Card Companies with Strong Performance, Will 'Fee Reduction' Backfire? (Comprehensive)

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

[Image source=Yonhap News]

[Asia Economy Reporter Ki Ha-young] Ahead of this year's discussion 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 pretext 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, surging 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 finance and leasing, as well as cost efficiency. There is also an analysis that it is a recession-type surplus achieved by tightening belts. Due to the impact of COVID-19, sales in travel-related sectors and duty-free shops decreased, reducing related marketing costs and thus increasing profits.

Franchise Store Commission Rate Recalculation Scheduled for This Year: "Must Reflect Actual Market Prices"

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

In reality, 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. Last year, the number of card recruiters fell below 10,000 for the first time since statistics began in 2013. Above all, as the difficulties faced by self-employed individuals and small business owners worsened due to COVID-19, voices calling for additional commission rate cuts are emerging, especially in political circles. Representative Gu Ja-geun of the People Power Party has proposed an amendment to the Specialized Credit Finance Business Act that exempts card fees entirely for small credit card payments under 10,000 KRW at franchise stores with annual sales under 3 billion KRW, and applies preferential commission rates to franchise stores in traditional markets regardless of sales size.

Credit card companies that posted strong performances last year are understandably concerned that pressure for additional commission rate cuts will intensify. An industry insider said, "Card companies have made multifaceted efforts to improve profitability worsened by commission rate cuts," adding, "It is regrettable that these painstaking efforts are becoming grounds for further commission rate reductions."

In fact, credit card companies' franchise store commission revenues are declining. Since the new franchise store commission rates were calculated in 2018, commission revenues decreased by 239.8 billion KRW in 2019, and in the first half of last year, they 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%. 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 eligible cost calculation system. The recalculation of eligible costs should function as a system that reflects actual market prices rather than continuously lowering franchise store commissions. Another industry insider said, "After several rounds of commission rate cuts, commission revenues are at cost level," adding, "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.