Franchise Fee Operating Loss of 130 Billion KRW... Card Companies Say "Losses Are Even Larger"

Estimated Operating Loss of 131.7 Billion KRW in Commission Fees Over the Past Two Years
Ahead of Next Month's Franchise Commission Fee Reassessment Results
Industry Weighs Possibility of Further Reductions

[Asia Economy Reporter Ki Ha-young] It has been estimated that the operating profit from merchant fees in the card industry recorded a deficit of approximately 130 billion KRW over the past two years. Ahead of the merchant fee recalculation scheduled for next month, the card industry maintains that there is no room for further fee reductions as the fee segment is already operating at a loss. However, despite COVID-19, card companies have shown strong performance, and with the presidential election next year approaching, there is a high possibility that the political sphere will strongly push for fee reductions.

According to the Legislative Review Report by the Political Affairs Committee on the 7th, the Korea Credit Finance Association estimated that the card industry's operating loss from merchant fees over the past two years (2019?2020) amounted to 131.7 billion KRW. This follows a sharp decline from 500 billion KRW in 2013?2015 to 24.5 billion KRW in 2016?2018, resulting in a deficit state.

The card industry views this estimate as a highly simplified figure and believes that if individual card companies are analyzed or qualified costs are considered in detail, the scale of the deficit would expand further. Over the past 12 years, with 13 reductions in merchant fees, losses have accumulated as 96% of merchants receiving preferential fee rates generate sales.

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

Industry insiders both inside and outside the sector expect a high possibility of additional fee reductions based on the merchant fee recalculation results around mid-next month. Rather than lowering the rates themselves, it is speculated that the approach will be similar to the recalculation three years ago, such as expanding the number of preferential merchants. In fact, the proposed amendment to the Specialized Credit Finance Business Act currently submitted to the National Assembly includes mandatory application of preferential fee rates for special merchants such as social enterprises, gas stations, and public transportation operators.

Credit rating agencies also place weight on the possibility of additional fee reductions in this year’s merchant fee recalculation. NICE Credit Rating recently estimated a downward adjustment of about 10?20 basis points in merchant fee rates and projected that if fees are reduced by more than 15 basis points, a maximum deficit of 1.3 trillion KRW could occur.

While the card industry insists there is no room for further fee reductions related to merchant fees, it is also concerned that if fee rates decrease, profitability will be significantly impacted compared to three years ago. Although 2019 was characterized by a low-interest-rate environment, the current period is one of rising interest rates, and business diversification is not easy.

An industry official stated, "With recent market interest rates rising, there is a high possibility that future bad debt and interest expenses will increase. While losses in the card fee segment have been offset not only by cost reductions but also by loans such as card loans, strong household debt management by financial authorities will likely limit the ability to generate profits through lending."

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