[Card Fee Reform] "Election Bribery" Only Increases Card Companies' Burden... Consumer Backlash (Comprehensive 2)

Commission Rate Reduced to 0.5% for Annual Sales Under 300 Million KRW, Resulting in Total Commission Relief of 470 Billion KRW
Industry: "Burden Increasing... Franchise Commission Revenue Already in Deficit"
Card Company Unions: "Card Fees Becoming a Political Tool"

Financial Services Commission Chairman Ko Seung-beom is delivering opening remarks at the ruling party-government consultation on card fee reform held at the National Assembly on the 23rd. Photo by Dongju Yoon doso7@

[Asia Economy Reporters Sunmi Park and Hayoung Ki] According to the credit card fee reform plan announced by the ruling party and the government on the 23rd, self-employed business owners will receive a fee reduction benefit of 470 billion KRW. The core of the plan is a significant reduction in the credit card fee rate for small merchants with annual sales of 300 million KRW or less, who account for about 75% of all card merchants, from 0.8% to 0.5%. The rationale is to minimize the burden on self-employed business owners who were directly hit by COVID-19. However, experts point out that since the actual card fees have effectively been zero after 14 reductions over 14 years since 2007, the real benefit for self-employed business owners from this measure will not be significant. Ultimately, criticism arises that, ahead of the presidential election, the government is shifting the responsibility for COVID-19 damages onto card companies, mindful of the self-employed who influence local votes.

Fee Reduction Amount 470 Billion KRW... 14th Reduction in 14 Years

According to the ruling party and government, the credit card fee rate for small merchants with annual sales of 300 million KRW or less will be lowered by 0.3 percentage points to 0.5%. For merchants with annual sales between 300 million and 500 million KRW, the fee will be reduced from 1.3% to 1.1%, and for those with 500 million to 1 billion KRW, from 1.4% to 1.25%.

For sales between 1 billion and 3 billion KRW, the fee will be reduced from 1.6% to 1.5%. This results in a fee reduction effect for about 96% of all card merchants. The actual reduction amount is 470 billion KRW.

Through this fee reform, it is expected that the fee burden will be reduced by more than 40% for approximately 2.2 million small merchants with annual sales of 300 million KRW or less (75% of all merchants). For example, a small self-employed business owner with annual sales of 300 million KRW or less, who has credit card sales of 150 million KRW and check card sales of 50 million KRW (total card sales of 200 million KRW), will be able to reduce annual fees by about 575,000 KRW due to this reform.

Card fees have been revised every three years according to the Specialized Credit Finance Business Act amended in 2012. The fee rate is determined by reviewing the 'eligible costs' calculated based on cost analysis including card companies' funding costs, risk management costs, general administrative costs, VAN fees, and marketing expenses. The new eligible costs are used to calculate the fee capacity, and the revised card merchant fee rates will be applied from next year. The introduction of the eligible cost system has reduced the annual fee burden on merchants by about 2.4 trillion KRW compared to before.

Card Industry: "Already Operating at a Loss on Fee Income... Burden Increasing"

However, due to continuous reductions in merchant fees, card companies are operating at a loss in their core merchant fee business. According to a report reviewed by the National Assembly's Political Affairs Committee, the Korea Credit Finance Association estimated that the card industry's operating loss in the merchant fee sector was 131.7 billion KRW over the past two years (2019-2020). This follows a sharp decline from 500 billion KRW in 2013-2015 to 24.5 billion KRW in 2016-2018, resulting in losses. Especially, after expanding the preferential merchant application range from 500 million KRW or less to 3 billion KRW or less in 2018, losses have accumulated as sales occur in 96% of merchants receiving preferential fee rates, suggesting actual losses are even greater.

Card companies have already reduced costs through workforce cuts and investment suspensions due to deteriorating profitability from fee reductions. As a result, the number of card solicitors, which once approached 100,000, has plummeted to 8,000, and 40% of branches have been downsized.

