Card and Capital Companies Face a Tough Year... "Rising Concerns Over Profitability Decline"

Credit Rating Industry Outlook 'Negative'
Cost Increases Due to Rising Interest Rates
Regulatory Impact from Household Debt Also Rises
Time Needed Until New Businesses Become Revenue Sources

[Asia Economy Reporter Ki Ha-young] This year, the business environment for specialized credit finance companies such as card and capital companies is expected to be challenging. Rising interest rates and household loan regulations are raising concerns about deteriorating profitability. Although financial authorities have promised institutional reforms, including expanding ancillary businesses to help discover new growth engines, it is expected to take time for new businesses to establish themselves as new sources of revenue.

On the 6th, credit rating agencies such as Korea Credit Rating and NICE Credit Rating released a negative industry outlook for the card and capital sectors this year. Commonly, card and capital companies, which do not have deposit functions, will face increased cost burdens due to higher funding costs from interest rate hikes. With the Bank of Korea signaling further rate increases, it is difficult to fully pass on the increased interest costs to loan rates, inevitably leading to reduced profitability.

For card companies, profitability deterioration is inevitable due to reduced merchant fees and strengthened household loan regulations. Following the card fee restructuring last year, the fee rate was lowered by up to 0.3 percentage points, which is estimated to reduce annual revenue by about 470 billion KRW. Although card companies have offset losses in card fee income through loan businesses such as long-term card loans (card loans), stricter household loan management by financial authorities has made this difficult. From this year, card loans have been included in the borrower's total debt service ratio (DSR).

Capital companies have seen a weakening of growth drivers in the automobile finance market, where they had previously dominated. This is due to active entry by banks and card companies. In particular, with an additional reduction in merchant fees, card companies are expected to pursue a more aggressive approach to the auto installment finance market this year, which is projected to reduce business opportunities for capital companies. According to household debt management measures, the DSR is expected to drop from 90% to 65%, limiting the growth potential of household loans. Although the leverage limit will be reduced to 9 times from this year, which is positive for financial stability, concerns have been raised that the expansion of card companies' leverage could undermine their business base.

Considering these circumstances, financial authorities have promised support for data businesses and expansion of ancillary businesses to diversify revenue sources for card and capital companies. Card companies have stated they will pursue institutional reforms to strengthen competitiveness and grow into comprehensive platform companies. However, it is expected to take time for these to become actual sources of revenue. Both card and capital companies are actively engaged in data businesses such as MyData, but analyses suggest the actual impact on revenue is minimal. Yeo Yoon-gi, senior analyst at Korea Credit Rating, said, "The MyData business is essential for customer acquisition and platform competitiveness," but added, "It will take time for data businesses to establish themselves as new sources of revenue."

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