Koreans’ fervour for credit cards is extending
to other electronic payments instruments, making the country one of
the world’s leaders in the adoption of new technologies ranging
from mobile phone-based banking to contactless payments. Despite
this the replacement of cash remains a slow process.

Though credit cards are losing ground to debit
cards in many parts of the world, in Korea the credit card remains
the undisputed payment card of choice. Indeed, in 2007 domestic
payments using credit cards totalled KRW312 trillion ($333
billion), up 19.4 percent compared with 2006, according to the
Korea Financial Supervisory Service (FSS). Of the total credit card
payments those made by consumers represented about KRW200 trillion,
almost 45 percent of private consumption expenditure.

The popularity of credit cards in Korea has
long been underpinned by solid support from the government in the
form of a tax deduction. The current tax concession for credit card
use permits an individual to deduct up to 20 percent of the amount
spent in excess of 20 percent of total annual salary income.The
maximum deduction is KRW5 million.

Contrasting with strong credit card payment
growth, debit card payments are in decline. According to the Bank
of Korea (BOK), the daily average number of debit cards
transactions in 2007 was 5,025 and the total daily average value
KRW200 million, declines of 25.6 percent and 29.9 percent,
respectively, compared with 2006. BOK explained that the use of
debit cards has been declining because fewer retailers accept debit
cards than accept credit cards. In 2004 total daily debit cards
transactions averaged KRW500 million.

Hybrid cards

However a hybrid of the debit card, the check card, has made
headway with payments climbing from KRW33.8 million in 2006 to
KRW51.7 million in 2007, an increase of 52.9 percent, with the
number of cards in issue rising 47 percent to 39.4 million. Check
cards, which are linked to current accounts, are accepted by all
merchants that accept credit cards.

Payments using check cards are also subject to
a tax rebate on the same basis as credit cards. Notably, in a study
conducted by BOK in 2007 it concluded that tax deductions increased
consumer use of cards by 16.4 percent and reduced the probability
of a consumer using cash by 14.1 percent.

Despite progress made by check cards in 2007,
the total spending via check and debit cards combined – an average
of KRW251.7 million per day – was a fraction of the KRW 855 billion
credit card daily average. The average number of credit card
transactions was 9.09 million per day.

The dominant position of the credit card in
Korea now ranks the country as the world’s fifth biggest market in
terms of credit card spending per capita, according to BOK. This is
a significantly higher ranking than Korea’s 35th position in terms
of its GDP per capita of $24,783 in 2007, according to global
financial body the International Monetary Fund. Korea’s GDP of $957
billion ranked it as the world’s 13th biggest economy.

Not surprisingly, most Korean’s wallets bulge
with credit cards. According to the FSS there were 89.56 million
credit cards in issue at the end of 2007, equal to 1.82 cards per
capita based on the country’s total population of 49.2 million.
Based on its economically active population, 24 million according
to the US Central Intelligence Agency (CIA), the average was 3.73
credit cards per person.

Credit card penetration in Korea compares, for
example, with the UK’s 1.1 cards per capita and 2.19 cards per
economically active person in 2007. This is based on data from the
CIA and UK payments industry body Apacs.

In the US, which has the highest credit card
density, data from consultancy and research company Experian shows
the average number of credit cards per capita in 2007 ranged from a
low of 3.0 in Mississippi and the District of Columbia to a high of
5.3 in New Hampshire.

The number of credit cards per capita in
California, with a population of 36.6 million the US most populous
statein the US, was 3.9.

A rocky road

The credit card market’s growth in Korea has not been without major
setbacks. First introduced in Korea in 1969 by department stores,
credit cards were strictly regulated and remained a small part of
the country’s payment scene until 1993 when regulations were eased
considerably

This led to aggressive marketing of credit
cards, particularly after the 1997 to 1998 Asian financial crisis
when the government acted to stimulate the economy via easy
consumer credit and other measures such as tax rebates on credit
card spending

Between 1998 and 2004 the credit card market
boomed with the number of cards in issue rising from 42 million to
105 million and annual transaction value increasing ten-fold to
KRW368 trillion. However the boom brought with it another financial
crisis as many Korean consumers found themselves unable to service
their debt. According to the FSS, in 2004 payments in arrears
reached a record 18.25 percent of card issuers’ outstanding
advances, forcing the government to act with measures that included
compelling banks and other businesses in the industry to shore up
their credit card units with substantial amounts of new
capital.

