How kakaobank successfully cracked the profitability code two years after rocket launch

In the first half of the year ended June 31, kakaobank hauled net income of KRW10b ($8.58m), booking net profit for the first time following a protracted loss-making period.

Launched in 2017, South Korea’s kakaobank has grown at a breakneck pace, amassing over 10 million customers and nearly KRW20t ($17.8b) in deposits, issuing over nine million debit cards and extending KRW13.6t ($11.68b) in loans as of September 2019. Cashing in on the strong brand recall from the country’s most popular messaging app kakao, the internet-only bank found its niche in the country with a tech-savvy consumer demographic and effectively set the stage for virtual banks to follow.

Under its regulatory banking license, kakaobank offers a wide range of services that directly compete against incumbent banks, including loans, deposits, debit cards and overseas remittances entirely on the consumer’s smartphone. Deposit products include time-deposit and installment savings account where the maturity and the installment amount can be adjusted by the customer.

kakaobank’s loan line-up consists of prime credit loan, secured and unsecured credit loan for mid-and-low credit holders, overdraft loan, micro loan and housing deposit loan. The entire journey of applying for a loan is done online, doing away with the need to go to a physical bank. Beyond conventional banking services, kakaobank also provides group account service, loan platform service and credit information service.

Ease is the name of the game for kakaobank. With no branches to maintain, the company is investing heavily in the app experience. Through the mobile platform, users seeking to open security accounts with its sister company and majority shareholder, Korea Investment & Securities, can breeze through the application process via a simplified authentication process. In the first ten days since its launch, over 350,000 security accounts were opened. Users can also check on their credit score information, balances of credit and debit cards and loan balance for free in order to manage their credit status.

Together with fellow internet-only player K bank, the two tech-powered companies have captured around 0.6% market share in Korean won-denominated loans by end-2018, data from Moody’s show. Despite making significant headway with two years in the market, kakaobank booked a cumulative net loss of nearly $60m in September 2018 as it made heavy investments in infrastructure and manpower. In the same vein, Kbank recorded a similar loss of $35.14m in the first half of the year owing to intensified spending in IT infrastructure.

Profitability has also been a challenge, especially as the two internet-only banks relied heavily on an aggressive pricing strategy to gain market share early on in the game, which manifested particularly lower lending rates and higher deposit rates. Return on average assets hit -0.9% in 2018 from -7.2% in 2017, according to Moody’s, although the two players have wound down heavy promotions and stabilised profit.

As South Korea prepares to grant a third virtual bank license, Su-young Lee, head of strategy at kakaobank, shares the company’s milestones and way forward as the bank tries to achieve the next level of growth.

Competitive pricing and convenience have been identified as key strategies that kakaobank deployed to gain market share early on from incumbent lenders. How is this displayed in your operations?
kakaobank looks to save the cost by leveraging on branch operation and also adopting new IT systems such as Linux X89 and using open sources when we build up IT system and app development. kakaobank uses the saved cost in waiving most of fees that can be generated at domestic remittances, cash withdrawal from ATM, and even early redemption charges. In interest rate side, we have maintained lower interest rates for loan and higher interest rates for deposit, compared to those of competitors.

Speaking of convenience, the kakaobank app is made as a native app, which resulted in its flexibility and fast speed kakaobank’s app also adopted an easy and simplified self-authentication process, including the biometrics, so customers can log-in swiftly. kakaobank’s intuitive UI/UX became a target to be emulated by competitors.

As one of the players that successfully cracked the digital banking code, what would you say are the best practices in banking for millennial demographic? For instance, there’s the bank’s core design and easily recognisable characters. How did you craft the bank’s UI/UX with that in mind?
It is true that collaboration with Kakao Friends characters by using those on our app and debit card is a part of things that have helped in attracting immense reaction at the early stage. Additionally, simplified authentication process, easy and fast operation, intuitive UI/UX, adopting fun and sharing function in banking activity are also important success points. 26-week-maturity installment saving account is clearly proving it.

Customers can select initial amount among KRW 1,000, 2,000, 3,000, 5,000, 10,000 then it will be deposited every week by increasing as much as the starting amount such as KRW 1,000 in the first week and KRW 2,000 in the second week. Customers also can see the installment status on the app with Kakao Friends characters being collected once the deposit is made. And customers can share the status on their social network.

You’re using e-KYC heavily. Up to what extent of kakaobank’s processes is automated?
From the registration stage to be a kakaobank member to the final stage of the loan execution, all of the process in using kakaobank carries on online. This resulted from API networks between kakaobank and outside credit rating bureau and government arms.

Internet-only banks are cashing in on their branchless advantage as they do not have to worry about the costs associated with maintaining a bank branch and back office. What are your plans to further boost efficiency?
As a virtual bank, kakaobank does not run branches. However, we have a sizable back office including customer service part. It is too early to control cost as kakaobank keeps hiring in efforts to develop new products and services. We would not focus on cost saving in short term as we know we have to invest more to make better and innovative services.

What are your plans to boost returns?
kakaobank has earned net income of about KRW10b for the first half ended June 31, booking net profit for the two consecutive quarters. It is expected that we continue generating net income in the second half. Making money is less important to kakaobank at this stage as we are well aware of the necessity of investment to create innovative financial services as we have been doing so far. We will seek both net income and investment.

The rapid pace of lending has weighed on virtual banks’ capital buffers. What are your plans to boost capital in line with regulatory requirements? How do you plan to access external capital to further unlock growth ceilings?
In such regard, kakaobank is mulling another round of capital raising by rights offering within this year. After the IPO preliminarily scheduled at the end of next year, it is believed that kakaobank will be having enough capital that we can stand alone.

What targets are you seeking to achieve this year and what are your long-term plans? What can we expect from kakaobank in the future?
Our initial target we set in late last year was becoming the no.1 mobile banking app by MAU. And we already achieved the goal as we outtopped another banking app in South Korea by MAU from June. Other than that, we will focus on book yearly-based net income, marking the first year of making net profit in the second year of launching business. The most important goal for long term is evolving into a financial platform, a hub that customers and even financial companies join to buy and sell all kinds of financial products such as Amazon.