Should We Lower It Again... Full-Scale Discussion on Recalculating Franchise Commission Rates (Comprehensive)

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

[Image source=Yonhap News]

[Asia Economy Reporter Ki Ha-young] As a draft for recalculating the fee rate that will determine card merchant fees over the next three years has been delivered to financial authorities, discussions on recalculating the fee rate are gaining momentum. While the card industry insists there is no room left for further reductions, a sentiment is emerging that fees should be lowered to support small business owners 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 rate around November by applying newly adjusted eligible costs suitable for this year through consultations with the industry.

The recalculation of merchant card fee rates has been conducted every three years according to the Credit Specialized Financial Business Act revised in 2012. The fee rate is 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 estimating the capacity for reduction, and the revised card merchant fee rates will be applied starting next year.

Will Fees Be Reduced Again?... Card Industry on Edge

Inside and outside the industry, there is a high possibility that merchant fees will be reduced again this time. Ahead of next year’s election, lawmakers are rushing to propose bills to lower 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 the industry, which has consistently advocated for fee reductions at each fee recalculation period for marts, gas stations, pharmacies, and others, has begun to gradually voice support for fee cuts.

Card companies are already pushing back, claiming that fee revenue is in deficit 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 proportion 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, could ironically justify further fee 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, "Fee revenue, the core business of card companies, has been declining every year, resulting in deficits. Since fees have always 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 for additional reductions, which is concerning."

Another industry insider lamented, "If deficits continue in merchant fees, card companies will have no choice but to reduce benefits returned to consumers." In fact, since the 2018 merchant fee recalculation, card companies have discontinued 150 to 160 types of credit cards annually from 2019 onward due to profitability reasons.

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