Transformation and growth

In July 2017, a new mobile-only bank was launched in Korea. In the first 24 hours, it had attracted more than 300,000 subscribers. Within a fortnight, it surpassed two million customers, amassing ₩1 trillion (US$930m) in savings and providing ₩770 billion (US$701m) in loans. Today, it is well on the way to having 10 million customers, that in a country of just over 50 million people (economically active population is 25 million). This is the story of the staggering growth of kakaobank.

Formed by the company behind South Korea’s hugely popular Kakao Talk messaging app, the rapid rise of the new, separate kakaobank digital-first bank was the result of looking at banking in an entirely new light. By constantly asking: “what is the purpose of a banking business?” and by applying digital-first thinking, kakaobank is transforming banking services in South Korea — and driving innovation in the banking industry.

The purpose of a banking business

Examining the existing banking landscape, EY and the kakaobank preparation team — made up of a number of key shareholders — identified that there were many Koreans who were not using many banking products and services because they had not been designed in a customer-centric way, and were often very difficult to use.

And market research by the EY FSO Advisory team in Seoul found that price was a driver of Korean banking customers switching providers. Creating a significant cost differential was therefore another important consideration.

Traditional banks spend large sums on their operational costs. Some banks can see up to 60% of their outgoings spent on branch operations and back offices. The kakaobank team wanted to strip away these costs and then share the benefits with their customers. Indeed, a key part of bringing the Korean financial regulator on board to issue new digital bank licenses was to demonstrate the benefits that could be passed on to the public.

So important was running a lean business that the kakaobank team even ruled out creating an online banking service, seeing it as unnecessarily expensive. This decision was reflective of the EY and kakaobank approach throughout the development process.

“The kakaobank team was very good at asking difficult questions,” says Young-Suk Kim, EY Korea Digital Lead and EY APAC FSO PI Lead. “Throughout, they kept asking ‘why are we doing this? Why are we selling loans and other banking products? Do we want to make money?’ — all to maintain their focus on delivering a bank beyond a bank.”

Starting with a blank sheet of paper, the kakaobank preparation team worked with EY to develop and implement a strategy to create and launch a different type of bank.

Building a new kind of bank is not merely about beating your rivals’ rates. It is about rethinking how people use banks in the 21st century.

“We see lots of challenger banks launching,” explains Jan Bellens, EY Global Banking & Capital Markets Sector Leader. Across the world, this phenomenon is being driven by industry convergence. Social media companies, e-commerce companies and gig economy companies are getting into financial services.”

“We looked at all types of digital banks around the world,” says Young-Suk Kim, Korea Digital Lead and APAC FSO PI Lead, EY. “But we wanted to take a new approach.”

For these users, everything is mobile and on-demand, available whenever and wherever. The EY and kakaobank teams channeled this mindset and transferred it to the banking world to develop a new banking app that borrowed the customer-centric characteristics of Kakao Talk to transform banking.

“We questioned every existing process, from transactions to money transfers, to foreign exchange,” explains Kim. “Could technology reduce the number of steps customers needed to take to open accounts or access finance? How can we make the process far more convenient and far more accessible?”

The need to get it right first time

Creating a digital platform that could offer far greater convenience, however, would only become a reality if they could help the new bank meet all the necessary standards of compliance, resilience and security. “After proposing the initial concept, we started work on helping the regulator understand what we were trying to achieve,” says Bellens. “This helped secure a license to bank — and then we helped kakaobank through set-up: technology assessment, risk control, customer experience design and so on.”

The EY FSO Assurance and Advisory teams and kakaobank in Seoul worked closely with the EY Technology services in Hong Kong under James Lloyd, EY Asia-Pacific FinTech Leader; as well as with the Korean regulator to prove that you can leverage new technologies to actually improve know-your-customer (KYC) benchmarks.

“For instance,” says Bellens, “Traditionally, a customer would have to show up to a branch in person to open a bank account. But since 2016, Korea has accepted a selfie as part of an e-KYC initiative. This is then cross-referenced against a series of databases and criteria, and could be more secure than an in-person meeting at a bank.”

The trouble was that customers weren’t comfortable using selfies to open bank accounts and didn’t really see the benefits. EY worked with the kakaobank team to demonstrate that a different approach to e-KYC could create a much better customer experience. Using these new systems, prospective kakaobank customers can now open an account in 7 minutes, compared to the average 20-30 minutes at other banks.

The EY Assurance team also worked closely with colleagues in China, the UK and the US to better understand data privacy, cybersecurity and anti-money laundering requirements. Similarly, the EY Tax team made sure that kakaobank’s tax function would be able to address the twin demands of regulatory compliance and enabling sound reporting.

A banking business model for a digital age

“Like many of its emerging technology peers around the world, Kakao views its business from an activation first, monetization second perspective,” says Kim. For kakaobank, this created a challenge: there were differing opinions within the shareholder group on what the business model should be and when to monetize.

The collaboration of EY and kakaobank has resulted in millions of customers having convenient access to a bank in the palm of their hands. A million people signed up in the first five days of the bank’s launch in July 2017, boosting Kakao’s share price by over 8% — and demand has continued to rise, with new services being prepared for roll-out to meet demand.

With the ability to manage their finances and get personal loans and international money transfers at low-interest rates and commission fees, it’s no surprise the success of kakaobank has prompted many other technology companies to look at creating their own financial services businesses. Digital disruption has blurred the lines across most industries and the banking sector is no exception.

“There has been a lot of inertia in banking,” says Bellens. “Traditional banks have benefited from the fact that, frankly, there were not a lot of better alternatives.” Emerging technology companies, from social media firms to e-commerce platforms, have seen the inertia in traditional banking and want to challenge the status quo.

These platform players and organizations with large customer bases often have very strong engagement. If these new players, who customers already trust, offer a convenient way to bank, or to do other things in a more convenient way, more traditional organizations are going to face an interesting question. Because trust is the way to acquire customers. And this threat is forcing banks to respond and reassess their existing value propositions.”

Bellens continues, “There's already quite a number of clients that have come to us, based on the kakaobank success, asking for us to help them build something similar. “We’ve helped and are helping several banks get better at digital.” Interest has extended beyond Southeast Asia to the Middle East and even to the bastion of traditional banking — Wall Street.