[Solution for Recalculating Franchise Fees Part 1] 13 Reductions in Fee Rates Over 12 Years... Will They Drop Again?

Reassessment Discussion Every 3 Years
Only Country Worldwide with Government-Direct Regulation
Political Circles Demand Fee Rate Reduction After COVID Crisis
Industry Argues "Already at Cost Level"

Discussions on the recalculation of card merchant fee rates, which occur every three years, have begun. Since the amendment of the Specialized Credit Finance Business Act (SCFBA) in 2012, financial authorities and the card industry have adjusted card merchant fee rates every three years by calculating eligible costs that comprehensively consider funding interest rates and operating and management expenses. South Korea is the only major country in the world where the government directly regulates card merchant fee rates. The political circles and government justify lowering the fee rates to protect small and micro merchants. This year, the COVID-19 crisis is cited as the reason for the downturn faced by small business owners. However, card companies argue that they no longer have the capacity to lower fee rates further as they cannot generate profits from their core card business. Criticism that the government and political circles are squeezing only the card companies without fundamental solutions is repeated every time the recalculation period comes around. This article examines the current state of card companies’ merchant fees and possible solutions.

[Asia Economy Reporter Ha-young Ki] "Three years ago, during the minimum wage crisis, the card merchant fee rates were drastically reduced to ease the burden on self-employed individuals. With the presidential election coming up next year, I believe there is a possibility that this year the COVID-19 crisis will be used as a pretext to pass the burden onto card companies." (Senior executive at Card Company A)

Ahead of this year’s recalculation of card company merchant fee rates, the card industry is once again suffering in silence. This has been a recurring issue every three years since the 2012 amendment of the Specialized Credit Finance Business Act. Whenever small business issues arise, the government and political circles have repeatedly cut card companies’ merchant fee rates. Since 2007, there have been 13 reductions. The cuts have been deeper when elections approach. There are even voices saying that as credit sales become unprofitable, the main source of income may shift from credit sales to loans, which is not the card companies’ original business. There are calls to leave price setting to the market rather than the government and political circles.

South Korea is the Only Country Directly Regulating Fees... 13 Reductions Since 2007

According to the card industry on the 15th, the Korea Federation of Credit Finance Associations plans to sign a service contract with Samjong KPMG early next week for cost analysis of card merchant fee rates. By the end of this month, the Financial Services Commission, the Credit Finance Association, and card companies are expected to form a task force (TF) and hold a kickoff meeting for the fee rate recalculation.

The recalculation of card merchant fee rates is conducted every three years according to the 2012 amended Specialized Credit Finance Business Act. The fee rates are determined by reviewing the "eligible costs" calculated based on cost analysis including card companies’ funding costs, risk management costs, general administrative costs, VAN fees, and marketing expenses. Based on the newly calculated eligible costs, the capacity to bear fees is assessed, and the revised card merchant fee rates are applied from the following year.

Card merchant fee rates have been reduced 13 times over 12 years from 2007 to 2019. As a result, the general merchant card fee rate, which was as high as 4.5% in 2007, has nearly halved to between 1.97% and 2.04%. In particular, in 2018, the scope of preferential merchants was expanded from those with annual sales under 500 million KRW to those under 3 billion KRW, increasing the proportion of preferential merchants from 84% to 96% of all merchants. As of January this year, 2,786,000 merchants are subject to preferential fee rates ranging from 0.8% to 1.6%. The card industry explains that considering tax benefits, merchants with annual sales under 1 billion KRW effectively pay fee rates in the 0% range.

Merchant fee revenue has also sharply declined. Following a decrease of 239.8 billion KRW in 2019 compared to the previous year, it fell by 113.6 billion KRW last year. Due to the retroactive application of the preferential fee refund system introduced in 2019, the amount refunded to new small and medium merchants over two years reached 244.3 billion KRW.

Among major countries worldwide, South Korea is the only country where the government directly regulates card merchant fee rates. The United States, European Union (EU), Australia, and Japan set fee rates through free contracts between card companies and merchants.

Political Moves to Lower Fees... Industry Says "No More Room to Cut"

The card industry is worried that merchant fee rates, which are already at cost level, may be further reduced this year. This is due to the worsening management difficulties of small business owners caused by COVID-19 and the upcoming presidential election next year. In particular, the effects of lower funding costs due to last year’s low interest rate environment and reduced operating and marketing expenses are ironically causing anxiety that these may be used as justification for further fee rate cuts.

A representative from Card Company B said, "Over the past 10 years, card fee rates have been cut more than 10 times, and fee revenue is now at cost level. We cannot sustain our business on fee revenue alone, so we are pursuing business diversification, but we worry that this too may be used as a reason to cut fee rates further."

In political circles, voices are growing louder to further reduce fees to support self-employed and small business owners struggling due to the prolonged COVID-19 crisis. Last month, independent lawmaker Lee Yong-ho proposed an amendment to the Specialized Credit Finance Business Act to apply additional preferential card fee rates exclusively to small merchants. Koo Ja-geun of the People Power Party also proposed an amendment to exempt card fees entirely for small credit card transactions under 10,000 KRW for small and medium merchants with annual sales under 3 billion KRW, and to apply preferential fee rates regardless of sales size for merchants in traditional markets.

There are also concerns that lowering merchant fee rates will inevitably lead to reduced benefits for card customers. An industry insider lamented, "Merchant fees, along with annual fees, are the most basic source of funds to provide benefits to card customers. If merchant fees generate negative margins, it is inevitable that customer benefits, starting with new product benefits, will be reduced."