A study on industrial bank of korea’s competitive strategy in the era of digital transformation = nghiên cứu về chiến lược cạnh tranh của ngân hàng công nghiệp hàn quốc trong thời kỳ chuyển Đổi kỹ thuật số

A study on Industrial Bank of Korea’s competitive strategy in the era of digital transformation = nghiên cứu về chiến lược cạnh tranh của ngân hàng công nghiệp Hàn Quốc trong thời kỳ chuyển đổi kỹ thuật số

ĐẠI HỌC QUỐC GIA HÀ NỘI TRƯỜNG QUẢN TRỊ VÀ KINH DOANH

TÓM TẮT LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: PGS.TS HOÀNG ĐÌNH PHI

HÀ NỘI - 2023

The aging population, coupled with Korea's fixed low growth rate, will further weaken the momentum for development Since the COVID-19 pandemic, global inflation, rapid interest rate hikes, wars, and trade disputes have also been major threats to the banking industry

Therefore, this paper examines the business environment in banking sector of Korea and how to strengthen the competitiveness of Industrial Bank of Korea (IBK) and increase productivity to survive in the era of infinite competition

2 Review of previous research

Among the existing studies, there are numerous papers and materials related to FinTech, Big Tech, Internet-only banks, changes in financial environment and the effects on banking industry However, many studies related were strategies or papers

of FinTech, Big Tech, Internet-only banks themselves or general commercial banking sector in Korea

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3 Research objectives

1 Investigate environmental changes in the banking sector of Korea

2 Analysis of the status of IBK and competitiveness

3 Providing proposals to strengthen the competitiveness of IBK

4 Research methodology

The author intends to propose competitive strategies to strengthen the competitiveness of IBK due to changes in the financial environment by deriving TOWS results through Internal Factors Evaluation (IFE) analysis and External Factors Evaluation (EFE) analysis

5 Research scope

 Time: This paper set the period from the 1960s to the end of 2021 when reliable data can be obtained to examine the characteristics and development process of the Korean banking industry

 Space: This paper focuses on IBK among Korean banks

6 Research structure

Firstly, Introduction Chapter introduces the background of research, review of prior studies, research objectives, research methodology, research scope and research structure The 1st chapter discusses the basic concepts and definitions of competitive strategy, Competitiveness of the banks and competitiveness of the banks in the era of digital transformation Chapter 2 provides the types of digital transformation in finance, analysis of financial environment of Korea and examines current status of IBK Based on these, the author utilizes IFE and EFE matrices to perform SWOT analysis In chapter 3, the author proposes strategies to strengthen the competitiveness of IBK by implementing TOWS matrix

Strategy has several definitions First of all, as quoted by, Michael E Porter (1996) claimed strategy is to create a unique and valuable position that involves a different set of activities and chooses to perform activities that are different from those that competitors do Second, strategy is to create value and provide the direction and integration of corporate activities for excellent performance (Robert M Grant, 2005) Thirdly, a strategy is an integrated and comprehensive plan designed to meet the company's basic objectives (Henry Mintzberg, 1987)

As competition among firms is getting fiercer today, it is essential to have competitiveness suitable for environment to survive According to Hoang Dinh Phi and Hoang Anh Tuan (2020) argued that without an ongoing innovative strategy in today's fiercely competitive business world, any company will soon be kicked out of the market and to promote and maintain competitiveness, all industries and businesses need to focus on innovation and process improvement

On the other hand, the goal of a competitive strategy is to find a position in an industry where companies can best defend themselves against competitive forces or influence them in their favor, and the essence of establishing a competitive strategy is

to relate the company to the business environment (Michael E Porter, 1980) The state of competition in an industry depends on five basic competitive forces: the entry

of the following, the threat of replacement, the bargaining power of the buyer, the bargaining power of the supplier, and the competitiveness among the current competitors Therefore, “Michael E Porter argued that „customers, suppliers,

 Overall cost strategy: In order to gain a cost advantage, it is necessary to

achieve an economy of scale and actively seek cost reduction through learning and experience

 Differentiation: It literally refers to a strategy that recognizes its products or

services as unique, distinct from other companies

 Focus: It is a strategy that targets only specific consumer groups or locally

limited markets This strategy can be divided into Low-Cost Focus and Differentiation Focus, where the former is similar to the Cost leadership strategy but is aimed at a specific segment The latter focuses on a particular market but focuses on a unique product rather than price

