What’s the Problem with Lowering Credit Card Fees?

In November 2018, the government introduced a plan to overhaul card fees for small self-employed business owners. As rapid increases in the minimum wage pushed many of them into hardship, the government decided to ease their burden by lowering merchant fees charged by card companies. As a result, merchants with annual sales of 3 billion won or less became eligible for fee cuts of up to 0.65%. The government announced that the reform would reduce fees by 780 billion won annually.

What is surprising is the government’s attitude. As if it were setting rates for a public utility, it determined the price of credit card services, which belong to the private sector, and intervened in card company management. It even congratulated itself as though the annual “cost reduction” of 780 billion won were the result of improved productivity and innovation. In reality, however, this was not a cost reduction at all, but merely a transfer of the merchant fees that small business owners were supposed to bear onto the card companies.

Card companies earn revenue by providing services that connect customers and merchants. Those services inevitably involve costs. In other words, card fees must be paid by someone. Forcing private companies—which must satisfy the interests of shareholders, creditors, and consumers alike—to carry out a public-interest project for the benefit of self-employed business owners is excessive market intervention.

Moreover, government intervention is perversely deepening conflict between card companies and merchants. Card companies announced that they would raise fees for large merchants in order to offset the fee cuts for small business owners. In response, large merchants have pushed back, even mentioning the possibility of terminating their merchant agreements. Because of government intervention, even large merchants—who contribute heavily to card sales volumes—have been caught in the crossfire. Meanwhile, the government, which actually triggered the conflict, has stepped back and left market participants to fight among themselves over their own interests.

The conflict in the credit card market is largely a problem the government itself has helped create. To improve tax transparency, the government forced all stores to accept credit cards. At the same time, it offered workers income tax deductions for credit card spending. As a result, consumers’ preference for credit cards increased, and self-employed merchants found it virtually impossible to leave the merchant network. It is fair to say that the weak bargaining power of small and mid-sized merchants over fees is the result of government intervention. Had the government not intervened in the market, small shops would have been able to choose voluntarily whether to join as merchants and would have had room to negotiate over high fees or refuse them.

The government is intervening in the determination of credit card fees on the grounds that it institutionally encouraged the use of credit cards. Through revisions to the Specialized Credit Finance Business Act, it introduced the concept of an “appropriate fee” and has regulated prices accordingly. Since 2007, the card industry has lowered fees 12 times in line with government policy, and under this latest measure, 96% of all merchants came to receive preferential fee rates.

It is desirable for the prices of goods and services to be determined not by government-calculated “appropriate costs,” but by voluntary transactions between the parties involved. Price regulation may appear in the short term to benefit someone, but in the long run it creates shortages or surpluses in the relevant market and encourages inefficient use of resources. The policy of lowering card fees may worsen the management conditions of card companies and, as a result, reduce benefits for card users. If annual fees rise and ancillary services are cut back, consumers will reduce spending. This, in turn, may reduce merchants’ sales as well. In addition, workers in the card industry are being pushed toward the threat of restructuring. In the end, all market participants—card companies, consumers, merchants, and workers in the card market—suffer harm.

The problem is that the government creates problems and then uses those problems as a pretext to intervene in the credit card market yet again. As controversy over credit card fees has grown, the government has been considering reducing or abolishing the income tax deduction for credit card spending while instead strengthening institutional benefits for simple payment systems. In other words, it is seeking to disrupt the market through another round of intervention. Policymaking that promotes simple payment systems would create the same kind of market distortion as government intervention in the credit card market.

It is desirable for the market to determine who bears the fees associated with card use and how card services should be priced. Rather than intervening in the market and regulating prices, the government should encourage competition among card companies and competition with other payment systems. Only then can the market function efficiently and the solution remain sustainable.

Credit card companies are already competing with newly emerging simple payment systems. If credit cards eliminated the inconvenience of carrying cash, simple payment systems are now replacing consumers’ wallets themselves. With nothing more than a smartphone, people can make bank transfers, order food delivery, and even purchase insurance for overseas travel. On the basis of such convenience, the market size of simple payment systems reached 39.9 trillion won in 2017, tripling in just one year. A more market-friendly approach is to ease relevant regulations so that new firms can enter the market, increase consumer satisfaction through competition, and expand the market itself.

The core of a market economy lies in the price mechanism. In his book Why Is the State Making the Decisions While Poverty Becomes My Burden?, Lawrence Reed, president of the Foundation for Economic Education, emphasizes that price regulation is a socialist element that undermines the foundations of the market economy. Since all socialist experiments attempted in the 20th century failed, almost no one now argues for the outright abolition of the market economy itself. Yet government intervention and control remain an extension of the same socialist experiment that paralyzes the functions of prices and markets. That is because a country in which all prices are controlled is, by definition, a socialist country.

Eun-kyung Kwak

Director of the Corporate Culture Division, Center for Free Enterprise (CFE)

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Original title: 카드수수료 인하, 무엇이 문제인가?

Author: Eun-kyung Kwak

Date: 2019-04-08

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=25&idx=20085