Competition in card industry deepens

Financial regulators are expected to approve Woori Financial’s plan to spin off its credit card unit, despite worries about further intensifying competition at the risk of worsening consumer finances. / Yonhap

Woori poised to spin off card division

By Kim Tong-hyung

Banking giant Woori Financial Group is pushing forward its much anticipated move to spin off its credit-card unit.

However, some observers are concerned that the market is overheating at the wrong time when unemployment, stagnant income and spiraling debt is clobbering the consumer economy.

Woori officials believe the major reorganization could be completed by March. They hope the new company, expected to be named Woori Card, will allow the group to maximize the potential of its credit card business and create closer synergy across its organizations also including banking, securities and asset management.

The Financial Services Commission (FSC) is widely expected to approve the plan when it reviews it next Monday.

``It’s true that the issue will be discussed in the meeting and approval is likely unless some major issue emerges,’’ said an official from the financial regulator.

Worries over destructive market competition and erosion of consumer finance forced Woori to assure regulators that its new credit company will focus predominantly on safe markets like debit cards and be less aggressive in personal loans. However, it’s likely the company will eventually be trading haymakers with rivals in expanding loans and gathering new customers as debit cards can only provide so much growth.

Hana Financial Group and mobile-phone giant SK Telecom offered the authorities a similar vow of restraint when they launched their credit card joint venture, Hana-SK Card, a couple of years ago, as did the KB Financial Group when it spun off its own credit card unit. But the market has seen in a bloodbath ever since the two companies waded in.

Borrowing on credit cards and the use of personal loans have risen since the economic downturn started, official figures show, as households struggle with the cost of living. Millions of families had already been sinking under a sea of debt due to their ill-advised splurge on property until the mid-2000s when disposable income came under sustained pressure.

Authorities are worried that many of them are now locked in a vicious cycle of elevating borrowing costs as their bad finances force them to increasingly rely on non-bank loans with higher interest rates.

The credit card industry has been battling its worst time in nearly a decade with consumer spending faltering, a strengthening regulatory environment and increasing pressure to lower commissions, eating into profit margins.

Doomsayers are comparing the current situation with the dark days of 2004 when a wave of consumer payment defaults nearly toppled LG Card, the top credit card issuer that has since been absorbed by the Shinhan Financial Group.

Concerns over historically high levels of personal indebtedness have financial regulators implementing stricter criteria for issuing cards. Authorities are also pressuring companies to encourage the use of less-profitable debit cards as part of efforts to claw away at the household debt mountain.

``You have to admit that the credit card industry is entering a red ocean and it will take sophistication to survive. We can’t play a high-risk, high-reward game any longer. But if there is a silver lining, the floor has also become higher to compensate for a lower ceiling. Credit card companies should adjust to the changing regulatory environment and be risk-averse, just as banks are,'' Choi Gi-eui, CEO of KB Kookmin Card, said in an earlier interview.

There are currently seven credit card companies in the market ― Shinhan Card, KB Kookmin Card, Samsung Card, Hana-SK Card, Hyundai Card, Lotte Card and BC Card ― when excluding banks that operate in-house card businesses.

It seems that the number will quickly approach double digits. NH Financial Group, the financial business unit of the National Agricultural Cooperatives Federation (Nonghyup), is another financial player looking to spin off its credit card business, aiming to leverage its massive pool of 10 million customers in banking and insurance.

``Considering the market size and state of the economy, having less than five independent credit card players seems to be right. The competition is way passed the level of being healthy,’’ said one credit card official.