South Korea prepares for a fourth digital bank

Written by Kapronasia || June 03 2024

With three of Asia’s most successful digital banks, South Korea is now considering adding a fourth. Though the country was well banked before the arrival of the digital challengers, Kakao Bank, K Bank and Toss Bank have all found a way to build market share rapidly without burning an inordinate amount of cash. The former two are profitable, while the latter should reach that milestone soon. Consumer interest in digital banks in Korea is such that the market can very likely support a fourth online lender.

Thus far, there are four consortiums that plan to bid for South Korea’s fourth digital banking license. They include Douzone Bank, Soso Bank, Korea Credit Data Bank and U-Bank. Among them, U-Bank is particularly interesting. The only large company in the consortium is Hyundai Marine & Fire Insurance. The others are startups: Lendit, Lunit, Jobis & Villains and Travel Wallet. Lendit is a peer-to-peer (P2P) online lending business, focusing on medium-interest-rate loans, while Lunit is an artificial intelligence (AI)-based cancer detection and treatment company. Jobis & Villains provides a tax refund service for small business owners and freelancers, and Travel Wallet provides no-fee foreign currency payment services.

It goes without saying that U-Bank is pumping up its financial inclusion credentials. Of course, it will focus on underserved and/or marginalized communities overlooked by incumbents. We rarely encounter an aspiring digital bank that says it wants to focus on the affluent.

However, U-Bank could make a strong case for itself with Korean regulators, given that it wants to focus on senior citizens and foreign workers (which now number almost 1 million) as well as SMEs. The former two are not the target markets for Kakao, K Bank and Toss Bank.

For its part, Douzone wants to focus on the non-retail banking market – which would also distinguish it from Korea’s existing three online lenders. It wants to help businesses with insufficient credit rating data that have had to rely on collateral and guarantees to secure funding. Douzone’s partner in the consortium is the incumbent heavyweight Shinhan. In 2021, Shinhan acquired a 1.97% stake in the software solution provider. The two parties also formed the joint venture Douzone Techfin, aiming to provide a finance platform for SMEs.

Given that there are several strong contenders to become Korea’s fourth digital bank, we suspect that additional licenses could eventually become available. We also reference the decision of the Financial Services Commission (FSC) in July 2023 to loosen requirements for being an online-only bank. The regulator said that the banking industry would be “a contestable market” where bidders with "demands and business plans which are considered stable and viable" can apply for a license at anytime. The long-term goal is to end the traditional oligopoly of the country’s top commercial lenders.