The race to receive the license to become South Korea’s fourth internet-only bank is growing fiercer, with four bidders announcing their will to contend.

There are currently three online lenders in Korea: KBank, Kakao Bank and Toss Bank. But four new contenders -- Soso Bank, Korea Credit Data Bank, and the U-Bank and Douzone Bank consortiums -- have lined up to compete for the fourth license.

In line with the local regulator Financial Services Commission’s vision to encourage financial innovation and deepen financial inclusion through internet-only banks, the potential bidders proposed to specialize in financial products that can benefit small- and medium-sized as well as micro-enterprises.

Korea Credit Data is an operator of the business solution platform Cashnote, which is used across 1.3 million companies here. Douzone Bank Consortium was launched by enterprise resource planning software provider Douzone Bizon.

While Soso Bank is backed by a coalition of small merchants nationwide, it is also the entity’s second time trying to gain approval. It failed to earn preliminary approval in 2019, with the FSC pointing out that the then-named Soso Smart Bank was unprepared to manage a bank.

U-Bank Consortium, formed by local startups, vowed to support the financially underserved as well, such as those aged 65 or over and foreign national residents, by offering services connected to health care and overseas transactions.

The rush to compete for a license to operate as an internet lender comes as the financial regulator lowered the bar for permission in July.

While previously bidders could only apply for a license when the FSC announced bidding periods, under the change, operators with "demands and business plans that are considered stable and viable" can apply for a license year-round.

Compared to commercial banks, online lenders could be set up with a relatively small amount of capital. The Internet-only Bank Act states internet bank operators must raise at least 25 billion won ($19 million) in capital or more, which is a quarter of the 100 billion-won bar set for commercial lenders.

The industry, however, views that banks will have to raise between 500 billion won and 1 trillion won in capital to earn a license.

“Innovative technology is a must, but securing sizable, stable capital is the most important part in earning the license,” an official from the local finance industry said.

Cho Yong-byoung, head of the Korea Federation of Banks, also said, “Raising capital will be the biggest requisite for the launch of the fourth internet lender.”

Even after retaining sufficient initial capital, sizing up will be a challenge for newcomers. Over the years, existing online banks which started their business with 250 to 300 billion won in capital have sized up to around 2 trillion won in paid-in capital.

To secure financing, the operators cooperated with traditional financial institutions: Kbank teamed up with Woori Bank, Kakao Bank with KB Kookmin Bank and Toss Bank with both Hana Bank and Standard Chartered Bank Korea.

The current bidders are attempting to use the same tactic. The U-Bank consortium is backed by Hyundai Marine & Fire Insurance, while the Douzone Bank consortium seeks endorsement from Shinhan Bank.

Yet, some point out it may not be easy for new players to secure their market share, when the existing three lenders have already garnered over 40 million customers over the years as of January.

"In Korea, the intensifying competition among internet-only banks may lead to declining expectations for future profits," Lee Yoon-sok, a senior research fellow at the Korea Institute of Finance, projected in a research paper issued in March.

The fall in revenue may prompt financial institutions to sell their stakes in the internet-only banks, leading to a shift in the ownership structure, Lee explained.

"Therefore, it would be necessary to promote overseas expansion by seeking collaborations with public finance councils and to provide consistent policy support for innovative inclusive finance," Lee added.