By Kang Seung-woo
Credit card companies are building up their market share over banks’ card units on the strength of aggressive marketing strategies.
According to the card industry, the combined card spending of six credit card companies reached 28.76 trillion won ($25.51 billion) last year, accounting for 55.6 percent of the total card spending at 51.74 trillion won.
The specialized companies’ market share was 49.3 percent compared with lenders’ card units at 50.7 percent, until the third quarter of 2009. This has reversed to 52.4 percent as opposed to 47.6 percent after Hana Financial Group spun off Hana SK Card in November 2009.
Since then, the card issuers have enjoyed a heyday, with a steady increase in market share, which peaked at 57 percent in the fourth quarter of last year.
Along with card spending, card firms put up impressive numbers in 2010.
Their collective net profit came in at 2.72 trillion won, up 46.1 percent from the previous year’s 1.86 trillion won, according to the Financial Supervisory Service (FSS) last week.
The stronger bottom line came after Samsung Card made 1.15 trillion won, followed by Shinhan Card with 1.11 trillion won and Hyundai Card with 352.9 billion won. Out of the six card firms, only Hana SK Card reported a loss of 58.9 billion won.
Market watchers say that credit card firms’ pushy marketing plans are the reason for the growing market share.
“There is a difference in business strategy between card firms and banks’ card units. The former can take advantage of aggressive measures to lure customers, but their counterparts can only depend on risk-averse strategies due to tightening conservative capital requirement rules at banks,” said Ku Yong-uk, a senior analyst at Daewoo Securities.
The improved return on assets (ROA), a key profitability ratio which measures the amount of profit made per dollar of assets owned also helped credit cards gain popularity.
In 2004, one year after the credit card crisis, the ROA of credit card companies registered minus 3.9 percent, but it bounced back to 6.9 percent in 2006. The ROA between 2007 and 2009 averaged 5.3 percent, which was much higher than 0.7 percent for lenders and 2.4 percent of securities companies.
The number of credit card companies is expected to soar as financial holding groups have already launched a card firm or are considering doing so.
KB Kookmin Card separated from KB Financial Group, the nation’s top financial group by assets, earlier this month and Woori Financial Group, the nation’s second-largest holding firm, is reportedly interested in spinning off its card unit in efforts to beef up the non-banking sector.
The National Agricultural Cooperative Federation (Nonghyup), the country’s agricultural cooperative lender, is also on the list to launch a card arm.
“Under defense-oriented banks, their card units cannot take on marketing strategies like increasing risk-weighted assets unlike card-only companies. That is why financial groups are actively launching card companies. Because of the ‘freer’ plans, card firms are expected to lead the industry,” Ku said.
The lucrative credit card industry is drawing interest from banking groups.
The nation’s credit card spending topped 400 trillion won in 2010 for the first time as the economy’s recovery from the global financial crisis supported consumers’ purchasing power, with Shinhan Card’s net profit reaching 1.1 trillion won, close to Shinhan Bank’s 1.64 trillion won.
Their low loan-loss provision and high credit rating can speed up new card firms.
However, the financial authorities are worried that the increasing number of players could spawn fierce competition, eventually resulting in companies’ overexpansion to lure customers.
The companies’ average marketing costs totaled 27.6 percent of their profits from credit card operations as of the end of 2010, up from 21.9 percent a year earlier, according to the financial watchdog.
Amid growing fears that excessive promotions could hurt the industry’s financial soundness, FSS Governor Kim Jong-chang issued a warning against credit card firms earlier this month, saying “Due to an assortment of freebies and slashed commissions at the sacrifice of profits, their profitability in credit sales has eroded.”
The FSS said it will substantially tighten up supervision of credit card firms in order to slow down their excessive competition and prevent potential default risks.
But Ku said that although the battle will get tougher, it is not likely to end up with another credit card crisis.
“The financial authorities plan to step up their inspections of card firms’ growing marketing cost burdens, but the FSS is aiming at preventing a credit card crisis from occurring rather than it is in the offing,” he said.