Better luck online

South Korean web bank hopes ignore offline gloom

South Korea's online bank hype ignores the gloom afflicting the country's offline lenders. Regulators have given the green light to the country's first two internet-only banks. Along with local players, foreign companies like Chinese e-commerce giant Alibaba and eBay have piled in. The euphoria is disconnected from Korea's ailing banking industry.

Plans to issue licences for South Korea's first internet-only bank, announced in June this year, attracted lots of interest. Regulators selected two of the three bidders on November 29. Local chat app Kakao is leading one 11-strong consortium while telecoms firm KT Corp heads another group of 21 companies.

The winning bidders are a motley crew. The $6.2-billion Kakao has teamed up with a local financial group as well as one of the country's largest lenders, Kookmin Bank. The start-up - to be named Kakao Bank - also counts Chinese social media and gaming giant Tencent and eBay's local unit among its supporters. Likewise, the KT Corp-led consortium features Woori Bank, a mishmash of internet groups and Ant Financial, Alibaba's financial services affiliate.

Restrictions on bank ownership may be one consideration. Currently, non-financial companies are barred from holding more than 10 per cent of a bank's equity or four per cent of its voting rights. Expertise is another factor. Ant Financial and Tencent already operate online banks in China and can provide the technology. Kakao Bank, which will initially focus on loans to small and medium-size enterprises, can potentially pool data from its e-commerce partners to help identify creditworthy borrowers. The hope is that technology, as well as the absence of expensive bricks-and-mortar branches, will give the upstarts a cost advantage over traditional institutions.

Yet the excitement largely brushes aside the poor performance of South Korea's banking sector. Rising credit costs, low interest rates and stringent regulation have squeezed profitability. Return on equity for domestic banks was just 4.73 per cent in the nine months to September, almost half the average for the previous decade, according to official data. New online banks may be unburdened by past lending mistakes. Even so, it will take a lot to disrupt the broader industry's woes.