The Korean credit card industry is only
now recovering well from the crisis that took place earlier this
decade. The after-effects include industry consolidation and a
tighter focus on targeting the most profitable customers.
Sarah Williams reports.

Any analysis of the current state of the Korean market needs to
be placed in the context of the credit card crisis of 2002 to
20004. In 2002, banks were competing intensely for business and
customers were often presented with inducements to sign up for and
use credit cards.

The value of credit card-based transactions and of debt
skyrocketed as cardholders paid off one card with another. By
December 2003, there was an average of four credit cards for every
working South Korean, 2.2 million citizens were behind on their
payments and credit card debt amounted to $2,000 for every South
Korean, an amount equal to roughly one-quarter of the country’s
then annual economic output.

The country’s largest issuer, LG Card, was bailed out with a
$1.7 billion emergency loan package provided by its creditors,
mainly banks. Of South Korea’s nine major card companies at the
time, eight lost money in the first half of 2003. At one point, KEB
Credit had to suspend cash advances. When delinquency rates soared,
the government did not inject public funds but it did apply
pressure to the chaebol (the large, conglomerate
family-controlled firms of South Korea characterised by strong ties
with government agencies) such as Samsung, LG and Hyundai to inject
funds into their credit card subsidiaries.

Since that time, the market has gone through a rebalancing

South Korea: Non-cash payments and settlements

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Credit cards

South Korea by numbersBy the end of 2006, the
total number of credit cards issued reached 92.46 million, a 6.9
percent increase from the 86.47 million at the end of 2005. The
number of merchants accepting credit cards rose by 9.0 percent to
reach 20.81 million. According to a survey carried out by the Bank
of Korea (BoK), Koreans had on average three credit cards, while
one out of five held more than five credit cards. This makes Korea
one of the top three credit card markets in the world, which is
surprising given that it is ranked only 12th in terms of

However, this is not a traditional revolving credit market.
Credit cards are used more as deferred debit cards, with huge
uptake of the cash advance functionality. Indeed, at the height of
the credit card crisis, cash advances accounted for as much as 70
percent of volume. These cash advances typically have to be repaid
within 30 to 35 days.

Spending habits have changed fairly dramatically since the
credit card crisis earlier this decade. Daily average credit card
billing totalled KRW1.01 trillion ($1.04 billion) in 2006, down
significantly from a high of KRW1.6 trillion per day at the peak of
the country’s spending spree in 2002. (See figure 1.) The use of
cash advance services dropped by 8.8 percent in terms of volume and
12.6 percent in terms of value from 2005 to 2006, due to the
heightened differentiation of the ceilings applied, as well as the
high interest rates on such services (8.9 to 29 percent annually).
(See figure 2.)

Yunsok Chang, country manager, Korea, MasterCard Worldwide,
anticipates that cash advances as a proportion of usage will
continue to decline.

South Korea: Credit card usage

Debit cards and cheque cards

During 2006, the daily average figures for use of debit cards
was 6,800 transactions in volume terms and KRW300 million in value
terms, representing declines of 30.2 percent and 35.1 percent,
respectively, from the previous year. The use of debit cards has
been on a steady decline as the number of shops accepting them is
smaller than that of those accepting credit cards, the operating
hours of the debit card system are limited to 8am to 11pm, and the
use of cheque cards has been expanding gradually. About 52.2
percent of Koreans said they hold a debit card, according to a 2006
BoK survey.

By contrast, the daily average use of cheque cards grew from
2005 by 68.2 percent in volume in 2006 and by 58.6 percent in
value. This was due mainly to the fact that cheque cards can be
used 24 hours a day at shops accepting credit cards, and deposit
holders aged over 18 are entitled to use cheque cards, regardless
of their credit status, which is in contrast to credit cards. The
total number of cheque cards issued rose significantly to 26.8
million at the end of 2006, up from 19.62 million at the previous

Prepaid cards and e-money

South Korea: Deliquency ratios as % of loans 1999-2005Over 2006, the daily average
use of prepaid cards reached 42,000 transactions, worth KRW2
billion. This represented increases of 40.4 percent and 36.1
percent in terms of volume and value over 2005. In particular, the
use of prepaid gift cards is possible at shops accepting credit
cards, so their more widespread acceptance makes them more widely
used now than gift certificates.

By contrast, during 2006, the daily average use of e-money
increased only 7.1 percent in volume terms and dropped 2.4 percent
in value terms from 2005. The limited use of e-money stemmed from
an expansion in the use of post-payment transportation cards, which
double as credit cards, and of prepaid transportation cards, both
of which compete with e-money in the mass transportation field.
Examples of e-money are K-Cash, MYbi and VisaCash.

