Eagerness can ruin things
The author is an editorial writer of the JoongAng Ilbo.
Personally, I approve of the idea of Zero Pay, a Seoul city-sponsored mobile payment system. It would lessen the need for people to carry wallets if smartphones could be used to pay. Using it was not as difficult as I thought. I opened the app, scanned the QR code of the shop, entered my pass number and typed in the sum. That got me a hot coffee and made me proud of being an early adopter. I also would have saved the self-employed shopkeeper the credit card commission. Still, I could not entirely shake off my skepticism.
The main purpose behind the consumer-merchant direct payment system is to help self-employed businesses save credit card service fees. But does it? Registered individual-run businesses with 1 billion won ($890,000) or lower annual sales get tax refunds of 1.3 percent off credit cards and cash receipts. The tax term is a deduction on value-added credit card sales. The tax refund rate was to be reduced from this year, but the benefit was extended to 2021 at a higher rate.
Given the tax relief, the owner of a business generating less than 1 billion won a year pays 0.5-percent to 0.1-percent fees to credit card issuers for every payment. The owner of a business earning less than 300 million won actually gets 0.5 percent extra on credit-based sales as taxpayers subject to the category are charged 0.8 percent credit card fees while the tax deduction rate is 1.3 percent. The system cannot entirely appeal to small merchants as they would prefer payment by credit card.
The small merchants using Zero Pay are also eligible for tax deductions as cash receipts are automatically registered. The question is whether consumers will like it as well. Minister of SMEs and Startups Hong Jong-haak aimed to calm the jitters in the payment market. Small merchants take up about 20 percent, or 190 trillion won, of the consumer market. Zero Pay aims to cover 10 percent, or 19 trillion won, of their sales over the next five years. If the target is met, Zero Pay will account for about 2 percent of the consumer payment market, according to the ministry forecast. If it does succeed, direct payments can reduce credit card service charges an average 10 percent for small businesses.
The SME and start-up minister is modest compared to Seoul Mayor Park Won-soon. He claimed nothing failed under his initiative. He is sure shopkeepers will all welcome the payment system as they can save money. He brims with confidence as an aspiring presidential candidate and optimism about grass roots support because of his civilian activist background. But over-eagerness can ruin things. The city government has turned officials into salesmen by placing a quota on persuading shops to use Zero Pay and offering tax-financed incentives for their achievements. Local districts may have to follow the order as the government has the authority over the subsidy budget. Excess can raise questions about motive.
Zero Pay falls under the economics definition of a two-sided, or two-way, market, where two user groups or agents interact through an intermediary platform to the benefit of both parties. The platform can scale up according to demand from merchants and consumers. A two-way market can be best explained by a night club. The waiter may serve a drink for one customer on behalf of another customer, but the drink is not free as it is paid for by the second customer.
Credit card issuers offering various perks to consumers to temp their spending have charged big fees to merchants to protect their bottom line. Zero Pay wants to defy the market. It poses neither as the first or second customer, but the club owner who pretends the drink is on them.
How long can such an arrangement last? Customers must ask where the club gets the money to buy drinks. The pretence must stop.
JoongAng Ilbo, Feb. 15, Page 34