[Economy Pulse] Three Innovations for the Sustainable Growth of Regional Banks

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Currently, Korea's regional banks are facing a 'sandwich' pressure, with their market share and profitability simultaneously being eroded by the quantitative offensive of major commercial banks with large capital power on one side, and the digital agility of internet-only banks on the other. In addition, declining regional populations, aging demographics, and the stagnation of key local industries are having a negative impact on the asset quality of these regional banks. As of the end of June 2025, the average delinquency rate of regional banks stood at 1.04%, which is significantly higher than the 0.3% average among commercial banks, highlighting the need for proactive risk management. In light of this, three strategic directions are proposed to ensure the sustainable growth of regional banks.

First, regional banks should consider expanding their business networks through strategic alliances with IT companies. To overcome regional limitations, regional banks must move beyond expanding their physical presence and instead establish a nationwide financial territory through strategic partnerships with IT companies that possess vast amounts of data. Jeju Bank is currently pursuing embedded finance by collaborating with Douzone Bizon, a leading IT company in Korea, to integrate corporate finance services into its systems. In practice, this allows corporate clients to handle financial work such as loans, remittances, and payments directly within the enterprise resource planning (ERP) interface they are already accustomed to using. By providing direct financial solutions to more than 130,000 Douzone ERP users nationwide, Jeju Bank is establishing a meaningful example of how a regional bank can emerge as a nationwide specialist in corporate banking.

Second, improving operational efficiency by expanding the application of artificial intelligence (AX·AI Transformation). Artificial intelligence (AI) technology should serve as a key driver not only for enhancing convenience, but also for fundamentally transforming the customer experience, strengthening risk management, and boosting overall productivity across work processes. By integrating AI across customer-facing channels, banks can secure external service competitiveness. Building an AI Contact Center (AICC) can enable 24/7 automated customer service, while AI bankers can streamline repetitive counter work, maximizing branch operational efficiency. Furthermore, AI-driven real-time risk monitoring can move the bank away from traditional, reactive approaches and towards an intelligent compliance system that proactively detects potential signs of insolvency and maximizes capital allocation efficiency. Lastly, regional banks need to realize back-office automation to enhance internal work efficiency and implement data-driven hyper-personalized marketing.

Third, redefining the hyper-local business model. Regional banks should move away from competing with generic financial services and instead secure exclusive competitive advantages by conducting in-depth analyses of the local economy and demographic characteristics, and by preemptively targeting niche markets that commercial banks tend to overlook. Jeonbuk Bank, for example, identified foreign workers residing in Korea and multicultural families-groups often avoided by commercial banks due to risk management issues and language barriers-as its strategic niche market. By launching a dedicated platform, 'Bravo Korea,' and providing specialized financial solutions linked to visa and administrative services, Jeonbuk Bank has achieved an overwhelming market share of over 70% in this segment, presenting a new growth model for regional banks. In the United States, Oregon-based Umpqua Bank redefined its branches as business and cultural hubs for local small businesses and residents, rather than simply as financial work spaces. By hosting exhibitions of local specialties and providing networking spaces for small entrepreneurs, the bank has become deeply embedded in the local economic ecosystem, securing a uniquely loyal customer base through emotional bonds and tailored financial advice that large capital providers cannot offer.

As the financial industry's paradigm rapidly shifts from digital to AI-centric models, regional banks must break away from their conventional business practices. Local characteristics should not be seen as limitations to overcome, but rather as differentiated core competencies for providing specialized financial services.

Manho Yoon, Chairman of the Management Consulting Committee, EY Han Young

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