Columns

Don’t meddle with markets

Yi Jung-jae
The author is a columnist of the JoongAng Ilbo.

The first article of the Financial Services Commission (FSC) Act defines the role of the state agency as the protection of “financial consumers including depositors and investors.” Nowhere in the statute does it give the right to force creditor companies to ease pressure on merchants and self-employed individuals struggling to make ends meet due to public policy failure. Credit card issuers and their customers actually fall under the category requiring protection from the FSC.

FSC chairman Choi Jong-ku followed through on the president’s order to come up with ways to ease credit card service fees. He rounded up the CEOs of eight credit card companies and, as a result, shops and businesses with an annual revenue from 50 billion won ($44 million) to 500 million won now pay less commission fees.

The act on credit services restricts the preferential rates that the FSC can enforce through presidential order to “marginal” businesses. “Marginal” refers to shops and businesses earning less than 500 million won a year. The industry is contesting how a business generating revenue of 3 billion won falls under the same marginal category. Choi has overreached the agency’s authority: authorities claim laws, acts, and regulations can be fixed.

Choi used to ask why merchants have to share the burden of service fees benefiting consumers opting to pay with credit. He claims it is a cabinet member’s duty to uphold the president’s governing philosophy. He would not have hesitated in carrying out the president’s campaign promise and order regardless of the credit card industry’s business woes.

The use of credit card commission has long been a populist tool by politicians. The service rate has come down a range of 2 to 3.6 percent in 2007 to 0.8 to 1.3 percent. The toll went to employees of credit card companies: the call-center service was outsourced and employees were laid off. Customer benefits decreased and credit financing charging high interest rates increased. Fee cuts aimed at saving 800,000 merchants from 2.14 million won to 5.05 million won a year translates into 1.4 trillion won in losses for credit card companies and a loss of benefits of an equivalent value for card users. The government takes the credit and the consumer pays the price.

Members of the Korean Finance and Service Workers’ Union held a press conference in front of the Central Government Complex in Seoul on Nov. 26 to protest the government’s decision to lower credit card commissions charged to small businesses. [YONHAP]

The 1.4 trillion won cut in commission income overwhelms credit card issuers’ combined net profit of 1.2 trillion won. The credit card industry is already battered by slow business from subdued consumer spending. Lotte Group has decided to sell Lotte Card. Credit card issuers must turn to non-mainstay businesses like loan services to minimize the dent on the balance sheet. If card companies rely too much on high-interest lending, a second credit burst could take place. Reckless issuance put major player LG Card out of business in 2003. The company incurred a 5.6 trillion won deficit, the biggest loss a Korean corporate entity has made in a year. The financial authority is creating risk instead of regulating it.

Article 2 of the FSC Act also stipulates that the FSC must not undermine the sovereignty of financial institutions. Intervention in rates and prices can hurt private enterprises the most. Even former FSC Chair Kim Seok-dong, known for his meddlesome bureaucratic style, was opposed to state rate interference in the credit card act six years ago, arguing that credit card companies were not public enterprises. If the government wants to interfere that much in service charges, it should nationalize credit card companies.

State price controls have all backfired in the past. Market intervention and control are like painkillers: they can relieve the immediate pain, but cannot reduce poverty or save jobs. They also cannot prevent the inevitable breakdown of self-employed people and marginal businesses. The FSC chief should know better.

JoongAng Ilbo, Nov. 30, Page 34