South Korean digibanks expand into new market segments

Written by Kapronasia || September 19 2023

South Korea’s digital banks have been among the most successful online lenders in East Asia, benefiting from the network effect of their respective digital services platforms, relatively weak incumbent digital offerings and strong demand from the country’s retail banking market for new types of products. Yet as they expand into new market segments, in some cases rapidly, regulators are bound to take notice. This holds especially true for the mortgage loan segment.

On September 13, South Korea’s financial regulators voiced concerns about household debt amid surging mortgage demand. In August, mortgage loans grew for a fifth straight month and by 7.0 trillion won, the largest rate of expansion since February 2020, while other loans fell by 0.1 trillion won in their 21st month of decline. The Financial Services Commission said it would roll out measures to prevent misuses of long-term mortgage loans, a stricter debt-to-service ratio for loans on floating rates, and tighter qualification criteria for the government's temporary policy mortgage loan.

Digital banks, though accounting for a tiny share of overall mortgage loans (Kakao says it has a 2% market share, for instance), appear to be in regulatory crosshairs. In early August, an official from a financial agency told The Korea Times that “given the explosive growth in mortgage loans by internet-only banks, it's essential to review their operations,” adding that the agency is “determining which areas should be regulated more strictly.”

Mortgage loans from digital banks are increasingly popular in Korea because of both convenience and competitive interest rates. In the second quarter of the year, the total loan balance at all of South Korea’s digital banks jumped 35% year-on-year to 21.2 trillion won, according to The Korea Times.

Undoubtedly, the popularity of mortgage loans was one factor in the solid performance of both Kakao Bank and K Bank in the first half of the year. Kakao posted a record profit of 183.8 billion won ($143 million) in the first six months of this year, up 48.5% from 123.8 billion won during the same period a year earlier. For its part, K Bank posted a net profit of 14.7 billion won ($11 million) a quarterly increase of 41% that the company attributes in part to its fast-growing apartment-exclusive mortgage loan products, of which it disbursed 900 billion won in new loans in the second quarter.

However, both digital banks appear to be straying from their original vision for lending: serving the underserved market, especially those with medium to low credit scores. Regulators are questioning how the digibanks are catering to this demographic when mortgage loans in Korea are typically provided to customers with high-value collateral.

Kakao Bank, K Bank and Toss Bank (once it launches mortgage loan products, which should be soon) need to ensure that they focus on serving those with less-optimal credit scores or else they will risk falling afoul of regulations that require them to provide a certain percentage of household credit loans to individuals with credit scores in the lower 50th percentile, which is 850 points or below per the Korea Credit Bureau’s standards.