Credit cards in South Korea: A swipe at profits; It is getting harder to make money from the world’s most prolific card-users

Credit cards in South Korea: A swipe at profits; It is getting harder to make money from the world’s most prolific card-users

Nov 9th 2013 | SEOUL |From the print edition

SOUTH KOREA is a notoriously competitive society. But how do those who play its fierce status games know when they have won? Probably when they are invited to apply for “the black”, a credit card issued by Hyundai Card, a subsidiary of Hyundai Motor. Cast in “liquidmetal”, a trademarked alloy suited to armour-piercing ammunition, the card is heavy. It is also rare. Only about 2,000 have been issued and only 9,999 ever will be. To qualify, a holder needs high social standing as well as high net worth. The card charges a stiff membership fee and offers a variety of benefits: members were, for example, invited to a mock Christie’s auction, featuring works flown in from New York. But the main reason people want the black card is that it is so difficult to get.That elusiveness is unusual in South Korea, where credit cards are issued promiscuously. The country has the equivalent of 4.4 cards for every member of the labour force. Koreans made 129.7 transactions per person in 2011, according to Yonhap, a news agency, more than any other country. In comparison, Canadians made 89.6 transactions and Americans 77.9.

The popularity of plastic dates back to the aftermath of the Asian financial crisis in 1997-98. By promoting cards the government hoped to boost consumption and curb cash payments, which are harder for the taxman to track. It rewarded users with a tax break and even entry into a lottery. The progress of plastic was interrupted by a wave of delinquencies and bankruptcies in 2003. But usage soon resumed its climb. Merchants are obliged to accept card payments, however small the purchase. South Koreans fill their wallets with multiple cards to take advantage of the endless promotions that card companies offer.

Hyundai Card has even succeeded in making cards cool and debt debonair. Unlike most financial firms, it showcased the product itself, not the company behind it. Its cards competed on the image they conveyed, not the features they offered. The company invested heavily in design and marketing. It invented its own typeface, suited to both English and Korean. One of its offerings had an orange rim to make it stand out in a wallet full of cards.

Unfortunately a credit card’s 86-by-54 millimetres offer a limited creative canvas. The firm has thus allowed its designers to indulge in a variety of sidelines, such as a range of kitchenware and a CD cover. It also “donates” their talents to struggling small firms in need of a makeover. Beneficiaries include a butcher’s shop and a handmade tofu restaurant run by a North Korean defector.

Hyundai Card now claims a 14% share of the market. But the market is not what it was. The return on assets for the average card company has fallen from over 5% before 2008 to only 2.5% in the first half of this year, according to Heakyu Chang of Fitch, a ratings agency. Hyundai Card managed less than 2%. In September the value of credit-card purchases fell by 1.7% compared with a year earlier.

Returns have been hurt by tighter regulations. In 2012 the government barred card companies from extracting higher fees from smaller merchants. It is also making it easier for customers to compare interest rates across products and harder for less creditworthy borrowers to spend beyond their means. Its tax breaks now favour debit-card purchases over those made by credit card. In 2010 debit-card payments amounted to only 11% of the value of credit-card purchases. That figure has now passed 15%.

The card companies’ efforts to seduce customers with perfectly matched cards have also reached their limits. “People are overwhelmed with choices,” says Kim Jung-in of Hyundai Card. “If you dine a lot, if you shop a lot, if you are a car maniac”—there is a card for each category. People often carry four or five cards in their wallets, he says, but they use only one or two. They may not know what benefits their cards offer. In July Hyundai Card streamlined its products, offering customers a simpler choice among more versatile cards. Their cards may not fit each customer so tightly. But at least their customers’ wallets will fit in their pockets more snugly.