The Card Fee Controversy Should Be Resolved by Expanding Consumer Choice

The conflict over card fees between credit card companies and large merchants continues. The controversy began in late 2018, when the government, seeking to head off backlash over the minimum wage increase, lowered credit card fees for small self-employed business owners and microbusinesses. When the government twisted the arms of card companies to reduce fees for small and medium-sized self-employed merchants, card companies announced that they would raise fees for large merchants to reduce their operating losses. In response, large merchants strongly pushed back, even mentioning the possibility of terminating their merchant agreements, and the card fee dispute has now dragged on for months.

At the heart of the fee conflict between large merchants and card companies is the question of who should bear the burden of the fee cuts granted to small self-employed business owners. It was the government that made life harder for the self-employed by raising the minimum wage, yet the government is standing by with folded arms while card companies and large merchants engage in a tug-of-war over merchant fees. Unfortunately, no matter which side wins this tug-of-war, consumers will bear the damage.

If the settlement proposal presented by large merchants is accepted, card companies are highly likely to scale back the consumer benefits they currently provide, such as discounts, reward point accrual, and interest-free installment plans, because of operating losses. As card fees have repeatedly been cut through political decisions, the “high-value cards” preferred by consumers have gradually disappeared.

On the other hand, even if fees are raised as card companies want, the damage will still be passed on to consumers. Some 60–70% of total credit card spending occurs at large merchants such as department stores, hospitals, telecom companies, and large discount marts. Raising fees on large merchants is highly likely to push up the prices of daily necessities, increasing the burden on consumers. In the end, consumers are being made to pay for the government’s policy failure.

The fundamental cause of the problem is government intervention. Raising or lowering fees through government intervention only adds to the confusion in the card market. When prices rise or card benefits are reduced, consumers tighten their wallets. If consumer spending falls, sales at card companies and self-employed businesses decline, and the situation of small self-employed merchants becomes even worse. There is a strong possibility that the government’s interventionist policies will make the very small self-employed business owners it sought to protect even worse off.

The solution is simple. Rather than intervening directly in the market, the government should respect corporate autonomy and adopt policies that expand consumer choice. Newly emerged easy payment systems now make it possible to transfer money between accounts or even sign up for insurance using a smartphone. If consumers are allowed to choose freely among various payment methods, each company will strive to cut costs and improve service quality in order to win consumer choice. In that process, the card fee problem can be resolved naturally.

The issue of helping small self-employed business owners also needs to be approached through expanding consumer choice. The difficult circumstances of the self-employed are caused not primarily by high card fees, but by low sales. This also means they are not providing the services consumers want. To win consumer choice, they must develop ways to cut costs and acquire the ability to identify what consumers want. Rather than relying on government support, they should aim to win consumer choice; only then can the productivity of self-employed business owners rise and their sales increase.

Unfortunately, however, there is no consideration for consumers in government policy. The government considers only existing suppliers and is pushing policies that ignore both the innovation of potential new suppliers entering the market and consumers’ freedom of choice.

It may seem at first to threaten the survival of market participants, but innovation and the emergence of new businesses produce beneficial results for both suppliers and consumers. Through competition, suppliers become more productive, the quality of the services they sell improves, and the prices of goods can also fall. As consumer satisfaction rises, the size of the market can grow. Moreover, the living expenses consumers save are spent in other sectors of society, expanding those markets and increasing jobs. We must not forget that strengthening consumer choice is the very key to economic growth.

Who sells what, at what price, and how fees are set are ultimately determined by consumers. Only when consumer choice is placed at the highest level can the economy develop and move forward on the path of progress. What our economy needs is not excessive government interference, but an expansion of consumer choice.

Eun-kyung Kwak, Head of the Corporate Culture Office, Center for Free Enterprise (CFE)

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Original title: 카드수수료 논란, 소비자 선택권 확대로 풀어야

Author: Eun-kyung Kwak

Date: 2019-05-13

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=25&idx=20168