Card Companies "No Room for Further Reduction"... 130 Billion KRW Operating Loss in Merchant Fee Sector (Comprehensive)

Estimated Operating Loss of 131.7 Billion KRW in Fees Over the Past 2 Years
Card Industry Says No Room for Further Cuts
Political Circles May Push for Forced 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 approaching next year, there is a high possibility that the political sphere will strongly push for fee reductions.

According to the bill review report by the National Assembly's 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 when analyzed in detail by individual card companies or considering eligible costs, the scale of the deficit could be even larger. Over the past 12 years, with 13 reductions in merchant fees, 96% of merchants benefiting from preferential fee rates have accumulated losses as sales increase.

The Card Company Labor Union Council also held a press conference at the end of last month regarding card fee reductions, stating, "Over the past 12 years, with 13 reductions in merchant fees, 40% of operating stores have been reduced, and the number of card solicitors, which once approached 100,000, has now dropped to only 8,500," adding, "The credit sales payment segment of card companies is already operating at a loss."

[Image source=Yonhap News]

Merchant Fee Recalculation Next Month... Increased Possibility of Additional Reductions Inside and Outside the Industry

Merchant fee rates have been recalculated every three years according to the amended Specialized Credit Finance Business Act of 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 reduction, and the revised card merchant fee rates will be applied starting next year.

Industry insiders expect a high possibility of additional reductions based on the merchant fee recalculation results around mid-next month. Rather than lowering the rates themselves, it is speculated that methods such as expanding preferential merchants, as was done during the merchant fee recalculation three years ago, will be employed. In fact, the amendment to the Specialized Credit Finance Business Act currently proposed in 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 emphasize the possibility of additional reductions in this year's scheduled 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 reductions exceed 15 basis points, a maximum deficit of 1.3 trillion KRW could occur.

The card industry maintains that there is no room for further reductions in merchant fees but is concerned that if the 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 also challenging.

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

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