Daniel Hoyoung Yun, chief executive officer of South Korea’s Kakao Bank, shares a background on the development of the internet-only bank, its recent achievements, and future plans.
Here is the transcript:
Emmanuel Daniel (ED): I’m very pleased to be able to speak with Daniel Hoyoung Yun, or Daniel Yun, the CEO of Kakao Bank. It’s a very young bank. Are you the founder of Kakao Bank or were you part of the Kakao group and then given this as a project?
Daniel Hoyoung Yun (DH): We set-up the Kakao Bank. I was in Kakao and I brought this agenda to our teams in Kakao. At that time we need to get a banking licence. And we finally got the banking licence from the government in 2015, and we set up the new company, named Kakao Bank. I joined that company as its CEO.
ED: Where the regulations in Korea need to be changed in order to accommodate Kakao Bank or were there already digital banking regulations in place?
DH: They have new regulations on digital banks.
ED: That was in 2015?
DH: Yeah, 2015.
ED: The big question that everyone asks is what took Kakao so long to set up a bank? Finance would have already been an important part of your business. Did Kakao have a payments platform before it had a bank?
DH: Even though Kakao is doing a KakaoPay service as a fintech service, we needed to get more services to customers in order to expand our product, and then, we needed to get a licence again. So, we got the licence in September 2015, then we prepared the IT system to launch the Kakao Bank product, and it took half a year. We finally opened at the end of July 2017, which was eight months baby company.
ED: When you say you set up the systems, why did it take two years to set up the system? Today, a digital bank can practically buy systems from a third party.
DH: We are a bank with a full banking licence. We have to be controlled by the regulators. With certain regulations and banking laws, we have to prepare everything under the law, so it took a long time. Some people said, “Only one and a half years?” It is impossible. How could you set up a company in one and a half years with a new IT system, new infrastructure, and new employees?
ED: So, you think that one and a half years didn’t seem too long to set up an internet-only bank? In terms of the back end of your bank, how is it integrated with the rest of the Kakao social media platform and how much of your system is a full core banking system, or is it more deposit account system and a CRM system?
DH: We have two kinds of dynamic system. One is a core banking system. We just adopted the core banking system, which exists in Korea but is pretty new. The other system is a mobile banking app plus any TV system and store brand. A third system was built by Kakao people who are from Kakao engineers. They just joined our company. People think that the Kakao mobile banking app is super well organised and very convenient. We have high speed of operations with the mobile app.
Overall product portfolio of Kakao Bank
ED: Of the products you launched at the beginning – and, your background is in finance, so you understand insurance and securities. So, what was the range of products that you introduced initially, and which one was the most successful? From what I’ve been able to see, cross-border remittance seems to be the hot product.
DH: Before we started our business, we had to find out which one was our core business. So, we agreed with gaining banking accounts, so we focused on achieving banking accounts through the mobile app. So, the savings account was made, basically, and then we had a microloan for achieving the banking account, and prime and subprime loans, and overseas wire – We have three categories of product: Savings deposit, loan, and overseas wire.
ED: How has the deposit growth been? Your asset products – your lending products – only started in November of last year, right?
DH: No, we started all products at the same time, in July.
ED: How has your deposit gathering been so far?
DH: As of February, we have $6.6 billion worth of deposits and $5.5 billion worth of loans.
ED: That’s very good. How many customers?
DH: We have 5.5 million customers and 4.1 million debit cards issued as of February.
ED: This is the curious part. Why do you need to issue a debit card when the idea would be to do as much of the transactions on your app as you can?
DH: Basically, because the debit card is very essential for customers because they want to withdraw money through an ATM, so we provide some kind of cash card.
ED: Yes, but today, in a number of countries – China, for example, and even in Korea – the wallet war –
DH: You mean the cyberwallet?
ED: Yes. Isn’t that the platform you should be competing on most of all?
DH: We didn’t set up the mobile wallet in creating the debit card. We will do it later, but the debit card is very useful on the company side because if they are spending a lot of money, then we can collect the information for credit rating scores. Our debit cards are really famous in Korea. They had to wait for three months to receive their card at its launch.
ED: You seemed quite unprepared during the launch. You had a crash and your system slowed up during the launch. Were you surprised with the take up? Shouldn’t you have created more capacity at the beginning?
DH: In the beginning, we were surprised. On the first day, we had over 300,000 people open loan accounts. We didn’t have time initially for service. We scaled up the server and the IT system. But, one thing that was a problem was on the loan side. We have a credit bureau system in Korea, and we have to get the data from the credit bureau company. There was a problem there.
ED: But, you also said creative credit scoring. Tell me a little bit more about that. Are you modifying your credit scoring criteria to include other forms of data? Also, to what extent do you need to keep in touch with the law of Korea? With traditional credit scoring, the reason they gave licences to digital banks like yours is because they wanted you to take the high-risk customers. So, give me a sense of your credit scoring model and how you’re evolving that.
