Why are digital banks in South Korea successful?

Written by Kapronasia || April 12 2023

While most digital banks struggle to make money, South Korea’s are largely profitable. They have been able to scale up quickly, despite negligible financial inclusion needs. According to the World Bank, almost 99% of South Koreans have a bank account. The factors that have made Kakao Bank, K Bank and Toss Bank successful are unique to South Korea and are unlikely to be replicated elsewhere.

One of the main reasons South Korea’s digital banks have been successful is that all three have large tech companies with strong digital capabilities as strategic shareholders while incumbent lenders in the country have unusually subpar digital capabilities. This paradigm has given the digibanks plenty of low-hanging fruit to pluck – and regulators have not constrained the digital banks’ ability to serve major market segments. It is a very different situation than in the other former Asian tiger economies of Hong Kong and Singapore, where big incumbents have invested heavily in digital banking, or Taiwan, where they have not, but regulators have heavily restricted online lenders’ scope of business.

Kakao Bank – the first digital lender in South Korea – has been profitable since 2019 and after some stumbles following its November 2021 IPO is back in the black. Even its battered stock has recovered, with shares up 33% in the past six months. Kakao Bank posted a record profit in 2022 of 263.1 billion won ($209 million), up almost 29% from a year before, while its revenue increased about 51% to 1.61 trillion won. Deposits increased 3.1 trillion won to reach 33.1 trillion won in deposits at the end of 2022. The bank’s loan balance increased 2 trillion won to 27.9 trillion won during the same period.

Kakao’s profits jumped on the back of rising interest following benchmark rate hikes and the introduction of new products like mortgage loans, which surpassed 1 trillion won just 10 months after the product launch.

South Korea’s second digital bank, K Bank, also posted a record profit in 2022 of 83.6 billion won (US$63.7 million), up 272% from the 22.5 billion won it earned in 2021. Like Kakao and other commercial banks, K Bank earned the lion’s share of its profit from interest income – 382.6 billion won, with just 3 billion won from other areas.

K Bank has been surprisingly resilient given its heavy dependency on cryptocurrency. The bank’s comeback in the past few years has been driven largely by its tie-up with leading Korean crypto exchange Upbit. Despite the crypto bear market, K Bank has continued to grow steadily by nearly all metrics.

Meanwhile, Korea’s third digital bank, Toss, raised US$405 million in a Series G funding round in December that lifted its valuation to an estimated US$7.1 billion from US$6.6 billion in June 2022. The mammoth fundraising round is a testament to investors’ confidence in Toss amid a broader fintech funding slump.

Toss Bank had about 6 million customers as of March 27, up from 5.4 million at the end of 2022, according to a company statement. The online lender said it expects to post a net profit in the second half of this year after a net loss of about 264 billion won (US$202 million) in 2022.