A bank that’s open around the clock… The age of online-only banks has begun in Korea with the country’s first digital-only banking venture, K-Bank, launched on April 3rd and the second online-only bank, Kakao Bank, also gaining regulatory approval. With the launch, a lot of changes are anticipated for the nation’s banking industry. We’ll take a closer look at what online-only banks are and what kind of changes they will bring about with LG Economic Institute’s Kim Gun-woo.

Online-only banks can be simply thought of as the internet banking system that we currently use. For an ordinary consumer, the services provided by an online-only bank are exactly the same as those of internet banking. However, while internet banking is an additional service provided by an offline commercial bank, online-only banks will solely provide their services online. Therefore, they do not have to invest in office space and associated staff, and can pass on these savings to their customers in the form of higher savings rates or lower loan rates.

Online-only banks manage all of their services, such as opening accounts, wire transfers, and loan applications, online through the internet or on mobile platforms. They can provide their services 24 hours a day, 7 days a week without restrictions on place or time. As online-only banks can cut costs on office space and personnel, consumers can take advantage of favorable savings and loan interest rates. With these advantages, Korea’s first online-only bank, K-Bank, racked up more than 100,000 customers in the three days since its launch.

Commercial banks in Korea began to allow customers to open up bank accounts without visiting the bank in late 2015. Initially, around 16 online bank accounts were opened each month, and 16,000 in total were opened across all of the commercial banks. However, looking at the figures for K-Bank, over 30,000 bank accounts have been opened each day so far, which shows its popularity. It seems like customers who were dissatisfied with the current services provided by commercial banks have been rushing to open up accounts. As mentioned before, commercial banks had to invest a lot in running the individual locations from rent to personnel. However, online-only banks would need less than one-tenth of the workforce that commercial banks need to operate, which is why they can provide more favorable interest rates than commercial banks.

The reason behind K-Bank’s success is its convenience. Financial transactions at commercial banks are complicated as they require significant amounts of paperwork, authentication certificates, and so on. However, customers only need a smartphone registered under their own name and personal identification for any kind of banking service at online-only banks. Even if you do not know the bank account number of the recipient, you can easily wire them money through a text message. Also, as online-only banks do not have physical locations, they offer more benefits and lower fees to customers, resulting in the incredible number of applications. This great start for online-only banks has raised hopes for a financial revolution in Korea.

A new banking business gaining regulatory approval is a significant moment in the Korean finance industry. The launch of online-only banks is providing a chance for the current industry landscape, which is dominated by a handful of major banks, to go through major changes. Also, with the 4th Industrial Revolution, there has been active integration between different industries, especially between information technology and other sectors. Fintech is a great example of convergence between information technology and the banking sector. Online-only banks are a great example of fintech as they merge IT with finance.

K-Bank is the first private commercial bank to be launched since Pyonghwa Bank in 1992, and it signifies the beginning of major change in the nation’s banking industry. New finance combines IT and financial services and is a main sector of the 4th Industrial Revolution. Fintech is being applied to Korea’s financial industry as well. Concerned about market erosion following the launch of online-only banks, bricks-and-mortar banks have begun restructuring their security programs, offering attractive interest rates, and more, bringing about change in the financial industry. This means that online-only banks will need to take further measures to remain competitive.

For this trend to continue, so-called “killer” content need to be created to win over consumers. Looking at the services provided by K-Bank, commercial banks already have various mobile services they have prepared as countermeasures. So, online-only banks will have to prepare services that can set them apart from existing banks. Also, online-only banks will have to give assurances to customers that they can provide safe services to customers in the mortgage and credit loan market, which is the biggest market.

Established in 1995, Security First Network Bank was the first online-only bank in the world and was followed by Net Bank in 1996 and England’s Egg Bank in 1998. At the time, online-only banks were able to take root in the financial industry through new business models, such as providing banking services and after services on the internet and social media, specialized services focused on vehicle financing, and internet-only banks based on manufacturing industries. To accommodate new business models, the rules must also change.

The newly launched online-only banks are not complete banks. This is because of Korea’s regulations that separate banking and industry capital. Because of these strict regulations, non-financial companies cannot operate a bank. That is why we cannot see convergence of technologies or industries happening with online-only banks. We are living in the era of the 4th Industrial Revolution where industries are changing rapidly. As such, there must be changes in the philosophy behind regulations to reflect the changing environment as well.

There are hurdles to overcome, such as Korea’s Banking Act which bars non-financial firms from possessing a stake of more than 4% of shares with voting rights in a bank. The meaningful emergence of online-only banks will only occur when innovation is spread throughout the financial industry. The new winds of change in the financial industry and where they will blow depend on how Korea changes in the future.