Card firms cry foul over fee reductions

Financial Services Commission Chairman Choi Jong-ku speaks at the National Assembly audit of the Political Committee Oct. 26. Yonhap

By Lee Kyung-min

A growing number of credit card issuers are voicing concerns over the government's plan to lower interchange fees by up to 1 trillion won ($875 million), claiming the measure lacks due consideration of the possible decrease in profitability and the resulting consequences in the financial market.

While card firms have achieved sound growth over the past few years, the plan could push smaller firms into bankruptcy, according to an industry official who refused to be named.

“The government says the amount cut will be 1 trillion won, but the eight card issuers in Korea expect the loss will be much larger than that amount,” the official said.

“If the government pushes ahead with the plan, many card companies will have little option other than to reduce both the investment and workforce. If their conditions worsen, some of them may go bankrupt.”

The government blindly demands the fee be lowered, without offering a viable alternative to guaranteeing profit generation, he added.

“In order for us to lower the interchange fee, we have to reduce marketing cost, a vital portion of our strategic expenditure to attract as many customers as possible in the cut-throat market. How will the government guarantee card firms stay afloat when smart, discriminating consumers are making benefit-conscious choices to maximize perks?”

Lowered fees mean reduced perks for customers, he added.

“We provide various services for customers through the fee merchants pay us including offering discount, cash reward or points. Customers choose credit or debit cards they see best fitting their spending patterns, and their right to best services available will be infringed.”

The fees which small and medium-sized enterprises (SMEs) deem “exorbitant” are set in accordance with the current standard, according to another card firm official.

“The card companies do not unilaterally set the interchange fee amount. It is set every three years at a meeting participated in by the government and officials representing credit card firms,” the official said.

The ongoing outcry from SMEs denouncing the card firms as the “sole source of evil,” is unfair characterization, the official added.

“They say their profit is falling because of the interchange fees, but there are many other factors that hurt their businesses including labor cost and rent. Blaming only card firms is a bit of a misplaced frustration.

“Our business going financially unsound is not a possibility but a reality amid rising interest rate, which is a considerable burden for those of us who generate revenue by offering financial services with the borrowed money.”

The rather palpable, growing sense of shared anxiety surged after the government made it clear to impose “substantial, effective measures” to lower the fee.

Financial Services Commission (FSC) Chairman Choi Jong-ku said efforts are underway to revise the current method to charge the fee, adding a more proper way of fee-setting measures will be unveiled in November.

“The system will be revised in a way that makes the beneficiary shoulder the burden,” he said Oct. 26 at the National Assembly audit of the Political Committee.

The net profit of Shinhan Card over the past three quarters stood at 395.5 billion won, a 49.3 percent drop from a year earlier. Its competitors Samsung and Hyundai are expected to post a decrease in their net profits.

Interchange fees, or transaction fees, are taken by a network of three intermediaries including credit card companies, a value-added network (VAN) service provider and a payment gate (PG), all of which divide the fee per transaction in exchange for a real-time money wire.