Consumer behaviour

According to a survey carried out by the Bank of Korea in late
2006, credit cards remain the most favoured settlement method in
Korea. The BoK report said 28.2 percent chose credit cards as the
most preferred settlement method, followed by cash at 26.1

As to what determines their method of payment, 38.7 percent of
respondents highlighted convenience, 22.8 percent cited tax
benefits and 16.4 percent named service charges for card usage.
Cash was the preferred method of settlement when buying products
priced below KRW10,000, whereas a credit card was favoured when the
price exceeded that amount.

The competitive landscape for issuers

Over the past year, South Korean lenders have reported
significant profit rises (albeit from low bases), helped in large
part by rapid economic growth in the country, which has helped
customers to repay debts more quickly.

Profit growth has also been attributed to rising credit card
fees and a recovery in consumer spending. Delinquency rates have
fallen dramatically. (See figure 3.)

The large revenue and profit pools in the Korean credit card
market has attracted many players – banks (eg, Shinhan, Kookmin and
Woori) and monolines (eg, Samsung Card, LG Card, and Lotte), as
well as foreign entrants. The quality of underwriting has improved
and the focus is very much on risk management and profitability,
rather than purely on issuing as many cards as possible.

However, some negatives remain for domestic issuers. These
include a deflated cash advance service market (which has led to a
fairly drastic reduction in revenues), aggressive marketing
strategies from the more recent entrants and continued unfavourable
consumer opinion about credit cards. Particularly, drastic market
shrinkage of the cash advance service led to huge reductions in
revenue from the service. Among issuers, there is a strong emphasis
on the importance of building brand strength and exploiting
cross-selling opportunities more thoroughly.

The past year has seen what one issuer has described as “fierce
competition for market share” and intensified card marketing among
credit card companies.

There have also been a number of mergers recently, which has
consolidated the retail financial services industry. Shinhan
Financial Group, for example, has acquired LG Card. This is partly
a reaction to competition from foreign lenders such as Standard
Chartered and Citigroup, which have set their sights on the
country’s personal lending environment. Standard Chartered has
declared its intention to double its market share in the country’s
consumer banking market to 10 percent by 2010. Standard Chartered
acquired Korea First Bank in 2005 and Citibank took over Koram Bank
the previous year.

An alternative way of entering the Korean credit card market is
through a venture with a domestic partner. In August 2005, for
example, GE Consumer Finance (GECF) signed a strategic alliance
agreement with Hyundai Card, in which GECF purchased a 43 percent
stake in Hyundai Card for a total investment of $663 million. This
investment followed an earlier one in August 2004 in Hyundai
Capital Services. The resulting joint venture has been providing a
variety of financial services products, including auto financing
and personal loans.

South Korea: Major issuers by number of cardholders, 2006

Product innovation

Due to the massive penetration of credit cards in Korean
society, issuers and schemes are always looking for new products to
introduce to the market. As MasterCard Worldwide’s Chang noted in
an interview with CI: “Korea is an excellent example of genuinely
creative marketing. The market offers a huge range of features,
ranging from cinema discounts to insurance.”

In January 2006, for example, Shinhan and Barclaycard teamed up
to launch the co-branded Manchester United football affinity credit
card. It offers a variety of benefits such as signed merchandise
and player photos, and has already attracted 600,000 customers.

Issuers are also adding more functionality to their product
offerings. In January 2006, for example, JCB announced that Chohung
Bank had launched the Chohung 365 BC JCB Card smart card (BC is the
local credit card issuer/processor BC Card), compliant with the
global EMV standard. The new card uses chip technology to offer a
wider range of customer services.

New technologies

South Korea was one of the first markets chosen to combine
contactless payments and transport, and is one of a handful of
countries in which MasterCard PayPass-related programmes are under

In June 2005, BC Card announced that it was implementing a
management software solution from smart card technology provider
Bell ID in order to issue and manage 17 million EMV cards for BC
Card member banks over the following three years. This allows
cardholders to manage their own credit card and on-card
applications remotely via a PC or mobile phone.

