New ways to tame a chaotic banking systemMay 2nd 2019Print edition | Special report
YU, A 25-YEAR-OLD student in Seoul, racks his brain to answer a simple question: where do you bank? At three different institutions, it turns out, with six active accounts. One bank was nominated by a grant-giving body for the payment of a scholarship, another offered perks while he was doing military service and a third was where a previous employer insisted his salary be paid. He has several other dormant accounts, and “too many cards to remember”. One of them he applied for merely to get a bonus. “A saleswoman came into my office and said that if I spent 300,000 won [$300] on it, I’d get 100,000 won back.” He used it just once.
In South Korea, this profusion is perfectly normal. The average adult has 5.2 bank accounts and 3.6 credit cards. Financial products are chosen not because they are a good fit, or because an institution offers fine service, but almost entirely because of personal connections. Credit cards are peddled to acquaintances by freelance agents who split their commission. Flaws in customer acquisition mean that banking in South Korea has long been a miserable experience. Mobile-banking apps are poor or non-existent. Making a payment online typically requires 40 clicks and four passwords. But the past couple of years have seen a flurry of digital entrants. Some seek to help South Koreans cope with the existing muddle; others aim to replace it with something better.
In 2015 the Financial Services Commission (FSC), South Korea’s national regulator, decided that encouraging fintechs would shake up the incumbents and improve customer service, says Suh Jeong-ho of the Institute of Finance, a think-tank associated with the FSC. One of the most ambitious newcomers is Viva Republica. In December the startup became South Korea’s first fintech unicorn, raising $80m in a funding round that valued it at $1.2bn.
Founded in 2013 by Lee Seung-gun, a former dentist, Viva Republica tried several other ventures before going into digital payments with Toss (the name is supposed to suggest an easy shot in a ballgame), which has since grown into a comprehensive money-management app. Users can aggregate accounts, cards and loans into a single view, with outgoings classified by category. They can sign up for financial products, with Toss earning a commission. “If you’re looking for convenience, you have to use Toss,” says Yu, the overbanked student. “I can see how much I’ve spent and even invest in foreign stocks and peer-to-peer funding.”
The upstart’s speedy growth testifies to the awfulness of the traditional banking experience. Toss has 11m registered users, a quarter of the South Korean population. But its ambitions go much further. It is applying for a licence to set up a digital bank. The aim, declares Mr Lee, is to be the dominant South Korean “super-app” for all things financial. Banks do not see Toss as a threat, he says, but as a partner that cuts the cost of acquiring customers. In the long term, though, banks may lose out, he thinks. “We will get the [customer] engagement and they will become suppliers.”
Bank Salad (banking, but healthy), from Rainist, a fintech founded in 2012, is taking a narrower approach. It has 4m users and also offers account aggregation and money management, though not payments or transfers. Its chief executive, Kim Tae-Hoon, says it aspires to be a financial-adviser version of Jarvis, the AI assistant in the superhero film “Iron Man”.
Rainist’s strength is its data-driven referral system, which suggests products based on users’ spending patterns. According to its research, credit-card customers whom its partner institutions have acquired by other routes, such as agents who offer signing bonuses, spend an average of 600,000 won a month and stay for four months. The customers who sign up through Bank Salad spend three times as much each month and last nearly three times as long, so the card-issuers get a bargain for the commission they pay.
Both apps are shaking up South Korean banking by rationalising customer acquisition, setting new expectations for quality of service and, if Toss succeeds in becoming a bank, competing head-on. But there is another formidable challenger. Fully 94% of South Koreans use Kakao Talk, the chat app of Kakao, a social-media and mobile-gaming giant. Like WeChat, it includes a payment function, Kakao Pay, which has 28m registered users. It was used for more than 20trn won ($17.5bn) of payments in 2018.
A dominant social-media player’s success in payments is of obvious interest to other fintechs. In February 2017 Ant bought nearly 40% of the fledgling Kakao Pay for $200m. For Kakao Pay, says Shin Won-keun, its chief strategy officer, the appeal of Ant as a partner was that its portfolio is similar to what Kakao Pay would like to do. For Ant, it is a chance to learn from Kakao Talk: “They wanted to see what would happen with a messenger app.”
Kakao is now making a full-frontal assault on South Korea’s incumbent banks. In 2017 a consortium including Kakao Corporation, the brand’s parent company, won one of the country’s first two licences to run a digital bank. Kakao Bank has been a runaway success: within 13 days 2m people had signed up for current accounts and it now has 8.9m clients (K-Bank, the other newcomer, lags far behind with 1m). The FSC is considering allowing non-financial firms to hold larger stakes in banks (Kakao Corporation owns just 10% of Kakao Bank, the maximum permissible) and granting two more digital licences. Toss hopes to win one of them.
Rather than present itself as solid and respectable, as banks usually do, Kakao Bank comes over as playful and fun. Its debit cards, and those of Kakao Pay, feature the Kakao Friends, eight kooky characters created as emoji for Kakao Talk. Muzi, for example, is an optimistic piece of danmuji (pickled yellow radish) who dresses as a rabbit; the most popular character, Ryan, is a gentle lion who refused the throne of Doong Doong island and is self-conscious about lacking a mane.
Whether South Koreans will shift to running their financial lives through their Kakao accounts is another question. After all, when you already have five accounts, adding a sixth may not be that big a deal. But the hordes who have signed up demonstrate that customer expectations are changing. Instead of picking a stolid, sober bank manager to keep watch over their money, they are choosing a brand fronted by a gentle, maneless lion.