SWOT analysis is a tool used to plan and manage an organization's strategy and can be used effectively to build organizational and competitive strategies (Emet GÜREL, 2017) The SWOT analysis consists of four elements: 'Strengths', 'Weaknesses', 'Opportunities', and 'Threats' By creating the TOWS matrix through SWOT analysis, strategies considered by internal factors of external factors can be derived

1.2 Competitiveness of the banks

The competitiveness of banks can be measured in three main categories: Profitability, Asset Quality, and Capital Adequacy

Young Jun Jin and Yanthi Hutagaol-Martowidjojo (2019) argued that there are market share, deposits, Net Interest Margin (NIM), Return on Asset (ROA), and Return on Equity (ROE) as indicators of banks' profitability Secondly, deposits are a key indicator of the bank's fund intermediary function The more deposits a bank attracts, the more opportunities it has to offer its customers a loan

ROE is calculated by dividing net income by shareholder capital and is a measure of a bank's financial performance

According to Federal Deposit Insurance Company (FDIC), Asset quality is one

of the most critical areas in determining the overall condition of a bank Korea's Banking Supervision Regulations include the following provisions for maintaining asset soundness of banks Banks must regularly classify the soundness of their holdings into five levels ('Normal', 'Cautionary', 'Fixed', 'Recovery question', 'Estimated loss') in consideration of the borrower's ability to repay debt and the details of financial transactions In addition, banks must accumulate and maintain an appropriate level of provision for bad debts Loans below „Fixed‟ among the five steps in asset quality classification are classified as Non-Performing Loans (NPL) Capital adequacy ratio is an indicator designed to guarantee the financial soundness of banks suggested by the Basel Convention Capital adequacy ratio refers

to the ratio of equity capital to risk assets in a bank's total assets The Bank for International Settlements (BIS) recommends maintaining at least 8% (CET 1 > 4.5%, and Tier 1 > 6%)1

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Regulatory capital = CET 1 (Common Equity Tier 1) + Additional Tier 1 + Tier 2 capital

Tier 1 = CET 1 + Additional Tier 1 (BIS)

1.3 Competitiveness of the banks in the era of digital transformation

Young Jun Jin & Yanthi Hutagaol-Martowidjojo (2019) argued that investment and operation in IT centers are needed to strengthen banks' competitiveness in the digital era Investment in IT centers is said to have a positive effect on increasing the market share of deposit and loan services by making customers convenient to use the banking system and increasing accessibility

According to Estelle Xue Liu (2021) of the International Monetary Fund (IMF), banks have been leaders in accepting new technologies quickly, but their leadership has not made digital innovation a priority due to restructuring and stricter regulations after the Global Financial Crisis Therefore, there has been a gap between the services expected by consumers and what banks provide recently, and FinTech companies and Big Tech companies are taking over Digital maturity is also associated with increasing banks' profitability, and banks with advanced digital foundations have higher ROA and ROE compared to banks that do not Banks' NPL ratio is low for banks with a high level of digital banking as well

Seo Jung-ho & Lee Byung-yoon (2020) argued that the competitiveness of banks in the era of digital transformation requires securing a large amount of customer data and sophisticated analysis capabilities The study also emphasized the importance of platform business As customers become familiar with the mobile ecosystem, they want to handle all their tasks online rather than existing physical branches Finally, a competitive risk management model is needed If the credit evaluation model and risk measurement using big data can be more sophisticated, it will be possible to increase bank profits and stability while reducing costs

1.4 Types of digital transformation in finance

1.4.1 FinTech

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According to the Korea Financial Services Commission (KFSC), FinTech is a compound word of Finance and Technology, which collectively refers to changes in financial services and industries through the convergence of finance and information technology (IT)

According to Ernst & Young (2015), FinTech can be divided into „Traditional FinTech‟ and „Emergent FinTech‟, and Traditional FinTech plays the role of an assistant who supports and maintains the existing financial infrastructure On the other hand, Emergent FinTech is a disruptor and innovator of existing financial markets