Visa International and SK Telecom announced in February 2007
that they are to launch what they expect to be the world’s first
contactless payment application on a mobile phone’s universal SIM
card, which can be personalised over the air. As Gordon Cooper,
regional head of mobile payments at Visa Asia-Pacific, commented:
“Our collaboration is an example of convergence in action. Mobile
phone subscribers are able to make Visa Wave contactless payments
at the more than 50,000 contactless readers at merchants in

In February 2007, UK-based supermarket group Tesco began trials
of Visa Wave contactless payments and payments via mobile phone
handsets at its 66 outlets in Korea. Tesco is being partnered by LG
Card, with which it has an existing co-branded credit card.

It is not only Korean consumers who are willing to adopt new
technologies and payment methods. Following the economic crisis of
1997, the Korean government made a concerted effort to restore tax
revenues by offering payment card incentives. The government
specifically mandated policies to promote payment card usage among
consumers, businesses and merchants.

Over time, these measures were successful in increasing Korea’s
national tax revenue while contributing to overall economic

Key players

Kookmin Bank

Kookmin Bank (KB) is the result of KB’s merger with H&CB,
which was then the largest mortgage lender in Korea. The bank had
8.884 million credit card customers at the end of 2006. The
delinquency rate on its credit cards was 2.47 percent.

In 2006, Kookmin Bank attempted to buy a controlling stake (64.1
percent) in Korea Exchange Bank (KEB) for KRW6.4 trillion in the
largest acquisition in South Korean history. However, a major KEB
shareholder, US investment firm Lone Star, pulled out of the deal
several months later for legal reasons.

KB prides itself on the quality of its brand and in June 2006 KB
Cards was selected by The Segye Times publication as the
best brand in Korea. Since October 2003 it has been issuing most of
its new credit cards under the KB Card brand.

Shinhan Financial Group

Shinhan Financial Group (SFG) is the parent of Shinhan Bank
(which merged in April 2006 with Chonghung Bank). In late 2005,
Shinhan Card formed a strategic alliance with American Express
(Amex) to issue Amex-branded cards in South Korea, becoming the
first bank issuer of Amex cards in the country.

In March 2007, Shinhan Bank formally acquired LG Card (the
country’s largest credit card issuer), making Shinhan the top
player in the domestic credit card industry. LG Card had 10.438
million card customers by the end of 2006, while Shinhan Card had
4.767 million. With LG Card, SFG expects that the profit
contribution of the non-bank sector will exceed 40 percent. It is
also hoped that the acquisition will lead to more efficient
utilisation of the group’s distribution channels. Furthermore, LG
Card’s 10 million cardholders will increase marketing and
cross-selling opportunities.

Shinhan Card has attempted to cultivate what it calls a “premium
image” with the recent launch of Shinhan Amex Card, Shinhan Premium
Amex Card and SK Amex Card.

National Agricultural Co-operative

National Agricultural Co-operative Federation (NACF) is the
umbrella organisation for the 1,327 farmer-owned multipurpose
member co-operatives and 2.4 million member farmers in Korea. NACF
is more widely known in Korea by the name Nonghyup.

In spite of the challenging business environment, its
non-performing loans have fallen significantly over the past few
years, which augurs well for the stability of the card business.
Nonghyup’s credit card division continued to diversify its
products, and the card business developed and marketed the Rural
Loving card and the Good Morning Riceman card. Nonghyup dominates
two new card markets in government administration and health with
its Public Servant‘s Welfare card and its Medical Supplies debit

Hyundai Card

The origins of Hyundai Card go back to at least 1993, when
industrial conglomerate Daewoo Group took over the management of
Diners Club Korea. In 2001 the company name was changed to Hyundai
Card, and in 2005 it entered into a strategic alliance with GE
Consumer Finance. Hyundai prides itself on the quality of its
customer service and in December 2006 the company ranked first in
the National Customer Satisfaction Index. Product launches over the
past few years have included the phenomenally popular HyundaiCard M
Card (with which the cardholder buys a new car and then earns back
the discount through card usage), the Purple Card, the Kia Nobles
Card and the Pizza Hut-HyundaiCard S Platinum.

Hana Financial Group

Hana began its credit card business in 1992. The company says it
is still too dependent on interest and commission incomes from its
banking business, and therefore is intent on increasing the
proportion of operational revenue coming from its non-banking
segment. Hana has been targeting Hana Bank’s credit card members,
using telemarketing channels to try to sell them low-cost
protection-type products such as accident insurance, cancer
insurance and youth insurance.

The sales volume of Hana’s credit card business rose by 20
percent in 2006, compared with 2005. Hana ascribed this in part to
marketing and promotional events for various customer groups. The
company also took various steps to improve risk management and
upgrade user-oriented convenience.