Kakao’s (KRX: 035720) share price is on a downward slide due to the recent announcement of various regulations by the government of South Korea.
In connection with the decline in Kakao’s share price, there is a recurring debate about the appropriateness of the market value of Kakao Bank.
The market capitalization of Kakao Bank, which currently stands at KRW 32.31 trillion, is 1.78 times that of KB Kookmin Bank, which stands at KRW 18.15 trillion.
For comparison, in the first quarter of 2021, Kakao Bank’s total assets were KRW 28.6 trillion, while KB Kookmin Bank was KRW 438.4 trillion at the end of 2020.
According to the KRX Filing of Kakao Bank, “development potential” was the central theme. In particular, the fact that MAU is growing upward was highlighted in the filing.
The banking sector in South Korea is divided into business and retail markets. Kakao Bank was indeed a disruptive innovator in the retail market.
Kakao Bank should position itself as a platform, not a bank, to achieve its ultimate goal.
However, unlike Toss Kakao, a platform cannot be for three reasons.
Naver Pay, Kakao Pay, Toss, or Bank Salad did not start with the original bank itself.
Therefore, getting along with the old banks was easy because they considered these fintech companies one of the channels for customer aggregation.
Since a single South Korean citizen has 11.7 bank accounts on average, it is vital to allow customers to create more accounts from the banks’ point of view.
These Fintech Players do not affect the carnivalization of the bank, as the money is deposited within the bank. However, Kakao Bank is a bank that can cannibalize its business.
2. Lack of Killer-Content
Kakao Bank could be a sensation in the market with its UX, Kakao Characters, and low-interest rate for lenders.
One of the critical success factors of Kakao Bank was credit, but now it does not look much different.
According to the Korean Federation of Banks, the interest rates for 1st and 2nd class loans of Kakao Bank are 3.62%.
The average interest rate for all users is also 3.67%.
Thus, the interest rate is higher than the general commercial banks to meet the government guidelines in South Korea.
The government initially established the South Korean Digital Bank to expand lending in the SME credit market.
In addition, fintech players in South Korea are trying to differentiate themselves through Personal Finance Management.
Fintech Players use the expansion strategy DAU to scale up Service Utilization Rate.
Kakao Bank is close to a “bank,” It is challenging to expand actively because the business model clashes with the subsidiary “Kakao Pay.”
Of course, Kakao’s culture is a strategy to develop the same business model through competition between subsidiaries, but the fintech sector with strong regulations is a different story.
3. Not 100% loyal customers
It is common knowledge that Millennials and Generation Z mainly use Kakao Bank.
This generation is very mobile-savvy and frequently visits Cherry Pickers.
In other words, as the Regulatory Direction of South Korea often determines the business models and services, the services were similar for each bank.
Interest rates often determine differentiated banking services, the number of branches, and corporate image.
Kakao Bank’s zero-contact banking service is already a service that existing banks copy.
Most notably, the COVID-19 pandemic has accelerated the adoption of these services.
I do not know if innovations like Pay-now Buy Later will be rampant, but in South Korea, where state finances are active, Kakao Bank customers may become fewer and fewer.
Ultimately, market expansion will most likely become the primary strategy of Kakao Bank.
However, it remains to be seen how well current corporate finance practices and customs will fit with a contactless service.
Especially in corporate finance, there is always a credit risk despite careful and rigorous management.
The credit market of South Korea is KRW 1,937 trillion, of which is about KRW 1,000 trillion in corporate credit.
Finally, the Fintech Platform is completed by diversifying sales products such as insurance and credit cards.
Strong incentives, such as the allocation target of offline channels, are needed to sell the products.
It is essential to familiarize online-based digital banks with DAU activation. In this context, paying attention to the listing of Kakao Pay and future synergies is necessary.