'Apple Pay Universalization' Countdown... Concerns Over Prolonged Trends of Discontinuation and Annual Fee Increases

As Shinhan and KB Kookmin Card accelerate their efforts to introduce Apple Pay, concerns are emerging that consumer welfare could deteriorate. With the increasing fee burden payable to big tech (large information technology companies) simple payment providers, card companies may raise annual fees and discontinue premium cards to maintain profitability. Although Financial Services Commission Chairman Kim Byung-hwan has stated that he will monitor to ensure card companies do not pass on fee burdens to consumers or merchants, the industry fears significant repercussions.

Financial Services Commission Chairman Kim Byung-hwan is speaking at a press briefing on recent issues held at the Government Seoul Office in Jongno-gu, Seoul, on the 22nd of last month. Photo by Jo Yong-jun

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According to financial authorities and the industry on the 20th, Shinhan Card is undergoing the Financial Supervisory Service's review of terms and conditions and security review procedures to introduce Apple Card. Although the terms review is not yet complete, the progress is reportedly not slow. Under the Electronic Financial Supervisory Regulations, the security review can be passed after new business operations begin. After the Financial Supervisory Service's terms review, there is no legally mandated official procedure by the Financial Services Commission. However, an unofficial verification by authorities regarding consumer protection measures related to customer fees, merchant fee burden transfer, and information leakage, similar to Hyundai Card's Apple Pay introduction in March 2023, is required. Essentially, passing the terms review means the Apple Pay business can proceed.

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The industry is paying close attention to Shinhan Card's Apple Pay business push because KB Kookmin, Hana, and Woori Card are also likely to hasten Apple Pay adoption to target the '2030 generation.' Hyundai Card, which was the first among card companies to introduce Apple Pay two years ago, saw a significant increase in members in their 20s and 30s. According to Hyundai Card, as of the end of last month, the number of members in their 20s reached 980,000, an 11.4% increase compared to the same month last year?the largest growth among all age groups. The number of members in their 30s also rose by 6.2% to 2.4 million during the same period.

If other card companies adopt Apple Pay like Hyundai Card, Samsung, Naver, Kakao, and Toss Pay, which currently offer free fees, may start charging fees. According to a source from the National Assembly's Political Affairs Committee, a Samsung Electronics official, representing Samsung Pay, visited the committee this month and reported plans to set a policy for transitioning to fee charging. If payments to simple payment providers increase, scenarios involving rising card annual fees and discontinuation of premium cards are more likely to materialize.

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Card companies are highly wary of the risk posed by simple payment fees. With profitability deteriorating due to government policies lowering merchant fee rates, the consensus is that paying fees to big tech simple payment providers such as Apple, Samsung, Naver, Kakao, and Toss will force card companies to drastically reduce various costs. Unlike banks, card companies lack deposit functions and must generate a certain level of profit to issue bonds and operate smoothly. The moment bond issuance stops, funding momentum weakens, increasing management risks. Cost-cutting methods include raising annual fees, securing loyal customers through premium card sales, and discontinuing affordable, high-quality premium cards.

The trend of card companies discontinuing products and raising annual fees has long been entrenched. Since the Credit Finance Association began tracking the number of discontinued credit card products from eight full-service card companies (Lotte, BC, Samsung, Shinhan, Woori, Hana, Hyundai, KB Kookmin) in the first half of 2021, discontinued products have increased about threefold. From 75 types in the first half of 2021 to 209 types in the second half of last year, a 2.8-fold increase. The number of discontinued cards surged sharply from 2023, following the policy interest rate hikes by the monetary authorities (Bank of Korea). The Bank of Korea raised policy rates four consecutive times in the second half of 2022, pushing credit loan interest rates into the 6% range. As ordinary citizens struggled to bear the soaring rates, they increasingly relied on long-term card loans (card loans), leading to more defaults and rising card company delinquency rates. To reduce costs, card companies discontinued products and cut back on interest-free installment benefits.

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Annual fees have also increased since 2023. According to the credit card platform Card Gorilla, the average annual fee for 76 cards launched in 2022 was 38,171 KRW, but for 59 cards launched in the first half of 2023, the average annual fee more than doubled to 83,453 KRW. In the first half of last year, it rose to 113,225 KRW. This represents about a threefold increase over a year and a half. It is difficult to attribute the sharp rise in average annual fees solely to some premium cards. According to Bank Salad, a MyData (personal credit information management) specialist company, excluding cards with annual fees in the 1 million KRW range, the average annual fee of 74 newly launched cards from six exclusive card companies in the second half of last year was 87,000 KRW. Including cards with annual fees in the 1 million KRW range, the average was 174,581 KRW.

An industry insider said, "With merchant fee rates lowered and related profits reduced, card companies are cutting back on so-called 'Hyeja cards' (cards with high price-performance ratio) and interest-free installment benefits. If the fee burden from big tech simple payment providers increases, it is obvious that card companies will rush to discontinue products and raise annual fees to secure the profitability needed for bond issuance."

However, authorities believe that, contrary to industry concerns, card companies operating big tech simple payment businesses including Apple Pay will not have such a significant impact as to pass fee burdens onto consumers or merchants. Financial Supervisory Service Governor Lee Bok-hyun said to reporters after a bank CEO meeting held at the Bankers Association in Jung-gu, Seoul, the previous day, "Various simulations show that the scale of fees after the phased introduction of Apple Pay does not appear to cause harm to consumers or merchants."

A Financial Services Commission official also explained, "Although Hyundai Card has been operating the Apple Pay business for two years, the proportion of Apple Pay in Hyundai Card's payment performance is estimated to be minimal. It is difficult to see that the fee burden from simple payment providers has a significant impact on card companies reducing product launches and additional services."

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