FSC tries to soothe credit card sector reeling from transaction fee cuts

The meeting came upon the Financial Services Commission forming a special task force after the credit card industry suffered from a regulatory change in November 2018 that lowered transaction fees for small businesses and merchants.

In attendance were the FSC chief, the head of the Korea’s Credit Finance Association and the executives of eight card firms: Shinhan Card, Samsung Card, KB Kookmin Card, Hyundai Card, Lotte Card, Woori Card, Hana Card and BC Card.

At the meeting, FSC Chairman Choi Jong-ku specifically referred to the need for the industry to amend the practice of providing hefty financial benefits to major retailers to secure more transactions. Such high-cost marketing activities have weighed heavily on the industry’s profitability and competitiveness.

The FSC said it will place a limit on how much firms can spend on “marketing benefits” to strengthen transactions at major retailers and corporate clients.

According to the commission, local card providers’ marketing expenses have risen around 10 percent annually, from 4.8 trillion won ($4.2 billion) in 2015 to 5.3 trillion won in 2016, 6.1 trillion won in 2017 and 6.7 trillion won in 2018.

Moreover, card firms devote around 50 percent or more of their gains from transaction fees to marketing expenses, creating a problematic business model, the regulator said.

To help diversify card companies’ sources of profit, the FSC will allow them to join the “My Data” initiative, which lets entities analyze and manage a person’s credit information, payment records and other forms of finance-related big data.

The card companies will be included in a pending bill to amend the Use and Protection of Credit Information Act to enable the operation of more businesses related to financial data usage and management.

But at the same time, the FSC did not accept the card providers’ demand to increase the industry-required “leverage ratio” -- the ratio of a company’s equity to debt -- from 6 to 10.

The companies had sought the change on grounds that the 6.0 ratio strains the funds and resources needed to invest in new businesses.

While maintaining the leverage ratio of 6.0, the FSC said the companies’ assets related to “newly forming” business arenas -- those related to big data and mid-interest loans -- will be excluded from the calculations.

Another major demand by the credit card industry -- paving the way for the “reasonable deduction” of selected discounts and benefits offered to users of a certain card in line with profitability -- was not addressed by the FSC’s latest measures.

The card firms had sought new legal grounds to “reasonably reduce” certain card benefits deemed hurtful to their profitability.

The Korea’s Credit Finance Association in response said the FSC’s measures were “helpful to a certain degree,” but that it evaded addressing the “core issues” -- resetting the leverage ratio and the reasonable reduction of card benefits.

An association of credit card unions said the measures failed to answer the controversial issue of a transaction fee hike for larger client firms, while disallowing the deduction of discounts and benefits offered to customers.

It added that they will be holding separate discussion with officials of the FSC to decide future steps.

Calling for the regulator to come up with due measures to protect their profitability, the union had gathered in front of FSC headquarters in Seoul a day before the final meeting Monday, pledging to take action if they could not accept the regulator’s proposed action plan.

The current standoff dates back to last year when the FSC ordered credit card companies here to lower their transaction fees for small businesses and merchants with less than 3 billion won in annual revenue, extending the threshold from the previous 50 million won.

The move dealt a blow to the credit card industry, whose profits were inevitably cut due to the reduced fee income.

To mitigate the apparent losses, the FSC enabled credit card firms to claim higher fees for marketing activities from client firms with more than 50 billion won in annual revenue, allowing fees to be raised by up to 0.25 percentage point.

Under this change, card companies here recently notified large clients that they would be raising their transaction fees. But negotiations have led to intense conflict, as big clients have mostly refused proposed rate hikes.

The card providers have complained they are in an inferior negotiating position and are under pressure to accept loss-making fee rates. They have simultaneously called for deregulation that can pave the way for increased profitability.

By Sohn Ji-young (jys@heraldcorp.com)