The Controversial KakaoPay... Will Its Growth Continue?

It is the heyday of ‘TechFin’ (technology companies entering the financial industry). Since the coining of the term ‘FinTech’ in 2010, which means the combination of finance and technology, numerous fintech startups have emerged. After more than a decade, the leadership has shifted from financial companies to technology (tech) companies. This is why the term TechFin is more widely used than FinTech.

Technology is changing payment methods. Instead of traditional cash or cards, a new form of payment called simple payment has become popular. Simple payment, which emerged in the mid-2010s, has grown even faster due to COVID-19 and has become a part of daily life. This year, the total transaction amount of simple payment and remittance service providers is expected to exceed 400 trillion won, accounting for 40% of the annual card payment volume.

According to the ‘2020 Payment Report’ published by the Bank of Korea, the average daily usage amount of simple payment and remittance services grew more than sevenfold from 64 billion won in 2016 to 449 billion won in 2020 over five years. As the market size expanded, TechFin companies also grew rapidly. KakaoPay is about to enter the KOSPI market just four years after its launch, and Viva Republica, which operates Toss, has grown its corporate value to 16 trillion won in eight years. Asia Economy examines the current status and growth potential of KakaoPay and Viva Republica, the frontrunners of the TechFin era.

[Asia Economy Reporter Yoo Hyun-seok] KakaoPay, whose IPO was postponed twice due to overvaluation and regulatory issues, will enter the KOSPI market this November. Its expected market capitalization after listing is 11.7 trillion won, placing it among the top 30 companies by market cap.

KakaoPay was established in April 2017 by receiving assets and liabilities related to fintech business from Kakao as a contribution in kind. It launched Korea’s first simple payment service in September 2014. Since then, it has successively introduced various services such as remittance, billing, and authentication. It also launched loan comparison services and a platform service linked to financial companies. Along with this, it is expanding into financial services such as brokerage services for financial products conducted by its subsidiaries. Its business segments are broadly divided into payment and financial services.

◆High growth based on the Kakao platform= KakaoPay has grown sharply, recording sales of 69.5 billion won in 2018, 141.1 billion won in 2019, and 284.4 billion won last year. In the first half of this year, sales reached 216.3 billion won, an 89.86% increase compared to the same period last year.

Operating loss was 96.5 billion won in 2018 but decreased to 65.3 billion won in 2019 and 17.9 billion won in 2020. In the first half of this year, operating profit was 2.6 billion won, turning profitable compared to the same period last year. As of the first half of this year, payment services account for 62.7% of total sales, followed by financial services (32.15%) and other services.

The driving force behind the rapid turnaround to profitability is the Kakao platform. Kakao’s messenger service KakaoTalk had 46.62 million monthly active users (MAU) domestically as of the second quarter. Based on the Kakao platform, KakaoPay’s payment service transaction amount increased from 3.5 trillion won in 2018 to 7.2 trillion won in 2019 and 12.5 trillion won last year. The transaction volume doubled every year.

The financial services sector, a new business area, is also growing rapidly. Financial services accounted for only 0.16% (113 million won) of total sales in 2018, but increased to 3.349 billion won (2.37%) in 2019 and 64.449 billion won (22.66%) last year. It is expected to continue growing rapidly. KakaoPay is currently conducting an IPO and plans to use the raised funds to expand KakaoPay Securities’ retail business and invest in a digital non-life insurance company.

Jung Kwang-myung, a researcher at DB Investment & Securities, explained, "KakaoPay Investment & Securities plans to strengthen retail operations with new financial products, and the digital non-life insurance company is scheduled to launch in the first quarter of next year. With the acquisition of a license for loan brokerage services in September, official loan services are now possible, and additional financial services through subsidiaries are expected, so growth in related sectors can continue."

◆Controversial IPO= KakaoPay’s initial public offering price range was 63,000 to 96,000 won but was lowered due to overvaluation controversy. The adjusted offering price was 60,000 to 90,000 won. Although the offering price was lowered, the corporate value actually increased from 16 trillion won to 17 trillion won.

The reason is that the corporate value grew by including half-year results rather than just first-quarter results. The method KakaoPay used to select the offering price was the Growth-adjusted EV/Sales comparison method. The growth adjustment factor is a method used to recognize the value of companies showing high growth. This factor uses sales growth rate. When KakaoPay first submitted its securities registration statement, it presented a sales growth rate of 83.4%, but later revised it to 98.70%.

The reason for the lower offering price was the application of a higher discount rate. The discount rate increased from 21.51?48.49% to 31.28?54.19%. The average discount rate for KOSPI IPOs over the past five years was 19.79?32.79%.

The expected market capitalization through this method is about 7.8 trillion to 11.7 trillion won. On the 22nd, KakaoPay announced that the offering price was set at 90,000 won, the upper limit, with an expected market capitalization of 11.7 trillion won after listing. Compared to Samsung Card, a card company listed domestically with a market cap of about 4 trillion won, this is roughly three times larger.

However, the limitation of this method is the risk that future actual performance may fall short of current expectations. Especially, KakaoPay’s core business is highly susceptible to regulatory impacts, creating uncertainty. In fact, the full enforcement of the Financial Consumer Protection Act in September led to the suspension of sales of some KakaoPay products, which was one of the reasons for another IPO postponement.

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