Why Kakao Bank is performing better than Kakao Pay

Written by Kapronasia || February 19 2024

As a core fintech service, payments are often tougher to monetize than higher-margin segments like lending, and this helps to explain why Kakao’s digital banking unit continues to outperform its payments arm. While Kakao Bank had yet another record year in 2023, the South Korea tech juggernaut’s payments swung to a loss. Kakao Pay has been trying to follow the Ant Group (a key Kakao Pay investor) formula which worked so well for the Chinese company – operating payments and digibanking as two distinct businesses. But we wonder if this model will work for the Korean company in the long run.

Kakao Pay lost 25 billion won (US$19 million) in 2023, a disappointing performance given that it made a profit of 26.8 billion won a year earlier and worse than the 17.2 billion won loss forecast by market tracker FnGuide. The loss occurred despite Kakao Pay posting solid growth in key areas of its business. For instance, its users held a total balance of 1.24 trillion won as of Dec. 2023, up 48% over a year earlier. Transaction volume from Korean users overseas increased 34% annually.

The key for Kakao Pay going forward will be a focus on higher-margin segments of financial services, but since it is not a bank like its counterpart, it has to grow inorganically to some extent through M&A. Unfortunately, due to a scandal involving alleged stock price manipulation by Kakao Pay executives, the company’s bid to acquire a majority stake in New York-based retail stock brokerage Siebert Financial collapsed in late 2023. Under a deal made by the two companies in April 2023, Kakao Pay planned to purchase a 51% stake in Siebert Financial for 103.9 billion won in two separate transactions. Now, it will have to settle for a 19.9% stake – the initial transaction that was completed in May 2023.

By comparison, Kakao Bank is experiencing much smoother sailing. In 2023, its earnings surged roughly 35% to a record 354.9 billion won on the back of strong growth in interest profit. Its deposit balance jumped 42% to 47.1 trillion won while its loan balance increased 39% annually to 38.7 trillion won. Mortgage sales are a key driver of Kakao Bank’s business, in particular loans for refinancing.

Although regulators last year singled out Korea’s digital banks for supposedly raising the level of household debt with their aggressive disbursal of mortgage loans, in reality the digibanks account for a minuscule portion of the overall balance for this type of loan – in Kakao Bank’s case about 2% as of the third quarter of 2023. Given strong demand for this product, Kakao Bank is likely to see continued growth in mortgage loans – and a corresponding boost to its earnings – in 2024.

For its part, Kakao Pay will likely have to assuage regulatory concerns about some of its business practices before it can again turn its attention to M&A opportunities.