Card fee cuts begin to eat into profit

gettyimagesbank

By Lee Kyung-min

Most card issuers have seen a significant drop in their net profits in the first quarter of 2019, a clear sign a card transaction fee cut is beginning to hit their bottom lines.

Korea's seven card issuers posted a combined 453.4 billion won ($380 million) in net profit in the January-March period, down 3 billion won, or 0.7 percent from a year earlier.

The hardest hit are mid- to bottom-tier companies whose limited business portfolio relies heavily on transaction fees unlike their top-tier counterparts which are expanding into “card loans” and other financing programs.

Lotte, Woori and KEB Hana saw their year-on-year net profit decline by 38.7 percent, 38.9 percent and 28.6 percent, respectively.

Lotte's net profit in the first quarter dropped to 26.5 billion won from 43.2 billion won the year before. Woori's figure dropped to 24 billion won from 39.3 billion won, while KEB Hana's fell to 18.2 billion won from 25.5 billion won.

Shinhan, the leading player in the market, saw its net profit drop by 12.1 percent to 122.2 billion won from 139.1 billion won the year before.

The firm said the 31.2 billion won fall came from the transaction fee reduction.

The performance will be far worse for the coming quarters given the first one has barely reflected the loss incurred due to the cut, a Shinhan official said.

“The government measure to lower card transaction fees took effect Jan. 31, which means net profit for the second and the third quarters will shrink significantly,” he said.

Given the ongoing conflict over setting the card fee with major retailers and telecom companies, the firm may have to return some of the money already collected.

“If we have to settle for 1.95 percent instead of the 2 percent we proposed earlier, for example, we will have to give back the difference of 5 basis points difference, which will further eat into our profit down the road,” he added.

Prospects will only become worse, as reducing costs has its limits.

“Removing redundancies and streamlining corporate structure will not offset losses incurred from the transaction fee cut. We are worried that this might lead to extreme measures,” he added.

Of the three firms that logged a net profit in the first quarter, Hyundai saw a 146 percent year-on-year increase to 64.2 billion won from 38.1 billion won from the year before.

However, the one-off jump came due to reduced marketing and labor costs in the fourth quarter of 2018 when it laid off 200 workers and cut marketing spending.

Samsung and KB Kookmin saw their net profit increase 7.9 percent and 8.8 percent, respectively.