Deposit rates at South Korea’s internet-only banks have dropped below 3 percent, weakening one of their main competitive advantages over traditional lenders.

According to data from the Korea Federation of Banks on Tuesday, the highest base rate for six-month fixed deposits stood at 2.55 percent, offered by KakaoBank Corp. and Kbank.

Woori Bank and Toss Bank products followed at 2.5 percent. KB Kookmin Bank offers a base rate of 2.10 percent and a maximum of 2.45 percent, leaving a mere 0.45-percentage point difference between traditional lenders and the three leading internet-only banks—KakaoBank, Kbank, and Toss Bank.

With internet-only bank deposit rates now below the 3 percent threshold, analysts say their interest rate advantage over traditional banks has effectively disappeared.

In late May, immediately after the Bank of Korea cut its benchmark interest rate, internet-only banks reduced deposit rates across the board by 0.1 to 0.3 percentage points.

Traditional banks are even leading in some installment savings rates. For one-year free installment savings accounts with simple interest, KakaoBank’s product at 2.75 percent and Toss Bank’s at 2.5 percent both trail Woori Bank’s 2.95 percent.

The decline in internet-only bank deposit rates is widely attributed to stricter government lending regulations, which have made loan operations more difficult.

Since banks earn interest income by deploying deposits into loans, market watchers say they have little choice but to lower deposit rates and apply stricter lending standards to preserve profitability.

Under the June 27 regulatory measures, banks must cut their existing loan volume targets by half.

Internet-only banks face even tighter requirements for loans to mid to low credit borrowers, defined as those in the bottom 50 percent of credit scores.

Previously, these banks were required to keep such loans at or above 30 percent of their average balance without reducing the total amount year over year. The new rules add that at least 30 percent of newly issued loans must go to these borrowers.

“Mid to low credit borrowers are a central focus for internet-only banks, given their founding mission of promoting inclusive finance,” an industry executive said. “But this also raises the challenge of managing delinquency risks. The government’s mandate to allocate 30 percent of new loans to these borrowers each quarter places a real operational burden on the banks.”

A bank official noted that the end of the interest rate hike cycle has also eased competition for deposits.

“In the early days, internet-only banks aggressively competed to attract customers, but now they have a stable base of loyal clients.”

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