A Threat from QR Code Payment
The Korean credit card industry, whose annual usage amounts to 627 trillion won (as of last year), may go extinct. It is because QR code payment systems, which transfer money directly from the buyer's bank account to the seller's bank account without going through the card network, are likely to become widespread. According to card industry officials, there is no room for credit card companies to intervene in this payment method. The card industry’s sense of crisis is deepening due to pressures for additional commission rate cuts and additional maximum interest rate cuts.
The domestic credit card industry began in 1978 when Korea Exchange Bank (currently KEB Hana Bank) started the card business. It did not spread widely in the early days, but the industry started to grow after the financial crisis in 1997, when the government encouraged the use of credit cards to stimulate consumption.
According to the Bank of Korea, the amount of credit card usage, which was 360.56 trillion won in 2008, grew 74% in 10 years to reach 627.34 trillion won last year. The amount of credit card usage has increased without any decline for 15 years since 2003.
However, the forecast in the financial circle is that the growth of credit cards will not last long. It is because QR code-based payment systems that do not go through the card network are likely to be spread more widely.
The Financial Information Promotion Council of the Bank of Korea has set a schedule to introduce a mobile direct payment service based on bank deposit accounts in the first half of next year. The BOK will develop the QR codes that can be commonly used by domestic banks by September this year.
The proposed mobile direct payment system is a structure that directly connects the bank accounts of a merchant and a consumer without using the card network. When a member store types in the payment app the amount of money to charge a consumer and creates a QR code, the consumer scans the QR code using a payment app or a bank app, presses the password, and pays the amount. As each person uses their own smartphone, a payment terminal (POS) is not needed. The Bank of Korea says this system would change the current settlement structure that depends too much on credit cards.
The new payment systems being promoted by local governments and public agencies also pose a threat to the credit card industry. A representative example is Zero Pay, which will be operated by the Seoul Metropolitan Government starting in December. Zero Pay is a simple payment platform aimed at 0% commission fee. Zero Pay also transfers money directly from a buyer’s account to a seller’s account using the QR code without going through the card network.
If these and other new payment systems spread, credit card companies will lose their ground. What is worse, the credit card industry already faces pressures to cut card fees and the statutory maximum interest rate, which would undermine their profitability.
Whether the Korean credit card industry will go extinct or not depends on how much the planned new payment systems will be activated. A mobile direct payment service is useless without the active involvement of sellers and buyers. Sellers have the advantage of reducing the burden of card fees, but it can be a hassle for buyers to use it. Unlike having to hand in a credit card, buyers will have to open their smart phone app and scan the QR code. Also, the QR code method has a disadvantage that it cannot be used without a balance in the bank account.