Purchasing with plastic to continue rise in new year

The total value of purchases made on cards is forecast to surpass 700 trillion won ($632 billion) this year for the first time, giving Korea the highest ratio of card use to gross domestic product in the world.

According to a report by KB Financial Group’s think tank on Sunday, the country’s total card use will reach 701 trillion won this year, accounting for 65.5 percent of nominal household consumption expenditures.

The think tank analyzed data submitted to the Financial Supervisory Service by eight local credit card companies.

Total card use stood at 690 trillion won last year, including payments made on personal credit cards, corporate credit cards and debit cards.

The nation’s total card spending exceeded 600 trillion won in 2011.

Separating the cards by type, spending on personal credit cards is expected to reach 466 trillion won this year, while spending by corporate credit cards will mark 133 trillion won, and debit cards are expected to reach 102 trillion won.

Despite the government’s expanded tax deduction for debit cards, use of the cards remains low across the nation.

“Debit card use has been declining since 2011, making the effectiveness of the government policy questionable,” said Jung Hoon, a research fellow at the KB think tank.

The Korean government encouraged credit card use after the 1998 Asian financial crisis in order to boost private consumption and increase transparency in tax collection. As credit card companies offered a variety of auxiliary services and discounts, credit card spending spiked from about 380 trillion won in 2005 to near 700 trillion won for the past 10 years.

“According to a survey by the Bank of International Settlements, the country’s credit card use in comparison to the GDP is the world’s largest,” Jung said.

As the number of one-person households rises, there is a notable change in the card use practices. The average amount per payment is on the decrease. Small payments of 10,000 won or less surged 42 percent compared to 2000, the report showed. Compared to card spending by families at large restaurants or department stores, use of credit and debit cards jumped significantly at convenience stores and fast-food chains, where payments are relatively smaller.

For the past five years, use of credit cards in taxis, cafes and convenience stores noticeably jumped.

Compared to 2009, taxi payments made with cards skyrocketed 516 percent last year, and coffee chain purchases climbed 427 percent.

Over that time, the average default rate at credit card companies has remained less than 2 percent, keeping the industry sound.

“Because risks of continuously rising household debt exist in our economy, there should be consistent monitoring,” Jung said.

According to the Bank of Korea, household debt, including credit card spending, reached 1,060 trillion won as in September. Korea’s household debt has been busting records since the second quarter of 2013, posing a serious threat to economic growth.

However, despite rising credit card use, issuers’ profitability is on a downward slope, as the growth of costs outstrips revenue growth.

Total operating profit in the credit card industry posted 3 trillion won in 2010, accounting for 21 percent of card companies’ total revenue. But in 2014, the figure is expected to be 2.8 trillion won, accounting for about 14 percent of total revenue, the data showed.

Shinhan Card, Samsung Card and KB Kookmin Card are the top three credit card issuers in Korea.

As the government is promoting fintech, an area that combines financial services with mobile technology, credit card companies are expected to see their profitability fall even further due to rising costs of research and development, the researcher at KB’s think tank added.

BY SONG SU-HYUN [ssh@joongang.co.kr]