[Exclusive] Financial Authorities to Assess Eligible Costs of 3 Companies for 'Downsizing Ban'

Conflict Over 'Downsizing Van' Continues for 8 Years
Industry Says "Need to Verify Proper Calculation of Eligible Costs"
Financial Services Commission to Make Final Decision Based on FSC Investigation

The financial authorities have launched a large-scale investigation into VAN (Value Added Network) companies operating 'Downsizing VAN' services (dedicated approval agency services). As these companies have expanded their influence in the financial settlement market by securing large merchants with unprecedentedly low fees, the authorities plan to examine whether there is any possibility of indirect rebates.

According to the financial sector on the 25th, the Financial Supervisory Service (FSS) recently conducted on-site inspections of three domestic VAN companies operating downsizing VANs: Smartro, Kovan, and Koces. An FSS official stated, "We are currently reviewing whether they have properly calculated the eligible costs based on the investigation results," adding, "Once the investigation is finalized, the related matters will be forwarded to the Financial Services Commission."

VAN companies act as intermediaries for card companies, handling payment processes such as approval mediation, acquiring, and paper receipt collection for merchants. Downsizing VAN is a service that separates and builds only the core approval mediation function from this. When card companies apply downsizing VAN, they can significantly reduce the fees paid to VAN companies. For example, when a merchant like Starbucks uses a general VAN system, the card company pays the VAN company a fee of 40 KRW per customer transaction, but with downsizing VAN, this fee drops to around 10 KRW.

The issue is that card companies use the reduced fees from applying downsizing VAN to offer discounts on merchant fees to large merchants such as Starbucks and Homeplus, while encouraging them to switch to downsizing VAN. The VAN industry opposes this, claiming it is a business practice equivalent to rebates. Large merchants like Starbucks, Starfield, Homeplus, and Daiso have already switched to downsizing VAN, and other merchants are considering adoption.

The question of whether downsizing VAN constitutes a rebate has arisen since Samsung Card and Homeplus first introduced the system in 2016. At that time, the Financial Services Commission concluded that this business method likely violated the Specialized Credit Finance Business Act. The following year, the FSS investigated Koces and judged that it was highly likely to violate the Act. However, after strong opposition from card companies, the Financial Services Commission later changed its stance, stating that downsizing VAN does not violate the prohibition on rebates. However, it added a caveat: "If the VAN fee reduction amount is excessively calculated beyond the objectively fair and reasonable level reflecting the dominant position of large merchants, the excessively calculated amount should not be reflected in the merchant fee rate calculation."

Despite this, controversies surrounding downsizing VAN have not disappeared. The phrase "objectively fair and reasonable level of reduction" has been ambiguously interpreted by the industry, which has instead intensified conflicts. VAN companies not operating downsizing VAN claim that card companies concentrate benefits on large merchants, causing the relatively weaker VAN companies' revenues to plummet. One VAN company official lamented, "After a large merchant switched to downsizing VAN, monthly sales dropped from 600 million KRW to less than 10 million KRW," adding, "Not only VAN companies but also related agencies have recently been shutting down." Another VAN company official said, "VAN companies like Koces, in which card companies hold most of the shares, are aggressively pursuing downsizing VAN business despite losses," and added, "Only 3 out of 13 major VAN companies operate downsizing VAN, indicating the high costs and low business viability."

On the other hand, card companies argue that downsizing VAN has reduced unnecessary tasks and streamlined IT payment procedures, cutting costs and enabling merchant fee discounts, which they claim is not problematic.

Ultimately, the key issue in this FSS investigation will be whether the three downsizing VAN companies have properly calculated eligible costs. Under the Specialized Credit Finance Business Act, whether the VAN fees have been lowered in proportion to cost reductions is central to determining if rebates occurred. An FSS official said, "We are not making the final decision; the Financial Services Commission will make the ultimate judgment after discussions with experts."