Internet Banks Struggle to Find Sustainable Growth Amidst Competition

Concerns are growing that internet banks, since their inception, have focused solely on superficial growth without establishing sustainable growth drivers. Their business models heavily rely on household loans, and their interest rates are less competitive than those of traditional banks. Initially aimed at reducing costs through online operations, these banks are now caught in a fierce competition for customer acquisition, neglecting the development of differentiated revenue models.

As of the first quarter of this year, Kakao Bank has attracted 27 million customers, capturing 78% of the customer base of the largest traditional bank, KB Kookmin Bank, which has 34.7 million customers. K Bank, the first internet bank in South Korea, has 16.07 million customers, while Toss Bank has 14.23 million, surpassing Shinhan Bank's mobile platform, SOL, which has 10.42 million users.

While these banks initially gained customers with low interest rates, they are now losing their competitive edge in interest rates compared to traditional banks. According to the Korea Federation of Banks, the interest rate spread for household loans in the first quarter was 2.02% for Kakao Bank, 2.28% for K Bank, and 2.09% for Toss Bank, compared to just 1.77% for the five major traditional banks (KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup).

In the realm of general credit loans, Kakao Bank's interest rate spread is 2.78%, K Bank's is 2.29%, and Toss Bank's is 3.20%, all exceeding the average rate of 1.76% for traditional banks. Unlike traditional banks, internet banks do not operate physical branches, allowing them to focus on household loans and easily generate interest income.

The high interest rate spreads have resulted in increased profitability. In the first quarter, Kakao Bank reported a net interest margin (NIM) of 2%, surpassing the average of 1.69% for the five major banks, while K Bank recorded 1.57%. Last year, Toss Bank achieved a high margin of 2.55%. However, the initial goal of providing differentiated digital services with lower costs is now being overshadowed by a focus on superficial growth.

Critics warn that a business structure fixated on growth could ultimately harm customers. The banks are perceived as vulnerable in terms of long-term risk management and profitability compared to traditional banks, raising concerns that their current strategies may not be sustainable. With household loans making up 90% of their portfolios, their offerings are limited to personal loans and advertising revenue from platforms, leading to questions about their original mission.

A financial industry insider stated, "The focus on expanding interest rate spreads and short-term funding strategies clearly has limitations in terms of sustainability. Given the high proportion of so-called cherry-picking customers who move based on interest rates or promotions, it will be challenging to secure a stable funding base. Ultimately, the risk of passing unfavorable conditions onto consumers during interest rate fluctuations cannot be ignored, so a competition model based on soundness and sustainability needs to be explored."