Kakao Bank: from 0 to 1,5 millions customers in just one week!

While many of you were enjoying well-deserved vacations this summer, an earthquake occured in the Land of the Calm Morning… or to be more precise in its banking market.

I'm talking about the launch of Kakao Bank, a new online bank which was launched in South Korea on July 27th 2017.

Some of you might think that this is hardly news worthy since new banks are launched quite frequently these days. In fact K-Bank, another internet-only bank was launched in South Korea in April, only a couple of months before Kakao Bank.

However, Kakao Bank is quite unique and is, in my opinion, a case study worth being familiar with even for those not working in the Asian market.

A staggering growth

Kakao Bank's launch was extremely successful. On its first day:

• 300 000 customers created an account
• Application was downloaded 652 000 times
• Over 50 M€ (about 74 billions wons) were put on deposits
• Almost 40 M€ (50 billions wons) of loans were granted

One month later Kakao Bank already had 3.07M users.

In the meantime, it became, after only two weeks, the largest household loans issuer on the local market, ahead of 19 other banks, achieving, with about 400 M€, a 25% share of the combined household lending during the period.

The recipe for a perfect storm

So what can explain such results?

After all, K-Bank took 100 days to reach 400 000 account users and did not achieve amount of deposits and loans similar to Kakao Bank before several months.

A. The power of platforms

Kakao Bank may be a new bank but it leverages a tremendously powerful asset: Kakao Talk, the digital messenger platform of Kakao Corp (a domestic internet company which is one of the key shareholders of Kakao Bank, holding 10% of the shares).

Created initially in 2010 as a mere instant messaging application for iPhone, Kakao Talk has since widely expanded its service (mobile gift certificates, social network service, navigation, game center...).

It is now used monthly by 42 millions unique visitors (97% of the entire smartphone user population) who are used to its convenience and reliability.

• First, this represents a huge pool of potential customers for Kakao Bank who can be addressed with limited marketing investments.
• Second, the power of the brand reassures customers who may otherwise hesitate more about jumping aboard.
• Finally, the already existing relationship enables simplification of customer onboarding which is a big factor for customer acquisition as discussed further in this post.

Looking at it from a foreigner's perspective, I can't help but wonder what would happen in other markets if giant platforms such as WhatsApp or WeChat decided to move more agressively in the banking space. Even more so knowing that Tecent (owner of WeChat) is one of the companies that invested money in Kakao Bank...

B. Aggressive pricing:

Savings accounts: interest rate is higher than its competitors (2% for savings account over 7500 Euros in a market where the average interest rate is 1,3%)

Personal Loans: easy to obtain and with rates lower than those of competitors.

NB: one of the loans product is the "emergency loan" which allows you to borrow up to 3 millions wons (about 2250€) in just 60 seconds if you're eligible.

As of July, Kakao Bank was still using external credit rating agencies. However on the long term, Kakao Bank plans to build its own credit evaluation and scoring system leveraging Big Data including Data coming from its shareholders (Kakao, Kookmin Bank, Tecent, eBay...) and artificial intelligence. Armed with this, Kakao Bank claims it will be better positioned to assess risks of defaults than other banks relying only on credit rating agencies.

Cheap offshore transfers: Kakao Bank claims to take commissions 10 times lower than what other Korean banks are charging.

There was some speculation before the launch about some fancy technology (Ripple...) behind this offering but apparently Kakao Bank's secret sauce for cheap transfers is more traditional. It seems that they were able to achieve this by using Citigroup’s WorldLink payment services instead of going through SWIFT.

C. A fast and smooth onboarding process

Account opening is fully digital and is completed without visiting a bank branch.

The ID is the only document required.

The whole process takes between 5 to 7 minutes to create an account. This is almost 2 times faster than K-Bank and way more convenient that the traditional banks that require you to go a branch for account opening.

Also the process is optimized for KakaoTalk users (i.e. almost everyone in South Korea):

1. Use KakaoTalk or a mobile number to open an account
2. Accept terms and conditions
3. Consent to opening a KakaoBank account
4. Account opening process overview
5. Select the type of bank account
6. Take a picture of your ID and enter personal information

The next challenges

A. Quality of customer experience

Kakao Bank's growth was so quick that this understandably caused some issues in the processing (congestions on loans/id verification...) and in customer service. In fact in the first days, the customer service center (250 people) was only able to respond to 14% of the calls.

Customer experience being paramount for an online bank, the matter needed to be addressed. Kakao Bank already increased the staffing of its current call center and announced potential plan to create an additional one.

B. Countermeasures from traditional banks

Kakao Bank's success can't be ignored by traditional banks which are now:

• Improving their mobile apps and expanding their online services
• Lowering their loan interest rates and commissions

C. Risk management and recapitalisation

In the face of the huge success of its lending business, Kakao Bank has to demonstrate to the regulator that it is properly managing risk. As a consequence, it had to:

• Implement some adjustments on the loans (rates, temporary restrictions) in keep the growth rate of the loans in check.
• Work on a refinancing plan to keep up with its activity. A major first step was completed in early September with a capital increase of 500 billion won (374 M€). However, this is a non trivial problem in a local regulatory environment that prevents industrial capital (and therefore Kakao Corp) to hold up more than 10% of bank stake (and no more than 8% of voting shares).

D. Quality of the customer base

Analysts were initially doubtful about the quality of the customer base acquired at such a quick pace. Current data seems to be reassuring although this will remain a subject to monitor:

• As of August 27th, over 70% (source Kakao Bank as reported by Arirang issue) of the customers have also applied for a card. A good indicator of the actual usage rate of the bank accounts.
• A large part (88%) of the loan applicants have high credit scores meaning their credit is good enough for competitive rates.

E. Expansion of product offering and customers

Credit cards

Currently Kakao Bank only offers debit cards. It is planning to file an application soon in order to obtain an approval for credit card business from the Financial Services Commission.

Foreigners

As described previously, Kakao Bank offers low overseas transfer fees. This makes it attractive to foreigners residing in Korea who regularly use international banking services. However, foreigners can't yet be registered. According to Korea times, around 2 million foreigners were locked out from registering.

This is an opportunity but it seems that the bank won't be able to address it quickly due to the lack of existing verification systems for passports.