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[Market Close-Up] How traditional banks can survive in the fintech era

Experts warn commercial lenders to diversity revenue sources, seek ways to coexist with fintechs, Big Techs

Hana Bank headquarters in central Seoul (Yonhap)
Hana Bank headquarters in central Seoul (Yonhap)
Competition between traditional banks and fintech or Big Tech companies, such as Kakao, is set to heat up further as the financial authorities clear away hurdles to new projects.

In this new environment, traditional lenders will be required to diversify their revenue sources -- from interest on loans to commissions and trusts -- to keep their heads above water in the financial market, officials and experts here say.

“With the digitalization of the global economy and the expansion of e-commerce, Big Tech and fintech companies are emerging as rivals of traditional banks,” a report published by analysts at the Bank of Korea showed April 27.

“Of them, the Big Tech firms will become a direct threat to traditional banks due to their capacity to develop customized financial products via analysis of user data compiled through their other services and e-commerce platforms,” it added.

Big Tech and major fintech firms have slowly expanded their presence in the financial sector in recent months, with the backing of the authorities.

Internet-only Kakao Bank and financial service app Toss both partnered up with local card issuers this month to offer credit card services for the first time. They highlighted their ability to offer tailored services to customers by making use of big data.

Thanks to big data, Kakao Bank simplified the credit card application process. Kakao Bank users are required only to submit basic information on the bank app and receive their cards almost immediately, whereas traditional issuers ask for several stages of certification. Kakao Bank partnered with the credit card units of institutions such as Shinhan, KB Kookmin, Samsung and Citibank.

Kakao Bank had 12 million users as of end-March and has opened 20,000 to 30,000 new accounts every month so far, according to the lender.

Toss, which has maintained around 16 million users since last year, partnered with Hana Card to offer its credit card service. It received 200,000 applications in the two weeks starting April 9. For traditional credit card issuers, receiving 300,000 applications a year is considered a success story.

Such partnerships may signal the start of a virtuous partnership between tech firms and traditional institutions, some say, but it has also prompted concerns. It reflects the traditional financial institutions’ growing reliance on large tech groups, which have a large, stable customer base that seeks to take advantage of the interconnected services that tech giants can offer, according to others.

And their strong user base not only reflects customers’ preference for financial services provided by tech groups, but growing trust in those groups as well.

“Basically, traditional institutions need to find a way to offer products or services in a customer-centered perspective -- fintech groups are catching up with old institutions in terms of customer trust, while having the upper hand in cost efficiency,” an analyst at the Hana Institute of Finance said.

Alongside calls for further digitalization and more customer-oriented services, experts stressed the need for traditional banks to diversify their profit sources. 

Kakao Bank’s credit card, launched in partnership with Shinhan Card (Kakao Bank)
Kakao Bank’s credit card, launched in partnership with Shinhan Card (Kakao Bank)

South Korea’s traditional banking sector continues to rely heavily on profit from interest, despite a low-growth, low-interest environment, the BOK report noted.

“Local banks continue to maintain a profit model that relies on income from interest and this is limiting growth in profitability for them amid a low-growth, low-interest environment,” the report said.

“They face restrictions in cost, workforce and governance structure to see tangible results in digitalization as global banks are investing heavily in digital transformation.”

Analysts said the financial authorities needed to balance support for fintech and Big Tech groups with a continued interest in traditional institutions. The policymaking Financial Services Commission said last month that it was currently reviewing plans to allow traditional financial institutions to operate online platforms such as those facilitating e-commerce and food delivery.

Kakao and Viva Republica, operator of Toss, meanwhile, continue their foray into uncharted territory. Kakao won FSC approval earlier this year to launch a new brokerage business, and Viva Republica won preliminary approval to do the same. Toss also plans to launch its own internet-only bank soon, having gained preliminary approval from the FSC to do so in December last year.

By Jung Min-kyung (