Digital banks in South Korea continue to thrive

Written by Kapronasia || April 10 2024

South Korea’s digital banks are the exception to a rule in East Asia’s advanced economies: They are extremely successful by multiple metrics instead of redundant. While the relative weak digital offerings of incumbent banks in Korea helps explain the phenomenon, it is not the main reason. We believe that South Korea’s three digital banks – Kakao Bank, K Bank and Toss Bank –  have been able to develop truly competitive products, in contrast to their counterparts in the other Asian tiger economies of Hong Kong, Singapore and Taiwan, and gradually have made themselves indispensable to many Korean retail customers.

The Korea Herald reported on April 1 that the aggregate assets of Kakao Bank, K Bank and Toss Bank reached approximately 101.61 trillion won (US$75 billion) by the end of last year, up 27% from the previous year's 79.5 trillion won. Kakao Bank was No. 1 with 54.48 trillion won, followed by Toss Bank with 25.73 trillion won and K bank with 21.4 trillion won, according to data released by each bank.

Considering that the Korean digibanks are less than a decade old (Kakao Bank and K Bank were founded in 2017, and Toss Bank’s parent company in 2015), their total assets are impressive. While K Bank experienced rapid growth in recent years due to its tie-up with crypto exchange UpBit, all three Korean online lenders are benefiting from strong demand for their mortgage loans. They have been able to offer lower interest rates in part because their operational costs are lower than traditional banks with a heavy branch presence. In 2023, the outstanding balance of mortgage loans at Korea’s three digibanks jumped to 26.6 trillion won, up 70% from 2022’s 15.6 trillion won.

Because it is preparing for potential credit insolvencies, K Bank boosted its provisions last year, which was the main reason its profits fell 80% to just 12.8 billion won. However, Kakao Bank had a banner year, recording an unprecedented 350 billion won profit, while Toss Bank narrowed its loss to 17.5 billion won and expects to swing to a profit in 2024.

Meanwhile, it will be interesting to see if K Bank goes through with its reported 2025 IPO plans. The Korea Times reported in February that K Bank designated NH Investment & Securities, KB Securities and Bank of America as preferred bidders to be its IPO underwriter, and that plans to file for a preliminary examination to the Korea Exchange before July.

K Bank had originally sought to begin the IPO process in 2022, but nixed its plans given unfavorable market conditions. We believe it made the correct choice, especially as its partnership with UpBit means cryptocurrency investors are a key part of its customer demographic. After a prolonged bear market, the situation appears to be looking up for crypto and K Bank will mostly like want to capitalize on more-bullish market sentiment.