1.4.2 Big Tech

According to BIS (2021), Big Tech's business model is an online platform where various users around the world can interact People's interaction creates the externalities of the network, and the more users interact with each other, the more active and developed the platform In addition, Big Tech companies can operate huge data centers to systematically store user data and analyze it using AI to utilize the network in various ways Big Tech companies generate the essential value of online

"Multi-Side Platforms" (MSPs) by enabling and inspiring interactions between multiple users The main types of such Big Tech platforms include social networks, e-commerce platforms, and search engines Due to the externalities of the network, the number of users increases, and the accumulated information creates another value This accumulated information makes data analytics, the core value of Big Tech companies, richer The vast amount of information analyzed with tools such as AI attracts more users by improving the quality of that information and improving services Therefore, network externalities is stronger in platforms that provide a wide range of services and is an essential element of the Big Tech lifecycle Accordingly, Big Tech is expanding its business area to the financial industry to increase network externalities essential for survival

Lee Byung Yoon & Seo Jung Ho (2021) argued that the reasons why Big Tech companies enter the financial industry are as follows

 Increasing demand for financial services from consumers

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 Increase loyalty to Big Tech's platforms by providing financial services

 Secure reliable profitability

 Collect customers data

 Improves network externalities of Big Tech

 Utilize technological superiority

1.4.3 Internet-only bank

KFSC defines terms related to Internet-only banks as follows Internet-only banks operate a small number of branches or run most of their work through electronic media such as ATM (Automated Teller Machine) and the Internet without branches refers to a bank It is distinguished from Internet banking, which refers to a business method that provides banking services over the Internet

The study of Jang Eun Kyo (2020) stated that Internet-only banks have several characteristics compared to existing commercial banks as follow

 Unlike incumbent banks operated based on offline stores, Internet-only banks can enter new markets without opening them as new branches

 Internet-only banks have high preferential interest rate and commission benefits

 Internet-only banks are easing the interest rate cliff phenomenon in the financial market with high interest rates and low loan interest rates

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CHAPTER 2 ANALYSIS OF BANKING INDUSTY COMPETITIVENESS

2.1 Analysis of the banking industry in Korea

2.1.1 Digital transformation in the Korean financial industry

2.1.1.1 Expansion of non-face-to-face transactions

According to BOK, the number of registered customers for Internet and mobile banking at domestic banks stood at 191 million as of the end of 2021, up 9.4% from the end of the previous year The number of mobile banking registered customers increased by 13.5% to 153 million, and the number of individual and corporate registered customers for Internet banking increased by 9.4% and 10.2% respectively from the end of the previous year to 179 million and 1.2 million

<Table 6: Number of Internet banking customers> 1)2)

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In particular, the average number and amount of daily use of mobile banking were 14.4 million cases and KRW12.9 trillion, which increased by 22.9% and 19.6% year-on-year Mobile banking accounts for 82.9% and 18.2%, respectively, in terms

of the number and amount of Internet banking

In addition, there was a significant growth of 47.6% (number of cases) and 56.9% (amount of loan) in the number and amount of loan application services

< Table 7: Internet banking usage performance> 1)2

2.1.1.2 FinTech and Big Tech

In Korea, the number of FinTech companies increased from 94 in 2013 to 484 in

2020 The domestic FinTech industry developed rapidly in 2015 when the government implemented regulatory improvement policies to innovate and enhance competitiveness of the financial industry The Korean government revised the

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existing offline-oriented financial system to suit the online mobile environment, raised policy funds to foster the FinTech industry, and eased barriers to entry into the electronic financial industry

<Table 10: Korea's FinTech services sector>

Service

Number of businesses (%)

24 (5.0%)

P2P lending

Loans made between individuals and borrowings through online platforms without intermediary from existing financial institutions

18 (3.7%)

Blockchain

Blockchain is a technology that distributes and stores data such as all transaction details by all users participating in the network

Source: FinTech center Korea

Meanwhile, as Big Tech companies are entering various financial services worldwide, online platform companies such as Naver and Kakao in Korea provide various financial services such as simple payment, simple remittance, deposit, loan, and insurance, etc in Korea

In 2020, Naver Financial, a subsidiary of Naver, launched a credit loan with Mirae Asset Capital for Naver Shopping operators, and signed a loan agreement with