Despite 90% of online banking transactions by 9 million daily mobile banking users, there are many underserved segments. These primarily arise due to the inability to secure loans from tier 1 banks. There is a 75% loan rejection rate, where the credit score is between 4-6; the loans that do get approved with a credit score above 4 have skyrocketing interest rates. Hence, 40% of the Korean population remains underserved with limited to no access to loan amounts.
Moreover, South Korea has restrictions on bank ownership which is largely controlled by the “Chaebols” (family-controlled industrial conglomerates). This reduces the ability to innovate and provide customer-oriented product/service offerings.
It also restricts the opportunity for foreign players to enter the market with their unique value propositions. However, the Financial Service Commission (FSC) allows information and communications technology (ICT) firms to own up to 34% stake. This is to promote competition and innovation with the emergence of digital-only banks. The virtual banks need a minimum paid-up capital of US$ 21.5 million, 1/4th as compared to the commercial banks.
Kakao bank is a consortium led by Korea Investment Holdings, KBKookmin Bank, and Kakao (social-media messaging company). Tencent and eBay are also the investors of the bank. Since its inception, Kakao bank records exponential growth in customer acquisition and revenue generation. Despite being the second one to start operations in the country, it is now a leading player.
The bank was headed by Lee Yong-Woo and Yoon Ho-Young as Co-CEOs. However, Yoon Ho-Young will now serve as a sole chief executive. Lee left the company to run for a parliamentary election in January 2020.
Kakao Bank’s 2-S framework analysis
Kakao bank has achieved exponential growth since its inception with 126% and 144% annualized growth in the lending and deposits business respectively. Currently, the bank houses US$ 13 billion in deposits and US$ 8.2 billion in loan balances. From booking losses in 2017 and 2018 due to heavy investments in infrastructure and workforce, the bank started earning profits beginning 2019 with a 48% growth from 2Q19 to 3Q19; the bank has earned US$ 4.7 billion in 3Q19.
Additionally, Kakao has broken records in acquiring customers since its launch. On day 1 of launch, 300,000 customers created an account on the bank’s app, and a month later it increased to 3 million customers. Currently, Kakao bank has 10 million active users on the platform, which is 20% of the Korean population.
Kakao Bank has raised capital with two funding rounds from existing investors with a combined value of US$ 1 billion. With the growth in lending and deposit market and sound earnings growth, Kakao bank is expected to go public by 2021.
The underlying success strategies for Kakao bank are a result of two key factors:
a. South Korean population has one of the highest penetration rates of smartphones in the world, which brings ease of access and use along with comfort to use electronic channels for conducting financial transactions.
b. The access to Kakao Talk’s customer base that dominates nearly 90% of the country’s population, bringing transformative synergies for market penetration.
-: Technology infrastructure
Kakao bank builds on the technological platforms of Kakao Talk and Kakao Pay aims to become a platform like Amazon and Facebook in the finance sector. Kakao bank also uses new IT systems such as Linux X89 and open sources to create its banking application and internal systems.
The bank also invests heavily in building interactive UI/UX experience for its customers. According to Su-young Lee, strategy head, simplified authentication process, easy and fast operation, intuitive UI/UX, adopting fun, and sharing function in banking activity are also important success points.
Further, to reduce customer resolution costs by 80%, the bank has rolled out new video-based customer chatbot.For easy, efficient onboarding and evaluation of a client, the selfie-based KYC processes enabled in the app which is integrated through API networks between the bank and outside credit rating bureau and government agencies.
-: People infrastructure
40% of Kakao’s workforce is IT professionals, continuously working towards bringing innovation in banking with a goal to build an ever-evolving financial platform, which becomes a hub for buying and selling financial products.
Actionable lessons learned from Kakao Bank
- Identify the synergy inflection points to achieve a competitive advantage in the market, building a mass reach out strategy in customer acquisition.
- Understand the visual behavioral patterns of the customers to design the application interface based on customer likings and preferences, creating a strong recall value and retention mechanism.