With this additional fee rate reduction, it is expected that card companies will expand workforce reductions such as voluntary retirement to cut costs. KB Kookmin Card already implemented voluntary retirement last month, and Lotte Card is conducting voluntary retirement again this year following last year. These are measures to prepare for worsening market conditions next year. Woori Card is currently negotiating with the labor union regarding voluntary retirement.

An industry insider said, "This additional fee reduction decision only increases the burden on the card industry rather than providing benefits," adding, "Considering future increases in funding rates, reduced loan income due to household debt regulations, and rising bad debts, the sustainability of profits will become increasingly difficult." Indeed, from next year, funding costs will rise due to base rate hikes, increasing cost burdens, and the financial authorities' inclusion of card loans in the Debt Service Ratio (DSR) regulations is likely to reduce loan income that has offset merchant fee losses.

The Card Company Labor Union Council also issued a statement on the same day, expressing regret and disappointment that the desperate voices of card workers, who persistently demanded a halt to fee reductions and abolition of the eligible cost recalculation system, were not fully reflected. Since card company unions have even considered shutting down payment networks if fees are further reduced, the intensity of future struggles is expected to increase.

Minimal Real Benefit for Self-Employed... Misused as Election Tool

Although the measure aims to alleviate difficulties for small self-employed business owners threatened by COVID-19 and other factors, there are criticisms that the actual benefits for small self-employed business owners are minimal. This is because merchants with annual sales of 1 billion KRW or less already have a fee rate of 0% when tax benefits are considered.

Professor Jiyong Seo of the Department of Business Administration at Sangmyung University said, "The card fee rate has already been sufficiently reduced, so it is questionable what effect further reductions will have," adding, "For small self-employed business owners with annual sales of 300 million KRW or less, the fee rate is only 0.5%, and when considering VAT refunds, it is close to a negative fee rate."

There are concerns that reducing card fees may actually increase the cost burden on small business owners. The losses from merchant fee reductions are passed not only to card companies but also to backend industries such as VAN companies, which may have to charge fees for services that were previously provided free of charge to small business owners to maintain profitability.

Jongwoo Jung, chairman of the Card Company Labor Union Council, also pointed out, "The difficulties of small self-employed business owners are not due to card fees, but card fees are being politically exploited as an election tool under the pretext of protecting them."

Card Companies Cutting Costs... Consumer Benefits Inevitably Reduced

Ultimately, there are concerns that further reductions in card fees will inevitably lead to a reduction in consumer benefits. As the card industry finds it increasingly difficult to earn profits from its core credit sales business, it will have no choice but to reduce the benefits included in cards launched from next year. There is also a possibility that annual fees for credit cards with many additional services will increase. In particular, if interest-free installment benefits are significantly reduced, it could lead to decreased consumption and prolonged domestic economic stagnation.

In fact, card companies have responded to past fee reductions by discontinuing cards with high discount rates and reward points. As a result, as of the 15th of this month, the total number of discontinued cards among the eight major card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana, BC) reached 192 (143 credit cards and 49 check cards). Since the significant fee reduction in 2018, the number of discontinued cards has more than doubled, reaching about 200 annually.

Although new cards have been introduced to replace discontinued ones, the additional service benefits available to consumers are not as good as before. This is why consumers say, "‘Hyeja cards’ (cards with many benefits) have disappeared and services are gradually deteriorating."

A representative from Card Company A said, "Merchant fees, along with annual fees, are basic resources for providing benefits to customers," adding, "If already loss-making merchant fees are lowered further, it will inevitably lead to a reduction in customer benefits, starting with new product benefits."

Professor Seo said, "If card fee rates continue to decrease, card companies will have no choice but to further reduce various benefits to preserve profits," adding, "Since the government is already forcing reductions in corporate card benefits, lowering fee rates will ultimately reduce the benefits returned to consumers."

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