[Card in Crisis] ① Overlapping Cost and Regulatory Headwinds... Profitability and Financial Soundness Both at Risk

Rising Funding and Bad Debt Costs Amid Deteriorating Business Environment
Merchant Fee and DSR Regulations Further Restrict Operations
Seeking Solutions Through Cost Management and Stablecoin Collaboration

The credit card industry has fallen into a vicious cycle where it is losing both profitability and financial soundness. As government regulations tighten and funding costs rise, the emergence of stablecoins, which threaten core businesses such as credit sales and payments, has further darkened the medium- to long-term outlook. Experts advise that, for the time being, the industry should focus on rigorous cost management and identifying collaborative opportunities related to stablecoins.

Rising Costs Make Profitability Defense Difficult

According to the industry on December 5, the main risk factors facing the credit card sector include increased funding and credit loss costs, regulatory reductions in merchant fees, the application of the debt service ratio (DSR) to card loans, intensifying competition from stablecoins and fintech (finance + technology), and higher IT expenses due to cyber incidents. As these complex negative factors accumulate, the deterioration of profitability has led to a decline in financial soundness, creating a repeating vicious cycle. As a result, the industry commonly assesses that it is difficult to pursue aggressive business strategies such as expanding credit sales.

The combined net income for the third quarter among the eight major credit card companies (Samsung, Shinhan, Hyundai, KB Kookmin, Lotte, Hana, Woori, and BC Card) was 681.6 billion won, a decrease of 44.3 billion won (6.1%) compared to the same period last year (725.9 billion won).

First, credit card companies are facing increased operating expenses. According to the Korea Financial Investment Association, as of December 2, the average interest rate for three-year AA+ rated asset-backed bonds was 3.415%, up 36.9 basis points (1bp = 0.01 percentage point) from 3.046% on the same day last year. As the interest rate on these bonds rises, funding costs increase, inevitably adding to the burden on credit card companies.

As their core business of credit sales weakens, companies are increasingly relying on high-risk products such as card loans to boost profitability, which in turn increases their credit loss provisions. The increase is particularly notable compared to the period before the Legoland incident. According to the Financial Supervisory Service’s Financial Statistics Information System, as of the end of June, the credit loss provisions for the eight major credit card companies stood at 10.8576 trillion won, up 2.4% from 10.5992 trillion won three years ago. The increase was particularly pronounced at Lotte Card (41.9%) and Woori Card (13.6%).

Government Policies Squeeze Operations

Credit sales are struggling to rebound due to the government’s policy of recalculating eligible merchant fee costs. For more than a decade, the government has continuously lowered preferential merchant fee rates for credit card companies to ease the burden on small business owners. As a result, it has become difficult for credit card companies to secure high profitability from their core merchant client segment.

In fact, the preferential merchant fee rates for Korean credit card companies are lower than those in major countries. According to the Financial Services Commission, the Bank of Korea, and the Merchant Payments Coalition (MPC), the credit card fee rate in the United States is 2.35% as of this year, whereas in Korea, the preferential fee rate for “general” merchants with annual sales exceeding 3 billion won is only 2.07%. For merchants with annual sales between 300 million and 3 billion won, the rate is 1.00-1.45%, and for those with sales below 300 million won, it is about 0.4%.

According to the Financial Statistics Information System, merchant fees accounted for 35.7% of total card revenue for the eight major credit card companies in the second quarter, down 5 percentage points from three years ago. The ratio has steadily decreased from 40.7% in the second quarter of 2022, to 38.6% in the second quarter of 2023, to 38.3% in 2023, and to 35.7% in 2024. BC Card, which has few proprietary products and thus relies heavily on merchant fees, saw its ratio drop from 84.6% to 77.8%, 77.9%, and finally 76% over the same period-a decline of 8.6 percentage points, resulting in a greater impact.

Furthermore, with card loans now subject to DSR regulations, lending operations have also contracted. As the current administration emphasizes support for small businesses and the public as a core economic policy, there is little expectation that merchant fee policies or card loan DSR regulations will be eased. Although the government extended the merchant fee cost recalculation cycle from three years to “in principle, six years” in December last year, expectations for regulatory relaxation remain low.

Profitability Decline Leads to Financial Soundness Deterioration: A Vicious Cycle

The decline in profitability is directly translating into worsening financial soundness indicators. According to the Financial Statistics Information System, as of the end of June this year, the average ratio of overdue receivables over one month (actual delinquency rate) for the eight major credit card companies was 1.88%, up 0.12 percentage points from the same period last year. Compared to the end of June 2022, before the Legoland incident (0.95%), it has nearly doubled. The actual delinquency rate includes overdue receivables from refinancing loans (whereas the nominal delinquency rate excludes them), making it the most accurate indicator of a credit card company’s financial soundness.

Credit card companies are proposing stronger risk management and monitoring systems as solutions. Specifically, they are optimizing debt allocation strategies to improve recovery rates of overdue receivables and enhancing screening for vulnerable borrowers. However, these measures are widely considered insufficient to address the structural problems. Persistent high interest rates, sluggish consumption due to economic downturn, increased debt repayment burdens on consumers, and weakened repayment capacity among borrowers due to rising credit relief applications are all cited as structural negative factors that make it difficult to manage financial soundness.

Stablecoins and New Business Ventures Are a Lifeline

Amid this structural downturn, stablecoins are emerging as one of the new business avenues the credit card industry is pinning its hopes on. However, ongoing debates over the issuance and payment settlement authority for Korean won-based stablecoins have raised doubts about whether credit card companies will be able to secure meaningful opportunities in the payments business.

If Korean won-based stablecoins are adopted for payments and settlements, credit card companies would clearly benefit from shorter settlement periods and reduced fees. Whereas the traditional card payment system involves multiple steps-customer → merchant → acquirer → card network → issuer-taking one to five business days to settle, stablecoin-based payments would reduce the number of steps, particularly at the issuer and network levels.

Kim Sangbong, professor of economics at Hansung University, said, "From the perspective of Korean won stablecoin payments, credit card companies should be given the first opportunity to participate and integrate stablecoins into their card networks," adding, "It is also necessary to create a structure that allows participation by non-bank financial institutions."