[Opinion] Credit Card Companies and Auto Financing

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

Recently, auto finance has been gaining attention as an alternative business for credit card companies. Due to the reduction in merchant fee rates and concerns over the deterioration of card loan soundness, auto finance is being strengthened to replace their core business. The scale of auto installment finance assets of credit card companies in the first quarter of this year increased by about 5% compared to the same period last year, and the profitability of this business also improved by 13%. However, during the same period, merchant fee income shrank by about 13%, and concerns over deteriorating soundness due to the rapid increase in card loans make further loan expansion difficult.

From October this year, the leverage ratio for credit card companies is scheduled to increase from 6 times to 8 times, securing capacity to expand auto finance. Specialized credit card companies, which have already strengthened installment finance in the new car finance market, are now turning their attention to the relatively larger used car finance market. To capture market share in the used car finance market, securing a digital platform that provides pricing, product recommendations, and payment services together is important. Therefore, credit card companies are focusing on building differentiated digital platforms that provide vehicle inspection and evaluation information and enhancing their functions.

Since the enhancement of used car platform functions directly leads to increased sales, strengthening customer convenience features on platforms is a global trend. Auto Trader, a UK-based car trading platform company, installs a financial calculator function on the vehicle listing screen to generate effective demand from potential vehicle buyers visiting the platform. This measure considers that monthly payments are a major decision factor for used car buyers. China's online car trading platform BitAuto also operates an online showroom providing information such as test drive reservations and inventory.

From the perspective of credit card companies, auto finance does not have a large profit margin but carries relatively low business risk. Compared to card loans, which contribute significantly to profit through high-interest loans, installment finance is not a high-profit business but mainly serves the middle class, and the risk of default is lower than card loans, which have higher borrower credit risk. Moreover, in the case of auto leasing, there is physical collateral in the form of the vehicle, so the possibility of loan default is lower than unsecured card loans. Additionally, auto finance is less exposed to policy risks compared to merchant businesses, whose profitability depends on merchant fee rates. Ultimately, because business risk is not high, the likelihood of increased non-recurring costs such as provisions for bad debts is also low.

The potential for stable profit generation through auto finance is another business attraction. In the first half of this year, the number of new car registrations in Korea was about 950,000, growing approximately 7% year-on-year, indicating steady demand for car purchases. Furthermore, the government’s current measures to reduce and extend the period of the individual consumption tax on automobiles, implemented as a consumption stimulus to prevent domestic demand contraction due to COVID-19, make a sharp decline in car purchase demand unlikely in the near term.

The possibility of business diversification through auto finance is also high. Recently, with the activation of the subscription economy, various car subscription services are being offered. Subscription services that allow unlimited or a certain number of vehicle model changes during the subscription period are gaining attention. These services provide more flexible financial options compared to leasing, which only allows driving the contracted vehicle. Ford Credit, the financial subsidiary of the automobile manufacturer Ford, offers a subscription service called Canvas. Monthly subscription fees vary depending on available vehicle models, subscription period, and monthly mileage, expanding consumer choice compared to leasing and installment finance.

Of course, auto finance cannot guarantee permanent profits for credit card companies. Competition among market participants such as banks and capital companies is fierce, and the market structure makes it difficult to expect rapid growth in car demand, limiting large-scale profit generation. Auto finance also entails operating costs due to providing low interest rates and card point benefits. However, until the digital finance era advances to MyData, MyPayment, and comprehensive payment services, it is clear that auto finance is a suitable transitional business to preserve the profitability of credit card companies.

[Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University]