DH: We do not have a strong credit-rating score system because we’ve only had it for eight months. We need three or four years to be employed with CSS. So, 30% of our loans are based on guarantees. One of our shareholders is a Seoul guarantee insurance company. They guarantee our subprime loans with full coverage. The total responsibility lies with the Seoul guaranteeing agents company.
Then, 70% of our loans are prime loans, which are based on the credit rating system. We borrowed this system from one of the biggest Korean credit bureaus. We just got the information from their company. They provided all the information to other banks, such as Shinhan Bank and Hana Bank. Our system is based on their evaluation.
ED: So, you’re not doing anything pioneering on the scoring side?
DH: Not yet.
ED: When you say 70% of your credit is subprime –
DH: 70% of our loans are prime loans.
ED: But, the licences are given to digital banks for subprime loans.
DH: Not only subprime, but we can also do prime loans.
ED: Are they overdrafts? Are they mortgages? Are they collateralised loans? What is the particular item?
DH: The prime loans are 100% credit loans, but it’s only for salarymen.
ED: So, it’s basically against the salary. Do you require that they put their salary into your account in order to qualify for loans?
Integration with Kakao platform, future strategy, and benchmark model
ED: So, you are getting a flow of salary accounts in it. Now, what is your strategy in growing the business? You are owned by Kakao, so there are supply chains, there’s shopping, lifestyle, and things like that. You need to integrate them. So, what have you been doing on that front?
DH: For the last 26 years, there has not been a new bank in Korea, so the major banks are not focused on mobile banking. We only focus on mobile banking. We don’t have a banking website and we don’t have any branches, so the first item we should carry for the costs is the prepaid mobile banking app.
Secondly, the mobile banking app is very convenient. It takes seven minutes to open a new account; three minutes to receive wired overseas money, and one minute to get the microloan, and ten seconds to transfer cash to my friends. It takes ten seconds. There are strong advantages to the customer. They were surprised, and they might be a fan of Kakao Bank. This is the most successful story. The third one is service and speed. If you use our mobile banking app, you will be shocked at how fast we deliver the product and other things.
ED: So, the connection with Kakao – the retailing, other functions?
DH: No, we are just utilising Kakao’s IP, which has a friends list, and Kakao IP has Kakao friends, Kakao emoticons, and Kakao characters, but we didn’t put our function on the Kakao Talk platform. We didn’t just add our function to Kakao Talk. It would not be successful. The banking-side customers don’t trust Kakao Talk.
ED: For banking?
DH: Yeah, for banking. Every day, they use Kakao Talk. They open it 10 or 20 times per day. But, money is a different side. We set up a new, fantastic, independent app that our customers will like.
ED: Yes. What about KakaoPay? Is that integrated with the bank at all, or is it a different platform?
DH: That is its own app. KakaoPay is added to the Kakao Talk platform.
ED: Is this a business that you think you will eventually export to other countries, or is it very Korean at the moment?
DH: Right now, we’ve only been here for eight months, so we should focus on our domestic business. I hope, someday, we will launch an overseas business someday.
ED: Which other digital banks do you personally admire? When you look around the region, Japan has got Sony Bank, China has My Bank, and India has its own internet-only banks. So, in your mind, which are the attractive bank models?
DH: That’s a very good question. When we got our licence and expanded our business model to cover more people, they asked me the same question. We researched other banking apps all the while, but they are not our benchmark model. We can benchmark part of them – the product, design, or app – but a 100% pure mobile banking app does not exist worldwide. Even today, we have five million customers as the only 100% pure mobile banking app, so I think we are the first mover for mobile banking.
ED: What about your competitor, K-Bank? Why are you better than K-Bank?
DH: I don’t think we’re better than they are. We have a strong Kakao IP. You can trust the Kakao brand. If Kakao does something different, they just believe that Kakao will do something good for the customer.
ED: Are you also experimenting with pioneering technology in data analytics – the use of artificial intelligence, chat bots, and things like that? Are you doing specific things in those areas?
DH: Well, we cannot do well with AI over our data system because we only have 100 engineers in the bank, and they are doing some business, but we have a big parent in Kakao. So, Kakao is doing the AI system and other things on the technical side, so we just borrow that and link to their technical side. For example, we’ll make a chat bot system through our mobile banking app within this year. Kakao has a strong chat bot system, so we’ll just borrow it.
ED: It looks like it’s early days for Kakao Bank. There areas such as supply chain that I think you should have thought about, but you seem to be focused on banking loans, building both the deposit and the lending side. Your loans at the moment – what is their average size?
DH: The size of the loan depends on the product. The microloan is around $1,000.00 or $2,000.00 and the prime loan is –I’m not sure in USD. I have the Korean won – It’s $20,000.00.
ED: But, for mortgages and stuff like that – you haven’t gone into that area?
DH: Right now, we don’t have any plans to set up new loan products such as mortgages, but next year, we’ll do mortgages. This year –
DH: Yeah. We’ll make every effort to achieve customer accounts, and then loans.
ED: Thank you very much. I hope we’ll be able to follow your success and evolution as you build Kakao Bank.
DH: Thank you for inviting me.