Retroactive Application of 20% Maximum Interest Rate... Card and Capital Companies Face Profitability Decline 'Distressed' (Comprehensive)

No Obligation but Voluntary Application
Loan Limits Reduced by Over 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) among 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 a voluntary retroactive decision by the industry, 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.

Concerns Over Profitability Deterioration in Loan Sectors Such as Card Loans

The retroactive application is expected to inevitably worsen profitability in loan sectors such as cash services and card loans. According to the Financial Supervisory Service's '2020 Credit Card Company Business Performance,' last year, the card loan balance was 35.4 trillion KRW, an increase of 9.2% (3 trillion KRW) compared to the previous year. Card loan usage also rose to 53 trillion KRW, up 14.9% (6.9 trillion KRW). On the other hand, merchant fee income decreased by 239.8 billion KRW in 2019 compared to the previous year and further declined by 113.6 billion KRW last year. For credit card companies experiencing reduced profits in the credit sales sector due to repeated merchant fee cuts, the retroactive application of the maximum interest rate reduction will also impact the loan sector.

According to the Credit Finance Association, as of February, among the card loan users of the seven major full-service card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana), up to 20% of members were subject to interest rates exceeding 20% per annum. Samsung Card had the highest proportion at 22.55%, followed by Hyundai Card (12.41%), Lotte Card (6.93%), and KB Kookmin Card (4.53%). Among cash service users of full-service card companies, the proportion subject to interest rates exceeding 20% per annum rises 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 the addition of retroactive application, 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 will inevitably be hit," adding, "With the upcoming recalculation of merchant fee rates 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.