Card and Capital Companies Face Retroactive Application of Legal Maximum Interest Rate... "Concerns Over Profitability Decline"

No Obligation but Voluntary Application
Loan Limit Reduced to Below 20% Starting July

Repeated Merchant Fee Cuts Lower Credit Sales Profitability
Concerns Over Profitability Decline in Loan Sector Too

[Asia Economy Reporter Ki Ha-young] Credit card companies and capital companies are expected to face inevitable profitability hits as they decide to retroactively apply the statutory maximum interest rate, which will be lowered to 20% starting this July. Amid a surge in card loans (long-term credit loans) from low-income people urgently needing cash due to the COVID-19 aftermath, there are concerns that business conditions will significantly worsen, especially for credit card companies with a high proportion of high-interest loans.

According to the financial sector on the 26th, card and capital companies plan to lower the interest rates for borrowers of loan products with interest rates exceeding 20% per annum starting in the second half of the year when the statutory maximum interest rate is reduced. According to the Credit Finance Association’s standard credit transaction terms, unlike savings banks, card and capital companies are not obligated to retroactively apply the lowered statutory interest rate to existing loans, but they have voluntarily decided to do so.

Previously, when the maximum interest rate was lowered from 27.9% to 24% in 2018, card companies also voluntarily participated in retroactive application. This time as well, the financial authorities announced in February that they would encourage financial companies’ voluntary cooperation regarding retroactive application. An industry insider said, "There have been cases of retroactive application related to the statutory maximum interest rate reduction before," adding, "With another statutory maximum interest rate reduction scheduled, there is a consensus that retroactive application should be applied to existing products as well."

In the market, although it is formally considered the industry’s voluntary retroactive decision, it is evaluated that implicit pressure from the financial authorities played a role. With card companies facing the upcoming recalculation of card merchant fees this year, they have no choice but to be mindful of the financial authorities.

The retroactive application is expected to inevitably worsen profitability in the loan sectors such as cash services and card loans. Card companies, whose profits from credit sales have been decreasing due to repeated reductions in merchant fees, will also suffer hits in the loan sector due to this retroactive maximum interest rate reduction.

According to the Credit Finance Association, as of February, among members using card loans from the seven major card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana), the proportion of members subject to interest rates exceeding 20% per annum reaches up to 20%. Samsung Card had the highest at 22.55%, followed by Hyundai Card (12.41%), Lotte Card (6.93%), and KB Kookmin Card (4.53%). Among users of cash services from major card companies, the proportion subject to interest rates exceeding 20% per annum soars to nearly 50%. According to a report prepared by Korea Credit Rating last year, card companies are expected to see a decrease in interest income of 35.1 billion KRW due to the maximum interest rate reduction. With retroactive application added, the loss is expected to increase.

Another industry insider lamented, "Due to the retroactive application following the statutory maximum interest rate reduction, profitability in card loans and other areas is bound to be hit," adding, "With the recalculation of merchant fee rates ahead this year, profitability in not only the loan sector but also the credit sales sector may decline."

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