Innovation and a strong organisation key to Kakaobank’s success

• Banking account was the core business of Kakaobank, with a savings borrowing, spending, payments and international transfer services built on top of it
• Kakaobank’s team spent time on design principles, creating an app that allows easy path finding and usability
• The active rate of Kakaobank app users has been consistently above 80% based on one transaction within a month

Kakaobank of Korea Corp (Kakaobank) received a full banking licence and went public in July 2017, making it the first pure mobile bank in South Korea’s banking sector. The digital bank is an offspring of Kakao, the largest social communication platform in the country, which has 42 million active users out of the 50 million population. Messaging app Kakaotalk was already leading Korea’s financial technology (fintech) innovation with Kakaopay and its bank wallet Kakao.

Banking account was the core business of the bank, with a savings borrowing, spending, payments and international transfer services built on top of it.

The Kakaobank platform, its offices and human resources were built from scratch. It is connected to Kakao via open application programming interface (API), heavily leveraging on customer data.

Traditional banks bought into the consulting myth that technology was a peripheral competency, causing banks to outsource massively. In hindsight, it was one of the biggest tactical management failures in the operational history of commercial banking.

Like their counterparts in China, Kakaobank made technology and information technology (IT) its core backbone, building every system within, which made it easier to upgrade and make changes. Compared to commercial banks in Korea where IT staff is less than 5% to 10%, 41% of Kakaobank’s 390 employees are working on IT.

Kakaobank’s team spent time on design principles, creating a superior app in the Korean market that allows easy path finding and usability, which other Korean banks have started copying this approach. The other attributes of success were convenience and servicing speed. It takes only minutes to open an account, three minutes to send money abroad, one minute to receive a microloan and ten seconds to send money to a friend.

In a recent representative customer survey of 1,500 people in October 2017, the top four reasons why customers bank with Kakaobank were: (in order of importance) easy to transfer money without certificate, easy to use, low fees, and easy to open an account (no documents required) (Figure 1). In Korea, commercial banks require customers to transfer money with a certificate/security card in their mobile phone.

Its shareholder structure comprises of nine key shareholders, chosen for their core digital online capabilities and leading position in their markets (Figure 2). Korea Investment Holdings (KIH), known for its investment and asset management capabilities, is the majority shareholder owning 58%. The other core members are Kakao and Kookmin Bank which hold 10% each.

Furthermore, Kakaobank has a credit card agency in KBcard, covering card issuance, payments and collection. Integrating it with Kookmin Bank’s capabilities allowed the bank to save investment into new systems.

Market success and bottlenecks

Within ten days of launch, the platform registered 240,000 customers, more than what the commercial banking industry acquires in a year. Kakaobank was able to bank on the trust that Kakao and Kakao talk have acquired in the market. On February 2018, Kakaobank crossed the 5.2 million user mark, which is equivalent to 10% of Korea’s population, averaging 290,000 additional users per month since it was launched, and shocking commercial banks and upset the market in retail financial services.

The number of financial transactions has also gradually increased. On August 2017, a month after its public opening, it reached 1.22 million, and by the end of January 2018, it went up to 41.3 million. These transactions included the opening of accounts, the opening of loans, overseas remittances, and the number of automated teller machines (ATM) used.

The active rate of Kakaobank app users has been consistently above 80% based on one transaction within a month. To achieve such success, Kakaobank focused on seven key areas. First, it unbundled products, focusing on single and easy to understand services, which made it more competitive.

The bank also ensured total accessibility through mobile delivery. Kakao provides payments, music, mobility, commerce, comics, and games on its app. It also ensured superior communications with customers. Technology was another important factor. The bank claims it was the first to be developed in-house and to use open source software, which gives it a competitive edge (Figure 3).

Fifth, it prioritised mobile banking to solve a customer problem. Its work culture provides the right culture for the mobile native generation, offering “something special” to employees. The bank also offered competitive interest rates and did not put ATM fees (e.g. cash back regardless of previous month’s usage amounts, overseas remittance fee: 1/10 of other commercial banks) Lastly, it made opening accounts as easy as setting up an account on Facebook.

Kakaobank made a profit in 2017 from the profit margin of its lending and deposit accounts. However, losses were recorded due to general administrative spending, including fees and depreciation costs from IT investment. These conditions appear however to be the transient effects that may occur early in the service’s commencement.

By February 2018, it had collected $6.6 billion in deposits, $5.5 billion in loans, and issued 4.1 million debit cards. It was a curious move to issue a physical cards instrument when all could be done on the app, but Kakaobank believes it was essential for customers because there is still a portion of who still likes to withdraw money through ATMs. The ability to track spending and usage pattern of cards allowed Kakaobank to collect information for credit and build a more robust credit rating score.

Other bottlenecks became more serious. Kakao Bank appeared to be taken by surprise with the scale of acquisition in the first months causing a system crash and a slowdown. More than 300,000 people opened loan accounts on the first day of launch, forcing the bank to scale up its server and IT system.

Another problem surfaced on the loan side. Since Kakaobank doesn’t have a strong credit-rating score system (CSS), it slowed down their approval processes.

The bank estimates that it needs three or four years to be employed with a more robust CSS. As a result, 30% of its loans (subprime) are based on guarantees by SGI.

The other 70% of the bank’s loans are prime loans, which are sanctioned based on the generic credit rating system in Korea, which also services commercial banks.

The bank aims to build a more advanced credit rating system by including social data that will offer “lower hurdle loan” via alternative information from nonfinancial sectors and big data analysis algorithm.

To expand its loan offerings beyond personal loan products, Kakaobank started selling housing deposit loans for a two-year period lease with down payment, a

contract or a monthly rent. A Kakaobank user may take a six-month convertible floating rate loans for up to $210,000 (KRW222 million), with a yearly interest rate of 2.82% or more.

A face-to-face process, compare to local commercial banks, when submitting documents is not required, like other products of the online-only bank, partly with the help of scraping technologies.

Throughout the screening process, users gave Kakaobank permission to access their digital signature certificates by the government. The bank’s scraping technology then scans the documents stored in the certificates, which contain proof of identity, family and marriage status, as well as other data.

However, some manual processes are still inevitable due to the nature of the monthly rent of the rental housing loan. When a customer submits a document to Kakaobank’s mobile application, a staff needs to check it out. Still, Kakaobank plans to increase the level of automation.

The company will also release a bridge loan, a virtual account for small and medium-sized enterprises, and an app to app payments service with a credit card planned for 2019. In addition, a chat bot will also be launched later this year through its mobile banking app.

The Asian Banker assessment

Kakaobank has a chief executive officer who has gathered the necessary financial acumen to run a bank, and a shareholder structure that contributes their expertise, which Kakaobank can leverage on for future expansion.