Card companies concerned about future despite increased net profits

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By Anna J. Park

Despite the prolonged COVID-19 situation, local card companies logged all-time-high net profits last year amid a recovery of consumer demand. Yet industry analysts doubt whether their good performance will continue this year, due to heightened competition with fintech companies as well as strengthened regulations on card commissions.

According to the Financial Supervisory Service (FSS), eight local card companies' net profit totaled 2.7 trillion won ($2.2 billion), which is a 33.9 percent increase from the previous year.

The year-on-year increase to the 613.8 billion won net profit is largely attributed to credit card processing fees imposed on transactions paid by card firms' merchant members. Last year, card holders increased use of their cards, either for debit or credit, spending a total of 960 trillion won, or 83 trillion won more than the previous year.

Market watchers view that the country's accelerated digital financing environment following the COVID-19 pandemic shock has led to an increase in credit card purchases. As digital payment services on platform companies have increased, online use of credit cards has consequently jumped up as well.

Against this backdrop, the total number of cards issued in the country has also increased by 3.5 percent last year from the end of the previous year. While only less than a quarter of new card holders made their card membership requests through the internet in 2019, the ratio soared to 42.5 percent of all new card holders last year.

Despite the impressive performance, card companies remain cautious in their projected outlook for this year due to the strengthened regulations by the financial authorities.

Starting this year, the credit card processing fees imposed on small merchant shops, with annual revenues under 3 billion won, will be discounted by the maximum of 0.3 percentage points. That discount alone will cost the card companies 700 billion won.

More than anything, digital payment services developed by big tech firms like Naver and Kakao have been a major threat to card companies' main business models. While the country's payment services are fast transforming to deepened digitalization, those mobile-based big tech companies are snatching customers from card companies.

“The combination of IT and finance is giving birth to numerous fintech firms. Competition with big tech firms is the reality that credit card companies can't avoid. IT companies have already become a pillar in the payment and settlement market,” Hyundai Research Institute's Heo Yong-seok said in a report.

The negative impacts from the competition with big tech firms have been reflected in card companies' falling revenues during the fourth quarter of last year. Four major card companies ― Shinhan, KB Kookmin, Woori and Hana ― logged a quarterly average net profit of 335.1 billion won in the fourth quarter, a 17 percent decrease from the previous quarter.

Card firms have been seeking a major transformation to compete with big tech competitors, focusing on personalized data and digitalization, but it remains to be seen as to whether their strategies will pay off.