FSS to crack down on card firms street promotions

By Kang Seung-woo

A top financial regulator issued a warning Monday that credit card companies need to refrain from excessive promotions that are feared to hurt the industry’s financial soundness and tempt consumers to spend more.

“Don’t try and concentrate only on expansion,” Financial Supervisory Service (FSS) Governor Kim Jong-chang said in a meeting with CEOs of seven credit card issuers ― Samsung, Lotte, BC, Shinhan, Hana SK, Hyundai and newly-born KB Kookmin.

Kim said that it is absurd that “these reputable card firms to attract customers through such illegal methods as street promotions.”

He said, “Due to an assortment of freebies and slashed commissions at the sacrifice of profits, their profitability in credit sales has eroded.”

His caution came as credit card companies aggressively increased their spending to provide gifts and other benefits for purchasing on plastic in their rising competition to lure customers and boost sales.

According to the FSS, the average marketing cost of local credit card firms reached 25.4 percent of their total profits in 2010, the highest level ever and up from 20.6 percent from a year earlier.

Kim was also worried about rapidly-growing and higher-risk loan services by card issuers, such as card loans and revolving credit programs.

“To make up for the loss in credit sales, they have heavily depended on card loans and revolving credit programs,” he said. “Credit card loan is a subprime loan, which poses a higher risk.”

He added, “If the Bank of Korea (BOK) raises its key interest rate in the future, users with a low credit rating are likely to have trouble in repaying debts, which will eventually result in higher default rates and soured loan assets.”

The central bank has hiked the policy rate by 75 basis points in three steps to 2.75 percent since July last year.

The governor expects that the credit card sector will see fiercer battles this year to win market shares, with KB Financial Group spinning off its card unit, KB Kookmin Card, earlier this month.

“There are rising risks that companies will excessively focus on expanding themselves without proper risk management as they did during the credit card crisis in 2002,” he said.

“One of the typical facts in most financial fiascos is that financial institutions looked to expand their size during the boom period. The card crisis also resulted from their soured assets created in the process of their expansion.”

Kim said that in its bid to prevent the growing risks, the FSS will step up efforts to regulate credit card firms’ illegally arranged credit card issuance and excessive gift provisions.