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[Editorial] Escalating credit card row

Oct. 19, 2011 - 18:37 By
Some 70,000 restaurant owners from across the nation rallied in Seoul on Tuesday, calling for a cut in the fees they pay to credit card companies. The demonstration came one day after credit card issuers announced a plan to lower the fees for restaurants and other small shops from the current low end of the 2 percent range to below 1.8 percent.

The fee adjustment plan hardly impressed the 420,000 members of the Korean Restaurant Association. They demanded that their fees be lowered to 1.5 percent, the lowest rate applied to large merchants, such as big retailers and general hospitals.

The restaurant owners’ massive protest has touched a nerve. Owners of gas stations announced they would hold a similar rally today to demand a reduction in card fees. They argue that the gasoline tax, which accounts for half of retail oil prices, should be deducted in calculating credit card fees because it only benefits card companies at the expense of consumers, gas stations and refineries.

Insurance companies are also stepping up their fight against card companies. Since June last year, when consumers were allowed to pay insurance premiums with their credit cards, insurers have complained that the 3 percent fees are excessively high.

As disputes over merchant fees escalate, politicians weighed in. Rep. Hong Joon-pyo, chairman of the ruling Grand National Party, has come up with a bill to ban card companies from applying different fee rates to different shops, depending on their size and line of business. Hong asserted that such an “arbitrary” rate-setting method had no reasonable grounds.

Rep. Jeong Tae-keun, another GNP lawmaker, is promoting a separate bill to allow shop owners to refuse certain credit cards. He said the bill would authorize associations of small and medium-sized companies to negotiate with card issuers on fees and other terms regarding the use of their cards. If card companies insist on unfair demands, the bill would enable merchants to refuse their cards.

As the row unfolds, the financial regulator has remained low-key. Last week, the Financial Supervisory Commission came up with a plan to allow merchants to refuse credit card payments for small-value transactions under 10,000 won. But it scrapped the plan as shop owners rebuffed it, saying it would simply cause inconveniences to consumers and discourage them from spending.

The FSC has since remained cautious. But it would be irresponsible if the regulator let politicians determine the fee rates or set the rules for card companies. While it is important to ease the fee burden on small shops, it is also important to ensure that card companies remain profitable.

Credit card companies currently have the upper hand in their relationship with merchants. This is due in large part to the Specialized Credit Financial Business Act, which subjects member shops to imprisonment of up to one year or fines of up to 10 million won, if they refuse to accept credit cards.

This harsh punishment was introduced to encourage credit card use as a means of preventing people from hiding or underreporting their taxable income. This scheme worked. Thanks to increased credit card payments, the nation’s tax base has expanded and transparency and fairness in taxation enhanced.

We do not think it is time to abolish the punishment. But we think it is necessary to rebalance the relationship between card companies and small merchants and give the latter some bargaining power.

At the same time, it is necessary for the regulator to ensure that competition among card companies does not result in excessive card issuance. This simply drives up their marketing costs, which removes the room to lower merchant fees.