Since 2013, the commission rate for franchise stores has been reduced 14 times with the aim of helping small and medium-sized enterprises, resulting in an estimated reduction of 9.27 trillion won in revenue for eight card companies over the past 12 years. Considering the cumulative effect of the rate reduction, over 21 trillion won in revenue has disappeared. Meanwhile, for the majority of small businesses, those with annual sales under 300 million won, the estimated savings in card fees is up to 1.57 million won per year, totaling 7.72 million won over the last six years. Since 96% (3.04 million) of franchise stores across the country benefit from the fee reduction, the perceived savings for each store is not significant.
The expense of lowering commission rates to revitalize alley businesses is being covered by the interest burdens on low-credit and low-income individuals. This is because card companies are increasing the margins on card loans, which serve as a quick cash outlet for the poor, while reducing installment benefits. Revenue from card loans rose from 3.7 trillion won in 2018 to over 5 trillion won last year, while revenue from installment service fees more than doubled from 1.6 trillion won to 3.4 trillion won during the same period.
According to the Financial Services Commission and the Financial Supervisory Service, the financial authorities have calculated eligible expenses for card commission rates five times since 2012 until this year. The authorities determine the costs by considering all expenses incurred during the card payment process, and based on that, they either lower or raise the commission rates. However, the commission rates have never been raised. This is because the perception that self-employed individuals need to be supported has become widespread in politics. The card industry criticizes that the eligible expense determination system operates according to political logic.
Due to the eligible expense determination system, the amount spent on credit cards (general) has increased every year, but franchise store commission revenue has fluctuated. Normally, when credit card spending rises, franchise store commission revenue also increases, but due to the reduction in commission rates every three years, they have not benefited from the increase.
The drop in fees was particularly steep in 2019. At that time, the financial authorities reduced the commission rates that small and medium-sized enterprises could bear by 0.3 to 0.5 percentage points and expanded the application of these preferential rates to franchise stores with annual sales increased from 500 million won to 3 billion won. Consequently, 93% of all franchise stores (2.69 million) benefited at that time. The commission rate for general franchise stores with annual sales under 50 billion won was also lowered from 2% to around 1% to ensure equity.
Ultimately, the franchise store commission revenue for eight major card companies (Woori, KB Kookmin, Lotte, BC, Samsung, Shinhan, Hana, Hyundai Card) dropped by 8.76% to 7.2183 trillion won compared to the previous year. In 2022, when the fourth eligible expense determination was conducted, credit card spending increased by 14.85% compared to the previous year, but franchise store commission revenue recorded a decline of 2.98%, totaling 7.4724 trillion won.
Last year, franchise store commission revenue was 8.1862 trillion won, a 13.4% increase compared to 2018 when the new accounting standard (IFRS 15) was applied. However, considering that credit card spending increased by 43% during the same period, the card industry concludes that profitability has worsened. Reports indicate that the commission rates for small and medium-sized franchise stores have dropped to the level of operating losses, relying on the commission rates of general and large franchise stores.
The reduction in commissions due to the fee decrease is estimated at 9.27 trillion won. This essentially means that the commission revenue for card companies has decreased by 9.27 trillion won. In particular, considering that the reduced commission rates continue to apply, the total estimated losses for card companies exceeding 21 trillion won from 2013 until last year. This amount is more than seven times the net profit of card companies last year (2.6 trillion won).
However, regarding the benefits from reduced fees received by individual small businesses, criticisms have emerged claiming there is no effect. Summarizing the data released by the financial authorities related to eligible expense calculations, the estimated reduction in card fees for small businesses with annual sales of 200 million won is approximately 7.725 million won over six years from 2019 to last year, averaging about 110,000 won per month. For medium-sized franchise stores with annual sales of 2 billion won, the estimated reduction is capped at 10.6 million won, totaling about 37.05 million won (510,000 won per month) over six years. Effectively, since preferential commission rates have been applied to nearly all franchise stores, the perceived savings per store are bound to be low.
The social cost associated with lowering commission rates for small businesses has led to increased interest burdens on low-credit and low-income individuals. This is because card companies are raising interest rates on card loans (card loans and cash services) to protect their revenue, while reducing interest-free installment benefits and increasing annual fees.
According to the Credit Finance Association, the average funding rate for eight card companies in March was 3.05%, a decrease from 3.88% compared to the same period last year. In contrast, the card loan interest rate (standard rate) rose from 15.47% to 15.61% during the same period. Despite the drop in funding rates (expense), they raised loan rates to increase their profit margins. A card industry official noted, “While card companies' net profits increased slightly, it should be interpreted as an increase due to cost savings.”