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What Korean commercial banks face in 2020

With unresolved problems set to drag into the new year, South Korean commercial lenders face a number of burdens that will keep them occupied throughout 2020.

One of the major issues that drew public flak earlier this year was the misselling of derivatives products worth a combined 800 billion won ($688 million) by Woori Bank and KEB Hana Bank, putting its customers at risk of losing large sums.

The banks failed to provide customers with adequate information about the high-risk nature of the products, financial authorities found in early December. The watchdog Financial Supervisory Service advised them to compensate customers for up to 80 percent of their losses, and both banks have officially expressed their willingness to do so.

Woori Financial Group Chairman and Woori Bank CEO Sohn Tae-seung on Monday called for his employees’ best efforts in the compensation process and said he was even considering the launch of a consumer protection fund. Part of the salaries of the bank’s ranking officials would be diverted to launch the fund, the firm said. 

A Woori Bank branch in Seoul (Yonhap)
A Woori Bank branch in Seoul (Yonhap)

KEB Hana has yet to announce any detailed plans concerning the indemnities, but vowed to do its best to comply with the financial authorities’ decision.

“The compensation process is expected to continue throughout next year as the last of our derivatives-linked funds and securities sold to clients is set to mature in September 2020,” a spokesperson for KEB Hana told The Korea Herald on Tuesday.

That fiasco is not the only burden lenders will have to bear this year. The FSS also recommended that six banks pay up to a combined 25.5 billion won to four local businesses that lost money after signing knock-in, knock-out contracts more than a decade ago. The six banks were Shinhan, Woori, KEB Hana, the state-run Korea Development Bank, Daegu Bank and Citibank’s Korea subsidiary.

The KIKO currency-linked derivatives caused heavy losses for Korean investors around 2008 due to the onset of the global financial crisis, which prompted the Korean won to dip heavily against the US greenback.

FSS Gov. Yoon Suk-heun on Monday warned of tighter boundaries and sanctions next year for banks that sell high-risk products. The sanctions must send “the right signal to the market,” he added.

Another major issue that lenders have to deal with is the rise of financial technology firms and internet-only banks, which have boosted market competition. The official launch of an open banking service on Dec. 18 is expected to fuel competition as well.

Open banking allows customers to use one mobile banking app of their choice to gain access to their bank accounts with any of the local lenders.

With the launch of Korea’s third internet-only bank, Toss Bank, having received approval for the first half of 2021, and budget app Bank Salad joining forces with Kakao Bank on open banking, traditional lenders will have to find ways other than lower transaction fees to improve their services.

In terms of offline business expansion, local lenders are expected to continue expanding their presence in Southeast Asian nations, including Thailand, Myanmar and Vietnam, to diversify their sources of revenue.

KEB Hana became the second-largest shareholder of a major Vietnamese bank, the Bank for Investment and Development of Vietnam, after completing the acquisition of a 15 percent stake in November.

Woori currently operates 11 branches in Vietnam and plans to open 20 more by 2021, while KB plans to expand its microfinancing business in Myanmar to encompass services such as digital banking and mortgages.