Does K Bank have a sound business model?

Written by Kapronasia || November 21 2023

South Korea is unique in that the majority of its digital banks are profitable. While Kakao Bank generates the most headlines, and has been successful in many regards, its competitor K Bank is the one we find the most intriguing. The reason is that K Bank, majority owned by the telecoms giant KT Corporation, was dogged by financial travails in its early years and even had to pause operations for a while. When the digital lender re-emerged, it was powered by a tie-up with South Korea’s leading cryptocurrency exchange Upbit. While regulatory intentions were good in this case, building a bank on the foundation of crypto seems at the very least to be a bit risky – and it brings into question K Bank’s overall business model.

Korean media recently reported that a remarkable 70% of K Bank’s deposits are tied to cryptocurrency. Since K Bank has about 15 trillion won (US$11.5 billion) in deposits, that means more than US$8 billion of the total is linked to crypto. What makes this worrisome is that the rules are murky when it comes to protecting customer deposits in the event of say, a run, on the crypto exchange Upbit – or a serious hack. Upbit has not suffered a serious security breach since 2019 when it lost about US$49 million, but one wonders how long its luck can hold. Upbit reportedly has suffered an exponential increase in hacking attempts over the past three years.

It seems that a lack of clear regulations has allowed K Bank to piggyback on the popularity of crypto with Koreans and the paramountcy of Upbit as an exchange in the country to grow exponentially for no reason other than it is the de facto “crypto bank.” While this business model has been profitable for K Bank so far, it seems less sustainable than Kakao’s broad ecosystemic strategy, or Toss’s more narrow financial services super app model.

Regulators may need to rethink their decision to link up digital banks with crypto exchanges, or if not, at least consider capping bank exposure to crypto firms, for instance at 5%. K Bank is so far beyond that at this point though that one wonders if it is an accident waiting to happen. While most Korean banks have nominal exposure to crypto, lawmaker Kim Hee-gon observed that “at this point, it isn’t an exaggeration to say that K Bank has degenerated into Upbit’s private treasury,” according to local media. Lee Bok-hyeon, director of the Financial Supervisory Service (FSS), said that the FSS wants to understand the situation in more detail. He plans to report back the Financial Services Commission (FSC).