Acuon Capital, a Korean consumer-finance business, has raised Krw140 billion ($127 million) from its inaugural issuance of ESG bonds. Its leaders view this as a testament to a rapid and successful digital transformation.
Acuon Capital and its affiliate, Acuon Savings Bank, have been around for more than three decades, originally as KT Capital. The businesses were acquired in 2019 by Baring Private Equity Asia, whose managers saw the opportunity to take a financial institution in the traditional consumer-finance space and digitize it.
“The remit was to grow the company,” said Hogan Lee, CEO at Acuon Savings Bank, who was brought in to lead the business in the wake of the acquisition; he had previously been president of Chicago Business Management in Seoul.
“Without digitization, our costs would grow linearly as we expanded, which meant we would not generate enough profits. As the market digitizes, cost structure becomes important. And customers now demand convenience.”
Digital yields results
In eighteen months, the firm has created an API layer with about 30 fintech companies, mobile payment apps, digital banks, and traditional banks. Today over 60 percent of new loans originate via digital partnerships.
That effort has paid off, helping Acuon jump up the Korean league tables in terms of size and deal flow. The combined businesses now have about $7 billion in total assets, of which over $5 billion are loans. At the start of 2020, about 20 percent of new retail loan origination was through digital channels, a figure that rose to around 50 percent by Q4 2020 – activity that is bolstered by a commensurate increase in deposits.
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Moreover, Lee says the heightened activity is improving the quality of the loan book. Two years ago, up to 7 percent of loans might fall delinquent, but that figure is down to about 4 percent. Digitization has made it possible to reach new customers but also to price them more accurately, with Acuon’s algorithms needing only a few seconds to determine whether an applicant is suitable.
“Better customers require better pricing,” Lee said. “To enable this required a total restructuring of our business.”
Part of this was about building internal machine-learning capabilities to make quick and accurate, data-led assessments of credit risk.
Building a tech stack that could integrate with leading banks was also important. Commercial banks, including Korea’s leading digital banks Kakao Bank and Kbank, which agreed to source their riskier clients to Acuon.
This ability to seamlessly take on such customers has helped Acuon improve its overall asset quality by 70 basis points over the past 12 months, Lee says.
Ready to expand
Put together, the firm is now in expansion mode. It is the first financial institution in Korea with a local A0 credit rating to issue an ESG bond, says Kim Junseok, group strategy team head at Acuon Capital. “Previously, only big conglomerates or bank holding companies with investment-grade credit ratings could issue these bonds,” he said.
Proceeds will include renewable energy projects and water treatment plants, as well as social projects to lend more to small businesses and startups, which traditionally have struggled to obtain credit in South Korea. In other words, Acuon intends to expand its lending to ESG-related companies, using its capital-market issue to generate the capital to lend as well as support other aspects of the business.
The question is, will Acuon’s digital transformation help it originate and distribute these ESG loans in a faster or more efficient way? Lee says he doesn’t know yet: its digitalization has focused on Acuon’s consumer business, not its corporate lending, which is still a face-to-face business.
Consumer finance companies sit below the top-tier, big commercial banks. The difference is in the credit quality they service. Top-tier banks tend to lend on average at an APR of 7.9 percent, and a maximum of about 10 percent.
Consumer finance companies lend at higher interest rates, typically at 14 percent to 15 percent APR (annual percentage rate), which puts them in the same tier as credit-card companies and electronic peer-to-peer lenders; but Korea’s P2P sector has suffered high delinquencies and is going through a shakeout, with many commercial banks cutting ties.