[Recalculation of Franchise Fees Solution Part 2] Fairness Issues with Big Tech and Delivery Apps... Improvement of Eligible Cost System Also Needed

Equity Issues with Card Companies Highlighted
Big Tech Simple Payment Fees Up to 1.68%p Higher

Small Businesses Face Greater Burden from Rent and Delivery App Fees than Card Fees

Experts Say "No More Real Benefit in Lowering Card Fees for Merchants"
Need to Improve Qualified Cost System

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 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 and governmental justification for lowering fee rates is to protect small and micro merchants. This year, the COVID-19 crisis is cited as a reason for the recession 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 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 Ki Ha-young] As the recalculation of card merchant fee rates approaches this year, the issue of fairness regarding big tech companies has resurfaced. Unlike card companies, big tech or fintech (IT + finance) companies’ simple payment services are not subject to merchant fee regulations. With financial authorities opening postpaid payment functions to big tech, effectively enabling credit card business, card companies commonly voice the need for a level playing field where they can compete under the same regulations.

Experts also point out the need to correct the "tilted playing field" and fundamentally improve the eligible cost calculation system rather than lowering card fee rates under the pretext of protecting small and micro merchants.

Big Tech Fees Higher than Card Fees

Experts emphasize that lowering card fee rates no longer brings practical benefits to merchants. While the card fee burden on small self-employed business owners has significantly decreased, fees from simple payment providers and delivery applications are higher. In fact, credit card sales generated by merchants with annual sales under 1 billion KRW receive a tax credit of up to 10 million KRW annually within a 1.3% fee rate, resulting in almost no fee burden.

Professor Kim Sang-bong of Hansung University’s Department of Economics stated, "Already, 96% of all merchants receive preferential fee rates, and considering tax credit benefits for small self-employed business owners, lowering card fee rates further is meaningless. The fee burden from various pay services and delivery apps is higher than card fees."

According to Rep. Yoon Chang-hyun of the People Power Party, Naver Pay’s fee rates range from 2.2% to 3.74%, and Kakao Pay’s from 1.04% to 2.5%. Considering that the upper limit for credit card merchant fee rates is between 0.8% and 2.3% of the payment amount, the difference ranges from 0.15 percentage points to as much as 1.68 percentage points. For debit-type payments rather than credit cards, check card fee rates range from 0.5% to 1.47%, while Naver Pay charges a flat 1.65% and Kakao Pay ranges from 1.02% to 2.28%.

Simple payment providers argue that their fee rates include credit card fees and various additional services, making uniform comparisons difficult. On the other hand, the card industry contends that big tech companies’ influence in the financial market is growing, yet they provide the same services without regulation.

The simple payment market is indeed rapidly growing. According to the Bank of Korea, the average daily number of simple payment service uses last year was 14.55 million transactions, with a usage amount of 449.2 billion KRW, increasing by 44.4% and 41.6% respectively compared to the previous year. Particularly, the usage share of fintech companies’ simple payment services expanded from 53.4% in Q1 2019 to 61.7% in Q4 last year.

An industry insider said, "Despite the growing influence of big tech in the payment market, card companies are hampered by various regulations. Even if card companies’ merchant fee rates are lower than those of big tech, they face pressure to reduce fees every time the merchant fee recalculation period comes."

Small Self-Employed Burdened More by Delivery App Fees

Merchants also cited rent, labor costs, and delivery app fees as burdens rather than merchant fees amid worsening business conditions due to COVID-19. According to a survey by the Korea Federation of Micro Enterprise Associations in September last year, rent burden (69.9%) ranked first as the biggest cost burden due to deteriorating business conditions.

Professor Seo Ji-yong of Sangmyung University’s Department of Business Administration said, "The reason small merchants are struggling is because business is down due to COVID-19, not because of card fees. Rather than lowering card fees, it would be better to find ways to help merchants overcome difficulties through consulting and other support via card companies."

Some also point out the need to improve the eligible cost calculation system. The recalculation of eligible costs should function as a system that reflects actual market prices rather than a mechanism that continuously lowers merchant fees. Professor Seo explained, "Since eligible costs are calculated every three years, there may be limitations in reflecting actual market prices. Considering measures such as weighting the most recent year could be an effective approach."