In the subsequent years Korea’s credit card
industry has recovered strongly and according to the FSS the
country’s six credit card companies’ total net income improved from
a loss of KRW1.341 trillion in 2004 to a net profit of KRW2.478
trillion in 2007, the latter amount representing a 14.5 percent
improvement compared with 2006. The delinquency ratio improved from
5.53 percent in 2006 to 3.79 percent in 2007.

Koreans’ affinity for credit cards has been
paralleled by the uptake of internet banking and commerce, a
development aided by the adoption of broadband by 80 percent of the
country’s 36 million internet users. According to BOK the average
daily number of internet banking transactions reached 17.9 million
at the end of 2007, up 40 percent compared to the end of 2006,
while the average total daily value of internet banking
transactions was KRW8.27 trillion.

The uptake of internet banking has continued in
2008, with BOK reporting an average of 21.2 million transactions
per day in the first quarter.

Notably, at the end of 2007 the number of
internet banking accounts reported by the country’s 18 banks and
state-owned Korea Post stood at 44.7 million, up from 24 million in
2004 and almost equal to Korea’s total population.

Mobile phone banking and payments have also
received a warm welcome, placing Korea among the world’s leaders in
the adoption of the technology.

Among pioneering ventures in the mobile
payments field was the launch by SK Telecom (SKT), Korea’s largest
mobile phone service supplier, of its Moneta Mobile Card in 2001.
Originally the service required a mobile phone with a slot into
which the card was inserted to execute transactions over SKT’s
mobile network, an approach that was refined in 2003 with the
incorporation of a chip in the phone. Further advances by SKT have
seen its mobile payments service extended to facilitate contactless
payments on the capital Seoul’s public transport systems.

Korea’s banking industry soon followed SKT’s
lead and in 2004 began launching mobile banking initiatives to
enable customers to undertake activities such as money transfer and
balance checking. In 2004 banks had already garnered 580,000 users,
a figure that by early 2007 had, according to mobile phone industry
body the GSM Association, risen to 12 million based on mobile
payment enabled handsets in circulation.

Indicative of the rising popularity of mobile
banking and payments, BOK reported that in 2007 the total average
number of daily transactions reached 41,000, up 40.9 percent from
29,100 in 2006. Total transactions in 2007 averaged KRW43 billion
per day, up 30.7 percent compared with 2006.

Another pioneer in Korea’s mobile payment arena
is mobile payments specialist Danal which in 2000 launched its
BilltoMobile service.

When customers using the service make a
purchase online, instead of inputting credit card and other
information, they input their mobile phone number, voicemail
password and an authentication code received instantly via short
message service. Transactions are completed in about 20 seconds and
customers settle the charges when they pay their mobile phone
bill.

According to Danel two-thirds of all Korean
mobile phone subscribers actively use this payment method. In
addition, 70 percent of all digital content purchased online is
charged to subscribers’ mobile phone bill and in 2007 represented a
total transaction value of almost $1.5 billion.

Koreans’ ready acceptance of innovation has
also extended to radio frequency identification (RFID) contactless
payments, including becoming the world’s first country to introduce
contactless cards for transportation payments in June 1996. The
service, Upass, now has 15 million cards and 50,000 reader
terminals in service in the greater Seoul area.

Korea is also out front in the introduction of
mobile phones equipped to undertake contactless payments. Among the
most significant developments in this respect was the launch by STK
and Visa in April 2007 of the world’s first commercial contactless
payments solution that enables users to download the RFID
application over the air onto the phone’s subscriber identification
module (SIM).

A long path ahead

Despite the popularity of electronic payments Korea is still far
from becoming a cashless society. According to BOK’s 2007 study the
use of cash began declining in 1995 in line with the rapid adoption
of credit cards. However, this decline was halted and marginally
reversed in 2005 when cash payments also became eligible for tax
deductions on the same basis as credit and check cards.

In the study BOK emphasised that it believes
that credit cards will continue to be the payment instrument of
choice even if the tax deduction benefit is reduced. In addition,
BOK sees debit-type cards as the main substitute for cash and
believes the use of cash will decline over time.

However, stressed BOK, “the rate of decrease
[in cash use] will be slow due to strong points of cash like
safety, convenience, protection of privacy and tax deduction.” In
addition BOK noted that surveys it has conducted reveal that
individuals who are accustomed to current payment habits are
reluctant to accept change because of the perceived inconvenience
involved.