Discussion on Recalculating Franchise Fees Intensifies... Will They Decrease Again This Time?

First Deliverable Submitted to Financial Authorities
Additional Fee Reductions Expected Ahead of Next Year's Election
Card Industry "Fee Revenue in Deficit"
Final Reassessment of Fee Rates Likely to Be Announced Around November

[Asia Economy Reporter Ki Ha-young] Discussions on recalculating the fee rates that determine card merchant fees over the next three years are gaining momentum as a draft for fee rate recalculation has been submitted to financial authorities. While the card industry maintains that there is no room for further reductions, a sentiment is emerging that fees should be lowered to support small business owners who have been hit hard by COVID-19 ahead of next year’s presidential election.

According to the card industry on the 27th, the first result of the cost analysis work, conducted by inputting current data based on the existing eligible cost calculation criteria, was reportedly delivered to the financial authorities this month. The financial authorities are expected to announce the final recalculated fee rates around November after applying newly adjusted eligible costs that reflect this year’s situation through consultations with the industry.

The recalculation of merchant card fee rates is conducted every three years in accordance with the Specialized Credit Finance Business Act, revised in 2012. The fee rates are determined by reviewing eligible costs calculated based on cost analysis, including card companies’ funding costs, risk management costs, general administrative expenses, VAN fees, and marketing expenses. The recalculated eligible costs form the basis for calculating the capacity for fee reduction, and the revised card merchant fee rates will be applied starting next year.

Inside and outside the industry, it is widely expected that merchant fees will likely be reduced again this time. Ahead of next year’s election, lawmakers are competing to propose bills aimed at lowering merchant fees for self-employed and small business owners. Since June last year, five bills have been proposed focusing on additional reductions in card fee rates or expanding the scope of preferential fee rates. Even within the industry, which has consistently advocated for card fee reductions at each fee recalculation period for marts, gas stations, pharmacies, and others, voices calling for fee cuts are gradually emerging.

Card companies are already pushing back, arguing that fee revenues are at cost level and there is no room for further reductions. Card fee rates have been lowered 13 times over 12 years from 2007 to 2019. In particular, in 2018, the scope of preferential merchants was expanded from those with annual sales under 500 million KRW to those under 3 billion KRW, increasing the share of preferential merchants from 84% to 96% of all merchants. The card industry explains that considering tax benefits, merchants with annual sales under 1 billion KRW effectively have fee rates in the 0% range.

However, there are concerns that the low-interest rate environment last year, which lowered funding costs and reduced operating and marketing expenses, may ironically provide justification for further fee rate reductions. In fact, the net income of eight major card companies?Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana, and BC Card?in the first half of this year increased by 33.6% year-on-year to 1.494 trillion KRW.

An industry insider said, "Card companies’ core fee revenue has been declining every year, resulting in losses. Since fees have consistently been lowered at each recalculation period and this year’s performance is good, there seems to be a growing atmosphere inside and outside the industry calling for additional reductions, which is concerning."

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