Banks Debating Whether to Set 'Non-Face-to-Face Loan Early Repayment Fees' (Comprehensive)

"Customer Retention" VS "Decrease in Product Appeal"

[Asia Economy Reporter Park Sun-mi] Major commercial banks are facing a dilemma over imposing prepayment penalties on non-face-to-face loan products. While it is necessary to charge prepayment fees on non-face-to-face loan products to manage the total volume of household loans and prevent customer attrition, there is a risk that this could reduce the appeal of non-face-to-face products and make it difficult to attract new customers.

According to the banking sector on the 20th, Woori Bank will apply prepayment penalties to its non-face-to-face credit loan products, ‘Woori WON Workplace Loan’ and ‘Woori Main Workplace Loan (Internet)’, starting from the 28th. Woori Bank is the first among commercial banks to charge fees for early repayment of non-face-to-face products. A prepayment penalty is a kind of ‘penalty’ fee that the bank charges when a borrower repays all or part of the loan principal before the maturity date after taking out a loan.

Until now, commercial banks have only set prepayment penalty rates of around 0.5?0.8% for general credit loans and have not charged separate fees for non-face-to-face credit loan products, which have been the focus of customer acquisition competition. However, with Woori Bank deciding to apply a prepayment penalty rate of 0.6% for variable interest rates and 0.7% for fixed interest rates, some other banks are also beginning to consider this.

An official from Bank A, which is planning to review the introduction of prepayment penalties, explained, "As there are more investment opportunities such as stocks, many cases have emerged where customers take out credit loans, use the funds for urgent expenses, and then terminate the loan early or switch to other banks with lower interest rates." He added, "When customers terminate loans early without reaching maturity, banks suffer losses in fund management and face difficulties in managing the total volume of household loans."

[Image source=Yonhap News]

Can Prevent Existing Customer Attrition but Has Many Side Effects

Woori Bank also cited the frequent new subscriptions and cancellations of credit loan products due to recent public offering subscriptions as a reason for the difficulty in managing the total volume of household loans and the need to introduce prepayment penalties.

However, there are concerns that if commercial banks consecutively introduce prepayment penalties while internet banks do not charge fees on non-face-to-face credit loans, they may lose competitiveness. Especially at a time when talks of base rate hikes are emerging, it may be difficult to attract customers if switching loans becomes difficult in the future.

An official from Bank B expressed concern, saying, "One of the advantages of internet non-face-to-face credit loans was that it was easy to borrow and easy to repay. While the introduction of fees may help prevent existing customer attrition, it could make it harder to attract new customers."

It is also difficult to avoid criticism that banks focus solely on fee profits without sharing the interest burden with borrowers during a period of rising interest rates.

Prepayment penalties can be an obstacle to consumers switching to products with lower interest rates or making early repayments. Previously, the Financial Consumers Federation pointed out that the five major commercial banks earned 1.0488 trillion won in prepayment penalty income from 2017 to 2020 and argued that prepayment penalties should be abolished to promote early repayment as part of the government’s household debt management efforts.

Meanwhile, financial authorities plan to launch a system around October that will allow consumers to easily switch loans online. Consumers will be able to compare interest rates and switch loans non-face-to-face and through a one-stop process without visiting bank branches.

This content was produced with the assistance of AI translation services.