Borrowers' credit scores rise after switching to internet bank loans

Second-quarter mid-to-low credit lending results from three internet banks

One Kakao Bank customer's score jumped 235 points

Refinancing out of high-rate non-bank loans drives the gains

All three banks exceeded the 30% mid-to-low credit target in Q2

All three internet banks — Kakao Bank, K bank and Toss Bank — met the government's target of extending 30 percent of loans to mid-to-low credit borrowers in the second quarter. [Image generated with ChatGPT]

A significant share of mid-to-low credit borrowers who took out loans from internet banks saw their credit scores rise within a month — a counterintuitive result, given that new debt typically causes scores to dip. The gains stem from borrowers refinancing out of high-interest non-bank loans and into bank-rate products.

Half of Kakao Bank's mid-credit loan customers in the second quarter saw their credit scores rise within one month of taking out the loan, the bank said Saturday, citing its quarterly mid-to-low credit lending disclosure. The average gain was 47 points. The biggest jump belonged to a customer whose score climbed 235 points, from 736 to 971. Some 21 percent of mid-credit loan recipients improved their creditworthiness enough to be reclassified as high-credit borrowers.

At Toss Bank, 44 percent of mid-to-low credit borrowers who received loans in the second quarter saw their external credit bureau scores rise by an average of 43 points one month after disbursement. Among customers who had held relatively high-rate non-bank credit loans before switching, 36 percent repaid an average of 3.5 million won ($2,540) of their existing loan balance within a month of taking out the new loan, and their credit scores rose by an average of 11 points.

Refinancing is the key driver. While new borrowing typically causes a modest score decline due to higher debt levels, repaying high-rate non-bank loans — in part or in full — produces a credit score improvement.

Kakao Bank's loan-switching service, which runs on the financial sector's shared refinancing infrastructure, illustrates the trend. In the second quarter, 47 percent of customers who moved a credit loan from another lender to Kakao Bank were mid-to-low credit borrowers, and 57 percent of those came from non-bank lenders.

The average interest rate reduction was 3.2 percentage points. For customers switching from non-bank lenders specifically, the average saving widened to 5.6 percentage points. In one case, a customer in their 50s with a KCB credit score of 719 refinanced a card-company loan into Kakao Bank's mid-credit product and cut their rate by 14.7 percentage points.

All three banks cite their proprietary credit-scoring models, which incorporate non-financial alternative data, as the foundation that makes this level of lending possible. The models allow them to approve borrowers who would have been rejected under conventional finance-data-only frameworks.

Toss Bank operates its own credit-scoring model, TSS, alongside nine specialized underwriting models tailored to different borrower profiles. By factoring in spending patterns, cash flow and payment history, the bank found that 33 percent of mid-to-low credit young borrowers received additional credit score points based on non-financial data — an effect the bank said was especially pronounced among younger customers with limited financial histories. Kakao Bank said it similarly uses non-financial data to identify and approve mid-to-low credit applicants who would otherwise be turned down.

K bank has taken a partnership-driven approach to broadening its reach. In June, it signed an MOU with Gwangju Bank to jointly develop products for mid-to-low credit customers and thin-file borrowers, and to share credit-scoring model expertise for underwriting and post-loan management. In May, it launched a guarantee-backed loan product for sole proprietors in partnership with the Gyeonggi Credit Guarantee Foundation, allowing applicants to complete the entire process — from application to disbursement — without switching apps or logging in again.

All three banks met their lending-share targets for the quarter. By outstanding balance, Toss Bank posted the highest mid-to-low credit ratio, while Kakao Bank led on new originations.

Measured by average outstanding balance in the second quarter, Toss Bank's mid-to-low credit loan share was the highest at 34.2 percent, followed by Kakao Bank at 31.9 percent and K bank at 31.3 percent — all three exceeding the 30 percent threshold agreed with regulators. Toss Bank's relatively high ratio partly reflects its business mix: the bank does not offer mortgage loans and runs a credit-loan-heavy asset base.

On a new-origination basis, Kakao Bank led at 38.4 percent, followed by Toss Bank at 32.7 percent and K bank at 32.4 percent — all three meeting the 32 percent target. The new-origination ratio, unlike the balance-based figure, reflects each quarter's active lending stance rather than the accumulated stock of existing loans.

In absolute terms, Kakao Bank was the largest lender. It extended 520 billion won to mid-to-low credit borrowers — including sole proprietors — in the second quarter, bringing its first-half cumulative total to 1 trillion won and its cumulative supply since its 2017 launch to more than 16 trillion won. K bank's second-quarter new lending to this segment reached 366.3 billion won, up 31 percent from 278.9 billion won a year earlier, pushing its cumulative total past the 9 trillion won mark to 9.03 trillion won. K bank also extended 235 billion won in private mid-rate loans during the quarter — the most among internet banks and second across the entire banking sector.

Toss Bank did not disclose a separate second-quarter new-lending figure, instead highlighting that it had cumulatively provided loan access to about 380,000 borrowers. Its first-half policy microfinance lending totaled about 1 trillion won, comprising 576.1 billion won in mid-rate loans including Saitdol loans and 409.9 billion won in Haetsal loans.

won@heraldcorp.com