Credit Card Companies' Hard-Earned Performance... Will 'Fee Reduction' Backfire?

Strong Performance Through Belt-Tightening Amid COVID and Diversification into Installment Finance and Leasing Businesses
Discussion on Recalculating Qualified Costs for Franchise Fees Next Month
Industry: "Efforts to Improve Profitability Are Not Justification for Fee Rate Reduction"

[Asia Economy Reporter Ki Ha-young] Ahead of this year's discussions on recalculating franchise store commission rates, credit card companies that posted strong performances last year are concerned about the possibility of further commission rate cuts. Despite the economic downturn caused by the COVID-19 pandemic, they achieved results beyond expectations through cost efficiency and business diversification, but these efforts could be used as a justification for lowering franchise store commission rates.

According to the industry on the 9th, Shinhan Card recorded a net profit of 606.5 billion KRW, an increase of 19.2% compared to the previous year. Samsung Card and KB Kookmin Card also posted results of 398.8 billion KRW and 324.7 billion KRW, up 15.9% and 2.6%, respectively. Small and medium-sized card companies also made significant progress. Hana Card recorded a net profit of 154.5 billion KRW last year, soaring approximately 174.4% compared to the same period last year. Woori Card also achieved 120.2 billion KRW, up 5.3% from the previous year.

This strong performance is interpreted as being influenced by efforts to diversify businesses such as installment financing and leasing, as well as cost efficiency. There is also an analysis that this is a recession-type surplus achieved by tightening belts. Due to the COVID-19 impact, sales in travel industries and duty-free shops decreased, reducing related marketing expenses and thus increasing profits.

Franchise Store Commission Rates Already at Cost Level... Need to Improve Qualified Cost Calculation System

The problem is that the credit card companies' painstaking efforts could become a rationale for lowering franchise store commission rates. As early as the end of next month, discussions on recalculating qualified costs for franchise store commissions, conducted every three years, will begin. Qualified costs refer to the costs incurred during card payments and are determined by reviewing card companies' ▲funding costs ▲risk management costs ▲general administrative costs ▲VAN fees ▲marketing costs ▲adjustment costs over the past three years. The newly calculated qualified costs form the basis for applying new card franchise store commission rates from 2022 onward.

In fact, due to the low-interest rate environment, card companies' funding costs have decreased, and card recruitment costs have also declined as sales channels shifted online. Above all, as the difficulties faced by self-employed and small business owners have intensified due to the COVID-19 impact, voices calling for additional commission rate cuts are emerging, mainly in political circles. Credit card companies that recorded strong performances last year are concerned that pressure for further commission rate reductions on franchise stores will inevitably increase.

An industry insider said, "Card companies have also made multifaceted efforts to improve profitability worsened by franchise store commission rate cuts," adding, "It is regrettable that these painstaking efforts are becoming grounds for further commission rate reductions."

In fact, credit card companies' commission income from franchise stores is decreasing. Since the new franchise store commission rates were established in 2018, commission income decreased by 239.8 billion KRW in 2019, and in the first half of last year, it also fell by 94.5 billion KRW compared to the previous year. This is the result of expanding the scope of preferential franchise stores from those with sales under 500 million KRW to those under 3 billion KRW in 2018, increasing the proportion of preferential franchise stores from 84% to 96% of all franchise stores. Additionally, due to the retroactive application of the preferential commission refund system, card companies plan to refund 49.9 billion KRW to newly registered small and medium-sized franchise stores in the second half of last year.

There are also calls to improve the qualified cost calculation system. Rather than serving as a mechanism to continuously lower franchise store commissions, the qualified cost recalculation should function as a system that reflects the actual market price structure. Another industry insider said, "Due to multiple commission rate cuts, commission income is already at cost level," and added, "The system that uses credit card companies' strong performance as a basis for commission cuts needs to be revised."

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