[Opinion] The Difference Between Loan Interest Rates and Card Fee Rates

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

Tightening policies are being implemented worldwide in earnest. This is because the surge in raw material prices due to global supply bottlenecks and increased consumption following the spread of With-Corona are intensifying inflationary pressures. The U.S. Federal Reserve, with the consumer price inflation rate already exceeding 6%, recently announced a reduction in bond purchases (tapering) and began reducing market liquidity. The Monetary Policy Committee also raised the base interest rate by 0.25 percentage points, returning it to 1%, moving toward a tightening of monetary policy.

Along with the base interest rate hike, domestic bank loan interest rates are also soaring. On the other hand, deposit interest rates are not keeping pace with the rise in loan interest rates. Fixed mortgage loan rates are approaching a maximum of 6%, and credit loan rates are nearing 5%. However, the interest rate on one-year fixed-term deposits generally remains around 1%. This is why financial consumers are voicing complaints everywhere that banks are making excessive profits in terms of interest income.

However, for some reason, financial authorities maintain that they cannot intervene in banks' interest rate setting. The historically large spread between deposit and loan interest rates is expected to widen further with future base rate hikes, and the banking sector's profit scale is also expected to reach an all-time high. The widening spread indicates that the loan market has shifted from being demand-driven to supply-driven. In a loan market where supply is restricted due to the financial authorities' strengthening of total loan volume controls, banks' business strategies to compensate interest income through the widening spread are expected to continue. Indeed, the loan market is evolving into a monopolistic market.

Meanwhile, merchant commission rates (card commission rates) are representative market prices for card companies to generate profits, similar to bank loan interest rates. While loan interest rates are determined autonomously by banks, financial authorities intervene in the determination of card commission rates. Card commission rates undergo a qualified cost calculation process every three years to set the cost of commissions. This is because the amendment of the Specialized Credit Finance Business Act in 2012 established grounds for the Financial Services Commission's involvement in setting card commission rates.

Currently, the card commission rate applied to small merchants with sales under 300 million KRW is only about 0.8%. Moreover, merchants eligible for preferential commission rates designated by financial authorities account for 96% of all merchants. In particular, through the tax credit system under the Value-Added Tax Act, these merchants receive refunds on card commissions, effectively reducing the real commission rate for merchants with sales under 300 million KRW to 0%. Nevertheless, financial authorities are considering further reductions in the card commission rate during this year's scheduled calculation process.

Is the differentiation in financial authorities' intervention in the market price-setting process, which forms the profit base of financial companies, truly desirable? This is because financial authorities ignore the household burden caused by rising loan interest rates while hesitating to intervene in the market to reduce card commission rates that are effectively 0%.

Of course, it is desirable to guarantee the autonomy of financial companies operating under financial business licenses as much as possible, regardless of the industry. However, there is justification for financial authorities' market intervention in terms of resolving unfair practices that distort market order and preventing the soundness of financial companies. This is because the damage from monopolies and loan defaults in the financial industry, which operates for financial consumers, ultimately returns to the public. Therefore, financial authorities' financial policies that distinguish between banks' loan interest rates and card companies' card commission rates when deciding on market intervention need to be reconsidered.

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

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