By Lee Hyo-sik
Staff Reporter
Credit card issuers are seeing their revenues increase at an explosive pace as more consumers pay for goods and services with plastic for discounts and tax benefits. But card firms are suffering from falling profits on rising advertising costs as a result of intensifying competition here, and the write-off of bad card debts.
The Financial Supervisory Service (FSS) said Monday that the combined revenues of Shinhan Card and four local credit card companies reached 6.2 trillion won in the first half of the year, up 19 percent from a year ago. But their net earnings dropped 42.3 percent to 1.1 trillion won.
Profits fell as plastic issuers had to pay more corporate income taxes, compared to last year, the regulator said. In March last year, Shinhan Financial Group purchased a 78.6 percent stake in LG card for 6.7 trillion won and merged it with the group's card arm. Thanks to the merger with LG Card, Shinhan Card paid less income tax last year.
``Additionally, plastic issuers engaged in intense competition in the first six months of the year to recruit new customers, spending large marketing-related expenditures. Card companies also wrote off overdue card payments and bad corporate debts, chipping away at profitability,'' a FSS official said.
During the January to June period, the use of cards, including services involving cash such as cash withdrawals and cash advances, stood at 227.7 trillion won, up 14.2 percent from a year ago, according to the Credit Finance Association.
People began to increase their payments through credit cards in 2000 when card usage accounted for 25 percent, up from 6 percent of private consumption on average during the 1990s.
It slightly dropped during the credit card bubble in 2003, but after recovery, credit purchases jumped to nearly 50 percent of private spending last year.
Consumer held nearly 93 million credit cards as of June, up 3.4 million from a year earlier. This means every Korean has an average of 3.78 cards, the second highest in the world after 5.3 in the United States.
The FSS projected that card issuers' revenues will continue to show an upward curve on the increasing use of plastics by consumers for tax deduction and other benefits, with more people using cards to settle small payments. But the size of their profits will likely decline as it has become more expensive for card firms to raise funds and to cope with increasing industry competition for new customers.
The regulator said card companies are financially sound at the moment, but they could be hit hard if the market interest rate and payment default rate rise further amid worsening economic conditions.