Gov’t tightens VAN regulations

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Gov’t tightens VAN regulations

The government has tightened the regulations on rebates offered to big businesses that subscribe to major credit cards.

According to the Financial Services Commission on Tuesday, any stores that earn more than 300 million won ($234,637) in annual sales are banned from receiving rebates by VAN (value-added network) operators.

VAN companies are the middlemen that connect credit card companies and stores. If not for the VAN companies, each credit card company would have to sign a contract with individual businesses, while the businesses would have to own each credit card’s unique credit card swiping machine.

Credit card companies pay VAN companies to get them represented at big businesses like department stores, discount retailers or even fancy restaurants. In order to get that representation, VAN companies will give the highest-profile clients rebates if they use those companies’ credit cards.

But to recoup the fees paid to the VAN companies, credit card companies increase the commissions they charge across the board, including to smaller businesses.

The businesses that received the rebates are less affected by these higher commission charges than smaller businesses, which many have alleged is unfair.

The 300 million won sales limit is much stricter than the current limit, which is set at 1 billion won.

Anyone who violates the regulations can face up to five years in prison or up to 30 million won in fines.

It is estimated that VAN companies provide roughly 250 billion won in rebates to major stores annually.

“We have decided to expand the stores that are subjected to the regulations that demand or receive unfair amounts of compensation,” said a FSC official. “Because of the excessive spending on compensation, the commission rate charged by VAN companies on credit card purchases has gone up.”

The new regulations passed the cabinet meeting on Tuesday and go into immediate effect after April 25.

The current law was first applied nearly a year ago in July 2015, and initially set the sales limit at over 100 billion won. The exceptionally high bar allowed several big players such as department stores and discount stores to slip through the regulations, and the industry estimated that only 300 or so businesses were actually affected. Due to growing criticism the government in November lowered the bar to 1 billion won.

But some are questioning whether even the 300 million won limit would actually change rebate practices in the industry since roughly 87 percent of the stores using VAN services have annual earnings of less than 300 million won.

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