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Companies face losses on fee reduction
By Park Hyong-ki
Credit card companies are reeling from constant state pressure to lower the fees they charge stores for customer transactions, industry sources said Monday.
This has been hurting their bottom lines to the point where they are barely able to keep their margins up.
"The industry has lowered fees six times since 2012 as the government has forced them to do so through legislation. Card companies have incurred losses worth billions of won since then," said an official of the Credit Finance Association (CREFIA).
"Some card companies have had to let employees go through restructuring."
Over the last two years, eight card companies had losses on lower fees amounting to more than 1 trillion won as the government expanded the scope of fee reductions in accordance with annual sales of stores, according to CREFIA.
In 2017, the government had credit card companies charge a 1.3 percent fee on every transaction at stores that posted annual sales of 300 million won to 500 million won. Before, they charged that much to stores with annual sales of 200 million won to 300 million won.
Those with annual sales of less than 300 million won need pay only 0.8 percent. Stores that post more than 500 million won in sales a year have to pay fees of up to 2.3 percent, according to the association.
About 10 years ago, the rate was as high as 4.5 percent.
For instance, when a customer pays for a meal worth 10,000 won via a credit card at a store with annual sales of less than 300 million won, a card company wires the money minus the fee of 80 won to that store's account within two days. In all transactions, customers face no extra cost burden when paying with their cards, the CREFIA official explained.
Card companies calculate and charge fees after taking into account their costs to raise capital, which will be used to give stores or business owners the money owed them following customer purchases.
Last year, the average fee charged against 2.66 million stores stood at 2.08 percent, it noted.
There are over 2 million small stores, including self-employed businesses with annual sales of less than 300 million won. Some 200,000 stores are medium-sized businesses, and the rest have sales of over 500 million won.
The point is, CREFIA added, card companies' 0.8 percent fee is charged against more than 80 percent of the total number of stores using credit card networks.
And the regulator is seeking to further reduce the fee to a near zero rate for all stores with sales less than 500 million won, or the administration's main constituents.
This is expected to eat into companies' profitability, leaving them with a very limited number of options for a business rebound.
"The fee reduction pressure is growing amid a weak economy and a rise in the minimum wage," the CREFIA official said.
Feeling the pinch
Shinhan Card, the country's biggest credit card company, said it has been in a difficult situation amid the state's pressure.
"Now, stores are being introduced to applications that do not charge fees at all, using bank networks, by regional and city governments. This would further downsize the credit card market," said a Shinhan spokesman.
There is a limit to expanding its core business in emerging markets, including Vietnam and boosting other "secondary" businesses such as loans.
If it increases its loan business, the company would have to set aside more provisions against potential losses and risks stemming from customer defaults.
"This raises costs for the company. Also, emerging markets do not yet have the infrastructure on a similar scale to Korea for credit card transactions," the spokesman said, noting that more than 70 percent of Koreans use cards for payment.
He added that those who cannot borrow from banks and nonbanks, such as mutual savings, usually seek loans from credit card companies. This entails considerable risks.
Woori Card agreed, given the industry's overseas ventures are at a nascent stage, it is unlikely to make up its losses from the fee reduction at home.
"We made inroads into Myanmar's microfinance as a means to seek new opportunities," a Woori Card spokesperson.
Card companies said adopting new technologies such as big data analysis to create tailored services also poses limitations given the country's stringent regulations toward the use of personal data.
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