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FSC limits credit card marketing benefits

To address imbalance, marketing directed to big companies capped
Apr 10,2019
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Chief executive officers of credit card companies listen to remarks made by Choi Jong-ku, chairman of the Financial Services Commission. [YONHAP]
Credit card company benefits, such as discounts and lower interest rates, are to be more tightly regulated with the rewards limited or, in some cases, totally eliminated.

Rules on the use of personal information will also be updated so the card issuers will be able to better utilize big data and offer consulting services.

The goals is to address long-held practices of committing huge marketing spending to automotive companies, mobile carriers and even discount marts, while shifting the cost to smaller businesses.

The moves are a follow-up to the Moon Jae-in government’s efforts to ease the financial burden on small businesses, such as restaurants and convenience stores. It has targeted credit card commission rates amid growing difficulties related to the rise of the minimum wage.

According to the Financial Services Commission (FSC) Tuesday, credit card companies will not be permitted to provide interest-free installment plans to corporate clients exceeding 0.5 percent of the total credit card payments made.

The FSC said it will later specify unfair compensation in law.

But at the same time, measures will be taken to increase the competitiveness of credit card companies. The government will allow credit card companies to use personal information for diversifying and expanding their businesses. This includes analyzing consumer spending patterns, offering financial consulting services and creating new business models.

The government is also easing regulations so that credit card companies will be able to enter business to business (B2B) processing. Companies will be able to purchase machinery or equipment with credit cards.

These measures were announced in the latest meeting between FSC Chairman Choi Jong-ku and the CEOs of credit card companies for improving the credit card company business practice. The FSC chairman has been meeting with credit card company CEOs and academics since the government announced its plans to reduce the burden on small businesses in November.

“The credit card industry will be unable to avoid the tragedy of decline from the changes taking place” if they don’t adjust their practices, Choi said.

He said the industry needs to be more innovative and not rely on its past business models, finding new services beneficial to consumers.

Since last year, the government has been pressuring credit card companies to reduce their marketing to large businesses and end the practice of burdening small businesses with the costs of this marketing.

The FSC estimated that credit card marketing expenses have been growing an average of more than 10 percent a year since 2015. In 2015, credit card issuer marketing expenses were 4.8 trillion won ($4.2 billion). By 2018, it has grown to 6.7 trillion won.

Those marketing expenses were equal to about half of commissions. Last year, marketing expenses totaled 54.5 percent of commissions. This is up from the 45 percent in 2015.

The FSC said on the marketing expense to commission ratio on large businesses was 70 percent and in some cases it even exceeded 100 percent.

Large discount marts are estimated to have had a 62.2 percent ratio last year while department stores were at 42.3 percent and automotive companies, like Hyundai Motor, were at 55.3 percent. Mobile carriers received the most, at 143 percent, with LG U+ at 194 percent and KT at 165 percent.

This was a stark contrast to the 30 percent marketing expense to commission ratio for small restaurants or neighborhood supermarkets.

The credit card companies on Monday decided to go on strike, arguing that the government measure is seriously hurting the profitability of credit card issuers and will result in many losing their jobs.

Last month, an attempt to raise commission rates on Hyundai Motor failed. In just 10 days since Hyundai Motor announced that it will be terminating its contract with credit card issuers in protest against raising the commissions from 1.8 percent to 1.9 percent, the credit card companies agreed to the automaker’s terms.

The credit card labor union has argued that in the first quarter of this year its profits fell 37 percent year on year. Last month alone, profits dropped 57 percent, making layoffs inevitable.

The credit card industry has demanded that the government set the minimum rate for large businesses and ease leverage regulations adopted in 2012, when credit card companies were told to limits assets to no more than 10 times the equity capital.

These requests were denied by the government.


BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]