[Ki Ha-young's Life Card] What Are Profitability Guidelines... "No Deficit Cards"

[Asia Economy Reporter Ki Ha-young]Is there anyone these days without at least one credit card? In modern society, anyone can have a card if they want one. Credit cards have brought unparalleled convenience to daily life. Now, wherever you go, you can easily see people paying with credit cards or smartphones. As demand has increased, cards with various benefits are being released almost daily. Accordingly, Asia Economy delivers diverse stories related to cards, which are inseparable from our consumer life, through the weekly 'Cards in Daily Life' corner, including introductions of new cards, behind-the-scenes industry stories, and guides for card beginners.

Starting from the 31st, new guidelines related to the launch of new cards will come into effect. These are the 'Profitability Analysis System Guidelines,' which are, as the name suggests, a form of self-regulation concerning card profitability.

The core of these guidelines can be summarized as 'Do not create loss-making cards.' When designing new cards, they must be structured so that sales revenue exceeds sales costs, and if losses occur, the causes and countermeasures must be reported to the board of directors.

It is natural for card companies, which are profit-seeking enterprises, not to create loss-making cards. Card companies already consider about a five-year card validity period when launching new cards, and the product planning departments analyze profits and losses before releasing new card products.

Then why were these guidelines created? A hint can be found in the 'Measures to Enhance Competitiveness of the Card Industry and Improve High-Cost Business Structures' announced by financial authorities in April last year.

The financial authorities judged that the card companies’ insufficiently rigorous profitability analysis was adversely affecting their financial soundness. They engaged in self-destructive marketing to attract new customers, such as unlimited airline mileage accumulation and free use of airport VIP lounges, and the costs of these were passed on as burdens to merchants. According to the financial authorities, card companies’ marketing expenses reached 6.7 trillion won in 2018, increasing by more than 10% annually since 2015.

With the implementation of these guidelines, when calculating card companies’ profits, ambiguous indirect effects such as reputation enhancement and synergy effects among affiliates will be excluded. Only revenues from annual fees, merchant fees, and installment fees will be recognized. On the other hand, costs will include all direct and indirect costs related to credit sales, such as costs of value-added services, marketing, sales management, and funding costs.

The goal is to stop the cutthroat competition in the card industry and improve soundness. This is a natural decision by the financial authorities aiming for the advancement and stabilization of the financial market. However, consumers have expressed dissatisfaction with this measure. As merchant fees have been reduced and the card industry has faced difficulties, card benefits have already shrunk, and there are concerns that even the remaining benefits might be reduced. Among consumers, there are reactions suggesting that so-called 'Hyeja cards' (cards with generous benefits) should be issued before they are discontinued.

The card industry also expresses regret. Although this measure is a form of self-regulation and the financial authorities cannot impose sanctions for violations, there are concerns that profitability analysis will have to be more conservative going forward, making it more difficult to attract new customers.

According to the guidelines, each card company is expected to incorporate standards related to profitability analysis and internal control into their internal regulations by next month. Products launched thereafter will undergo stricter profitability analysis than before. Will truly valuable cards decrease? We will have to watch what new cards will be released in the future.