Kakao’s fintech business may be in trouble

Written by Kapronasia || July 29 2024

Kakao Bank has long proven skeptics of digital banks wrong. It has been profitable since 2019 and is now set to expand in Southeast Asia. There is just one problem: Its parent company’s founder Kim Beom-su was arrested on July 23. He has been accused of manipulating stocks during Kakao’s acquisition of the K-Pop agency SM Entertainment last year.

To be sure, at present there are no specific allegations against Kim that mention either of Kakao’s fintech units, Kakao Bank or Kakao Pay. However, an indictment of him would inevitably cause trouble for the whole Kakao organization, of which he and affiliated entities hold a 24% share – the largest of any investor in the company. Further, there would be a problem for Kakao Bank in that South Korea’s regulations prevent persons convicted of financial crime from owning more than a 10% stake in a bank.

However, K Bank, the first South Korean digital lender, has shown that problem is not insurmountable. In 2016, a key K Bank shareholder, KT, was fined for antitrust violations. K Bank avoided a shutdown when KT transferred its stake to BC Card, which remains the Korean digital bank’s largest shareholder with a 33.72% stake.

Yet that would not be the end of Kakao’s fintech woes. Kakao Bank is in the process of expanding to Thailand with its local Thai banking partner Siam Commercial Bank (SCB). If Kim is found guilty, the chance that SCB and/or Thai regulators get cold feet about Kakao being part of a digital bank consortium in the country is not low.

The reaction of investors thus far has been mixed. They do not seem concerned about the implications of Kim’s arrest for Kakao Bank, whose share price has fallen less than 1% since July 23. However, Kakao Pay’s stock has fallen almost 5.5% in value since then, dovetailing with the decrease in value for the overall Kakao Corp. stock.

One thing we find concerning is that Kim’s detention follows the Oct. 2023 arrest of Kakao’s chief investment officer, Jae-Hyun Bae. Prosecutors accuse Bae of stock price manipulation after the takeover of SM Entertainment last year. He is currently on trial.

Analysts in Korea warn that while the country’s Supreme Court may need two to three years to issue a final verdict, the arrest of Kim arrest suggests that at least one or two of the involved individuals are likely to receive prison sentences. If that happens, Kakao Corporation will be penalized given that South Korean law has a joint penalty provision that states if an executive or related firm violates the law, the corporation is also punished. A potential penalty for Kakao would be the separation of its banking unit from the parent organization.