If Merchant Fee Rates Are Lowered... Card Companies' Operating Profit Could Decrease by Up to 1.3 Trillion Won

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Rising Interest Rate Trend Also Negatively Impacts Profitability

[Asia Economy Reporter Ki Ha-young] It is forecasted that if the merchant commission fee is further reduced by more than 0.15 percentage points in the reassessment scheduled for this year, the profitability of card companies will deteriorate. Unlike in 2019, the recent rise in market interest rates increases the likelihood of expanded bad debt and interest expense ratios, which is also pointed out as a negative factor.

According to the report titled "Review of Merchant Commission Fee Reduction and Interest Rate Rise Response Capability" released by NICE Credit Rating on the 30th, the merchant commission fee rate to be announced in November is predicted to be likely further reduced. This is due to improvements in eligible cost components that determine the commission fee rate, such as funding and bad debt costs, and marketing expenses. Assuming that the merchant commission fee adjustment is made similarly to the past, the expected downward adjustment range is about 10 to 20 basis points (bp).

Assuming all variables except for the 10 to 20 bp level merchant commission fee rate reduction and the increase in credit sales usage linked to nominal Gross Domestic Product (GDP) growth remain the same, the estimated combined operating profit decrease for card companies in 2022 is about 500 billion to 1.3 trillion KRW. The direct decline in return on assets (ROA) resulting from this is estimated to be 0.4 to 0.7 percentage points.

In 2018, when the fee reassessment was conducted three years ago, the application of preferential commission rates expanded to 96% of merchants, and the operating profit in 2019 decreased by 14.8% compared to the previous year due to the reduction in merchant commission fees. The combined operating profit of seven full-service card companies including Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, and Hana in 2019 was 1.9873 trillion KRW, down from 2.3337 trillion KRW the previous year. However, the increase in card usage, expansion of loan-type card assets, installment financing, and lease assets offset the revenue decline caused by the fee reduction. In particular, the lowering of the base interest rate since the second half of 2019 and the increase in market liquidity following the spread of COVID-19 significantly contributed to the decline in funding and bad debt cost ratios.

For 2022, the impact of merchant commission fee reductions on card company profitability is expected to worsen compared to 2019. This is because the Bank of Korea raised the base interest rate last month, entering a period of rising interest rates. If the upward trend in interest rates continues, the delinquency rate and bad debt cost ratio of card companies are likely to increase. Additionally, the operating yield of loan-type card assets such as card loans, which have been responsible for defending profitability, is also likely to decline due to the implementation of strong household debt management measures by financial authorities.

Senior Researcher Kim Seo-yeon stated, "The profitability of credit card companies is likely to deteriorate due to the downward adjustment of merchant commission fees. However, if card usage increases due to the revitalization of private consumption and the handling assets increase through the expansion of card loans, installment financing, and lease operations, the extent of profitability decline will be mitigated."

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