having obtained preliminary approval by the FSC in Dec 2019, Toss Bank is expected to start operations by Jul 2021. While some worry that the dominance of Kakao Bank in the market may leave little room for Toss Bank’s growth, noting that the Toss platform exceeds Kakao Bank in terms of the number of app users, we believe that Toss Bank possesses the potential to emerge as a major player in the competitive landscape of Internet-only banking.
We note that the banking business has a high entry barrier, as it is regulated by financial authorities and requires a certain level of economies of scale to secure stable revenue. But, moving ahead, possible deregulation could spur the emergence of new Internet-only banks, in turn driving innovative changes in the domestic banking sector landscape.