• Kakao Bank's rapid growth underscores the threat that Big Tech poses to incumbent banks 
• Incumbent banks will have to strengthen their online platforms as competition mounts with Kakao Bank expanding into multiple loan segments

Hong Kong, July 12, 2021 -- 

Korea's incumbent banks face mounting competition as virtual bank KakaoBank Corp. (Kakao Bank) ventures into multiple loan segments, says Moody's Investors Service in a new report. Launched in 2017 as an offshoot of social media giant Kakao Corp., the virtual bank has jumped to become the eighth-largest retail bank in Korea (Aa2 stable), underscoring the success of a Big Tech company penetrating the highly regulated banking industry. 

"Kakao Bank's assets rose rapidly in unsecured personal lending by attracting the largest number of users among Korea's mobile banking apps through a seamless digital banking experience. It has lower costs than most local bank peers in 2020, by using advances in technology and operating without physical branches," says Tae Jong Ok, a Moody's Vice President and Senior Analyst. 

Competition will ramp up as Kakao Bank expands its loan portfolio and capital base. The virtual bank plans to launch mortgages and merchant loan products, which will expand its addressable market to 65% of Korea's won-denominated loans over the next 12-18 months, from just 14% now. As a result, the profitability of large incumbent banks that have high shares of household loans could worsen, while smaller banks' already limited presence in these loan segments could reduce. 

At the same time, Kakao Bank's planned capital raising via an initial public offering (IPO) in the second half of 2021 could increase its capital by around 76%-90% compared with that at the end of March 2021. Kakao Bank's profitability matched that of nationwide banks' in 2020, generating capital and allowing it to access capital markets. 

Incumbents are at a competitive disadvantage against Big Tech firms because they lack a platform to attract customers and collect data from nonfinancial services, as well as incur higher costs to maintain physical branches. While Big Tech companies make inroads to banks' core businesses, incumbents' strategies to strengthen their platforms could increase costs and operational risks. Still, more fundamental adjustment risks are potential changes in pricing and underwriting, which could subject incumbents' asset quality and profitability to greater uncertainties. The burden has shifted to the incumbent banks to strengthen their platforms and make the customer experience similar to virtual banks'.