[Fee Tragedy] ① Profitability at Risk as Loan Business Grows Amid 80% Drop in Fees Over 12 Years, Increasing Delinquency Risk

Commission Rates Slashed to One-Fifth Over 12 Years
Loan Business Surpasses Credit Sales, Soundness Deteriorates
Card Companies Lament: "We've Lowered Rates as Much as Possible"

"The commissions received are drastically reduced, while the commissions to be paid are soaring." The card industry is facing a profitability crisis due to a "decline in commission income." As commissions to be received from merchants have sharply decreased due to merchant commission rate cuts, warning signs of profit decline are growing. Meanwhile, with the move to monetize simple payment services, the commissions that card companies must pay are expected to skyrocket, further worsening profitability. The financial authorities have cut commission rates five times over 12 years, distorting the business structure of card companies and severely damaging their fundamentals. The proportion of long-term card loans (card loans) to low-income consumers, who have reduced capacity to repay debt, has grown to match the share of credit card sales to general consumers, the "core business." As card companies increasingly struggle to manage delinquency rates and rush to meet performance targets through aggressive sales, concerns arise that the medium- to long-term growth momentum of the industry will be significantly weakened.

According to the industry on the 14th, from this day forward, credit and check card commission rates will be lowered by 0.05 to 0.1 percentage points from the previous rates. Credit card merchant commissions for annual sales under 300 million KRW will drop from 0.50% to 0.40%, with reductions ranging from 0.1 to 0.05 percentage points depending on sales scale. Check card commission rates will fall by 0.1 percentage points. The Financial Services Commission announced on December 17 last year that the reduction in commission rates would "reduce the card commission burden on small and medium-sized merchants by about 300 billion KRW annually."

Unlike merchants relieved of commission burdens, the card industry is wearing a gloomy expression. This is because card merchant commissions have been continuously lowered. The Financial Services Commission has recalculated the "qualified costs," which are the operating costs of card companies, five times. Since the revision of the Specialized Credit Finance Business Act in 2012, qualified costs have been recalculated every three years to restructure card commission rates. All five times, commission rates were cut. For small merchants with annual sales under 300 million KRW, credit card commission rates dropped from 1.5?2.12% to 0.4%, and for small and medium merchants with sales between 300 million and 3 billion KRW, rates fell from 2.12% to between 1 and 1.45%. Over 12 years, commissions for small merchants have decreased to one-fifth, and for small and medium merchants by more than half.

As commission rates fall, card companies’ net profits decrease and delinquency rates rise. First, the commission income card companies receive from merchants declines. If the commission payments by small and self-employed merchants decrease by 300 billion KRW, the total net profit of the card industry is estimated to drop by about 200 to 300 billion KRW. A card company official said, "We have already lowered commission rates as much as possible, but with another cut, the business environment will worsen."

Due to the economic slowdown, aggressive credit card sales (new sales) have become difficult, and competition with big tech simple payment companies such as Apple, Samsung, Naver, Kakao, and Toss Pay has intensified. As a result, card companies have expanded the proportion of low-income loans such as card loans rather than new sales. If low-income borrowers who took out card loans fail to repay principal and interest, card companies’ delinquency rates rise. Card companies have fallen into a vicious cycle where they try to maintain profitability through loan businesses but their soundness deteriorates.

According to the Financial Supervisory Service’s Financial Statistics Information System, excluding BC Card, the total revenue of seven full-service card companies (Woori, KB Kookmin, Lotte, Samsung, Shinhan, Hana, Hyundai Card) from the first to third quarters of last year was 18.1458 trillion KRW. Revenue from their core business, new sales (merchant commissions), was 4.1357 trillion KRW, accounting for only 22.8% of total revenue. Card loan revenue was 3.6725 trillion KRW, making up 20.2% of total revenue. In the fourth quarter results to be announced at the end of next month, card loan revenue is likely to exceed credit sales revenue. BC Card mainly handles card payment processing (slip acquisition) agency work, so its business nature differs from typical credit card sales and is usually excluded from new sales revenue statistics.

Delinquency rates are rising. According to the Financial Supervisory Service’s Financial Statistics Information System, the average delinquency rate of seven full-service card companies excluding BC Card in the third quarter of last year was 1.31%. This is 0.06 percentage points higher than the same period the previous year (1.25%). The third-quarter delinquency rates of Woori Card, Lotte Card, and Shinhan Card, whose card loan proportions exceed credit sales proportions, reached 1.49%, 0.16 percentage points higher than the seven-company average (1.31%). Generally, a delinquency rate exceeding 2% is considered a dangerous level for card company soundness. The delinquency rate refers to the proportion of receivables overdue by more than one month among all card company receivables.

With delinquency rates rising and new sales performance declining, card companies complain that they have no choice but to reduce promotional activities such as cashback and mileage and adopt a conservative business strategy focused on cost management. They are also paying attention to new businesses such as data services to overcome profitability decline, but since these are still in early stages, it is uncertain whether they will significantly contribute to profitability improvement in the short term.

An industry insider said, "While commission rate cuts have the positive effect of reducing the burden on small and medium merchants, they inevitably pose a challenge of profitability deterioration for the card industry," adding, "Card companies must seek various measures such as cost reduction and reduction of value-added services while also striving for business diversification and efficiency enhancement."