By Kang Seung-woo
A couple of newcomers are set to join the credit card industry with the existing ones gearing up to increase their slice of the pie.
The result is a level of competition that has not been seen before, spurring the credit card firms to give their all to recruit new clients, often offering incentives. That should be good news for consumers in terms of greater choice but it could quickly turn into a nightmare for the economy in a broader sense. The credit card debt crisis is still fresh in the collective memory of financial regulators.
Financial Supervisory Service (FSS) Governor Kim Jong-chang said recently that his agency will impose stricter regulations.
“We plan to force credit card companies to increase the level of allowance for bad debts in credit card loans as part of containing their excessive race to increase the loan amounts,” Kim told reporters. Growing debts from the soured card loans is one of the main problems the financial authorities are concerned about.
Currently, the standard for loan-loss provision for credit sales is equal to those of card loan and cash-advance services, although the default rate for the latter is higher.
His remark came after the Financial Services Commission (FSC), the decision-making body of the FSS, expressed worries over sharply increasing marketing costs by credit card issuers of late.
The marketing costs to total profits was at 18.8 percent in the first quarter of 2009, but following a steady rise, the proportion surged to 24.9 percent in the third quarter of last year, the FSS said.
According to card industry sources, five card issuers ― Shinhan, Hyundai, Samsung, Lotte and Hana SK ― spent 1.37 trillion won in the first three quarters of 2010, including 584.7 billion won in the July-to-September period.
Consequently, the FSS has decided to conduct stricter monitoring to stop the expenses from affecting the management of the credit card issuers.
The nation’s financial watchdog will closely investigate factors including annual membership fees, interest-free installment payment schemes and free gifts and, if costs on one of them surge, the FSS plans to immediately monitor causes and take counteraction.
In addition, card companies will have to face stringent regulations in the launch of new products because card issuers usually offer an assortment of freebies including points that can be used like cash, interest-free installment payments and even household appliances to promote new products.
In conjunction with the government’s attempt to ease the cut-throat battle, the Credit Finance Association (CFA) plans to put a ceiling on the marketing expenses of card issuers.
“If we place a cap on the costs, we will be able to restrain excessive competition,” CFA Chairman Lee Doo-hyung said.
Those measures came as there is likely to be a fiercer competition to lure new membership this year.
KB Card is scheduled to be spun off in February and the National Agricultural Cooperative Federation, or Nonghyup, Woori Bank, Korea Exchange Bank (KEB) and Citibank Korea, are said to be also considering spinoffs, while other major financial institutions, such as the Korea Development Bank (KDB) and the Korea Post are set to enter the card industry.
Existing card companies are busy coming up with new plans to gain a footing in the industry, as well.
As a result of the overheated rivalry, the number of card recruiters is recently on the rise and so are illegal ones.
The number of recruiters was at 50,292 as of the end of last year, up 43.7 percent from the previous year, offering a glimpse of returning to the pre-credit card crisis in 2002.
Prior to the crisis, there were 87,733 recruiters, but Korea saw more than three million people defaulting on payments for credit cards, which resulted in the number shrinking to 17,021 in 2003.
A total of 27 cases of illegal recruiting such as offering including excessive freebies, was caught by joint inspection of card companies in 2009, but it grew to 66 as of the end of November last year.
“Legitimate recruiting is not a problem, but we will take countermeasures if we find anything against the law,” the FSS said.
Meanwhile, a local think tank said that the excessive competition will eventually impose a burden on consumers and make the companies insolvent.
“Card issuers will dump costs spent on inordinate services on their affiliates, which will in turn spur them to increase prices,” the Korea Institute of Finance (KIF) said.
“The recent moves by banks to spin off their card units will cause a fierce battle in the industry and they can turn a blind eye to issuing cards to unqualified people as was the case before the credit card crisis.”