By Kim Jae-won
These are tough times for credit card companies, struggling to cope with declining profits, stricter regulations and pressure to lower the commission they charge retailers and shop owners. This has the companies struggling to improvise and diversify their revenue sources rather than waiting for the country to turn swipe-happy again.
According to data from financial regulators, card issuers saw their profit from secondary businesses like insurance and tourism rise dramatically last year. The jump is likely to be even more prominent this year with the regulatory environment further tightening and consumer spending taking a deeper plunge.
Credit card firms earned more than 2.5 trillion won (about $2.2 billion) combined last year from their non-core businesses, which included insurance sales, travel arrangements, wedding arrangements and courier services. This represented a 36 percent jump from the 1.8 trillion won in 2010, according to the Korea Credit Finance Association.
While card companies have been branching out into these new markets through affiliations with existing players in those areas, experts worry that these knee-jerk business strategies will hurt the firms by compromising their ability in their core business.
``Many savings banks filed for bankruptcy due to increased defaults from project financing. They neglected their main business. Who says this can’t happen to credit card companies?” asked an economist from a private economic think tank.
Korea’s secondary lenders have suffered from big losses from poor project financing during the past few years. They invested trillions of won in the business expecting to make massive profits from the then-booming industry but have been hit hard by the frozen construction market due to the global financial crisis.
Some of the firms have called on the local financial regulator for a law revision which would allow them to expand their secondary businesses, saying the commission rate cut will reduce their profits.
Early this month, Korea's financial regulator said it will lower the average commission rate card firms charge merchants in an effort to help ease smaller stores' financial burdens. Market watchers project card firms will likely lose some 900 billion won annually when the measure takes effect.
Card issuers say it is inevitable to expand to non-core businesses to survive the cutthroat competition.
"Peripheral services make up about 15 percent of overall sales but it will grow more as they are new profit sources we have to nurture," an industry official said.
Analysts forecast the credit card firms' ancillary revenue to rise further to nearly 3 trillion won this year. The firms reaped a total of 669 billion won in the first quarter.