Kakao Bank has done what most digital banks in Asia’s advanced economies have not: It has found a strong market niche. South Korea’s population is well banked, and there is no low-hanging fruit to be found in simply repackaging existing retail banking services with an all-digital interface. This type of thinking is tripping up digital lenders in Hong Kong and Taiwan.
To some extent, Kakao is the beneficiary of a favorable regulatory environment. South Korea’s Financial Services Commission (FSC) has not restricted Korea’s digital banks from market segments that put them in direct competition with incumbents.
For that reason, Kakao has a burgeoning mortgage loan business, boosted by a mortgage refinancing service launched earlier this year. Kakao’s total balance for home purchase mortgages rose 30% on a quarterly basis to 11.8 trillion won in the January-March period, while mortgages for rental deposits increased to 12.2 trillion won, up 200 billion won from the end of 2023. According to data cited by The Korea Herald, Kakao Bank is estimated to hold about 31% of the Korean housing mortgage refinancing market and 46% of the rental deposit refinancing market.
While Kakao’s lending business is growing, and it has said that its target customers often do not have exceptional credit, thus far it has managed to avoid a significant rise in delinquent loans. In the first quarter, so-called “mid-to-low credit” loans rose to 31.6% of its credit balance, but the delinquency rate decreased to 0.47 percent, down by 0.02% from the previous quarter and 0.11% from a year earlier. The net interest margin, a key indicator of profitability, improved to 2.18%, while the cost-to-income ratio fell to 35.2%.
Looking ahead, we will be closely watching Kakao Bank’s international expansion, which is currently focused on Thailand. Kakao has established a strong position in its home market and continues to benefit from the synergies provided by its ubiquitous Kakao Talk messaging app. Competitors like K Bank and Toss Bank are unlikely to dethrone Kakao from its dominant position. But the Kakao Messaging app does not have strong reach outside of Korea and in Thailand Kakao Bank will have to leverage the resources of its strategic partner Siam Commercial Bank (SCB).
We believe that SCB’s strong position in the Thai banking market almost guarantees it will win a digital banking license together with Kakao and technology partner, Hong Kong-based WeBank. The last foreign banks to receive a license to operate in the Thai market were the Australia and New Zealand Banking Group and Japan's Sumitomo Mitsui Trust Bank in 2015, so it will be a significant development.