Research on the Effects of the Credit Card Industry on the Korean Economy
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Research on the Effects of the Credit Card Industry on the Korean Economy This report is a joint report published by Samil PwC and KAIST Graduate School of Management's Professor Namgyoo Park (and team), comissioned by Visa International Asia Pacific. Visa and the authors acknowledge the assistance provided by the Credit Finance Association (CREFIA) in the preparation of this report April, 2006
Table of Contents Welcome 2 Executive Summary 3 1. Research Background 6 2. Effects of the Credit Card Industry on the Korean Economy 10 2-1. Enhanced Transaction Transparencies 11 through Credit Card Usage 2-2. Increased Tax Revenue 13 through Credit Card Usage 2-3. Increase in Deposits of Financial Institutions 17 through Credit Card Usage 2-4. Development of Directly and Indirectly Related Industries 20 through the Credit Card Industry 3. Conclusion Contributions to GDP 27 4. Appendix 31 5. References 37
welcome 2 Welcome The payments industry in Korea has come a long way in a relatively short time. It has transformed the way Koreans buy and sell goods and services. The existence of a sophisticated and flexible payments system has also been a key factor underpinning Koreas strong economic performance in recent years. By supporting consumer spending it has fueled domestic growth, and by allowing for easy travel by Koreans overseas and foreign visitors to Korea it has boosted tourism and international commerce. Through the operations of Visa, its members and technology partners, Korea has established an electronic payments system that leads the world in technological innovation. Koreas domestic system is especially highly advanced in the use of contactless and chip cards, and the leader in mobile payment. Furthermore, Korean companies are now successfully exporting these technologies to many other countries. Despite the remarkable progress, some have voiced criticism of the Korean credit card industry, claiming that widespread use of payment cards has led to over consumption and negative economic impacts. This report strives to shed new light on such negative perceptions by investigating the Korean credit card industry both statistically and qualitatively. This report is a contribution by Visa to the Korean credit card industry; revealing not only an economic infrastructure that has contributed to the significant increase in transaction transparency, tax revenue, and deposits, but is also a driving force that accelerates the development of directly and indirectly related industries. Moreover, the Korean Governments policy of fostering credit card usage and the experience of the Korean credit card industry could be considered a meaningful case study for other countries. The credit card industry, combined with the recent establishment of the Credit Bureau, is expected to play an essential role in advancing the Korean financial sector as well as developing the national economy. This report was prepared to review and assess positive aspects in promoting widespread usage of cards by consumers. As a result, this report is not intended to present potential risk in identifying and solving potential adverse impact on respective risk of various kinds. Potential risk should be assessed to minimize the risk of the industry and each country before introducing similar practices. We hope that this report may help eliminate the negative perception of the Korean credit card industry and further contribute to the establishment of a desirable culture of consumption and payment transactions. We look forward to playing our full part in the discussions that lie ahead. Young Chong Kim Country Manager Korea Visa International
executive summary 4 In 2004, the Korean credit card industry recorded 358 trillion KRW in credit card spending and 20.4 billion credit card transactions, becoming the largest in the Asia-pacific region, and comparable in size to those in major developed countries. This research demonstrates some positive contributions the Korean credit card industry has made to Koreas sound economic development. This research shows that the Korean credit card industry generated a 21.5 trillion KRW worth of value for the national economy in 2002 when it reached its peak. It also contributed to the significant increases in transaction transparency, tax revenue, and deposits. Furthermore, it accelerated the development of directly and indirectly related industries, establishing a foundation for a new era in the Korean financial sector. Enhanced Transaction Transparency Increased Tax Revenue through Credit through Credit Card Usage Card Usage In order to examine whether the This study examines whether the development and expansion of the credit development and expansion of the credit card industry promotes transaction card industry decreases the potential to transparency, revenue data was collected under-report revenue, which eventually from 54 merchants in four sectors: contributes to increases in tax revenue. In educational academies, hospitals, gas order to investigate the above stations, and restaurants. These sectors relationships, this study collected data on were selected because they have high value added tax payments and total credit potential to under-report revenue, due to card spend in the restaurant, retail, and the fact that a high proportion of their service sectors from 1990 to 2003. revenue is paid in cash. The ratio of credit Statistical analysis shows that credit card card payments over total revenue has spend significantly increased value added increased steadily since 2000, which tax payment in these sectors. Specifically, ultimately decreased the potential to a 1% increase in credit card spend leads under-report revenues in those sectors. to a corresponding increase in value added tax of up to 1.56%. These empirical This study also investigates whether findings show that credit card usage Korean firms increased credit card spend contributes to an increase in tax revenue for their entertainment expense payments in the national economy. Thus, the credit after the introduction of the government card industry provides a foundation for policies to promote credit card usage. the sound development of the national Detailed expense data were collected from economy. 40 companies from 1995 to 2004. The results show that the proportion of credit card usage for entertainment expenses continuously increased from 1995 to 2003, which subsequently increased the ratio of credit card spend over total revenue in the various sectors in Korea; including bars, restaurants, and golf clubs. Thus, this study verifies that the credit card industry has enhanced transparency in corporate entertainment expenses. In consequence, it increased transparencies of the reported revenues in those sectors.
executive summary 5 Increase in Deposits of Financial Development of Directly and Indirectly Institutions through Credit Card Usage Related Industries through the Credit Card Industry In order to study whether the propagation of the credit card industry can increase This research analyzed primary and the deposits of various financial secondary data to examine the impact of institutions, this report, using quarterly the credit card usage on various directly data from 1994 to 2004, analyzed the and indirectly related industries. The relationships between the currency index, results show that an increase in credit credit card purchases and cash advance card usage has made possible the fast usage. The empirical findings show that growth and rapid activation of various credit card usage significantly increased directly related industries; including VANs deposits of non-monetary banks while (Value Added Networks), POS (Point of cash advance usage did not. From the Sale) terminal manufacturers, PGs statistical perspective, an increase of 1% (Payment Gateways), and Public Key in credit card purchases led to a 0.13% Infrastructure services. The total net value increase in deposits. Such results show added created by firms participating in that an increase in credit card usage the card market is estimated at 21.19 decreases individuals need for cash, trillion KRW in 2002. In addition, the total leading to a subsequent increase in the revenue of these directly related industries amounts on deposit. In terms of the had grown from 36.3 billion KRW in 1998 national economy, this research shows to 358 billion KRW in 2002. that the declining need of various economic entities for cash will eventually Indirectly related industries such as e- increase the amount on deposit in financial commerce, leisure & travel, and institutions, which could enhance liquidity entertainment are also experiencing in the national economy and further foster continuing growth due to the convenient economic growth and development. purchasing process which credit cards and other value added services allow. It is very challenging to quantify the economic value added by such indirectly related industries. However, from the data collected, we can see that Koreas credit card industry significantly contributed to the growth of these indirectly related industries.
research background 7 While credit cards were first introduced Credit Card Spend - Major Asia-Pacific Nations to the United States in 1950, they were 250 not introduced to Korea until the 1970s Credit card spend (US$ in billion) and even then they were only available to 200 certain wealthy classes of people. The The Korean Credit Card Business Act of 1987 provided 150 government policies a foundation for the regulation and 100 to promote credit development of the Korean credit card card usage since industry. Samsung Card Co., Ltd and LG 50 Card Co., Ltd were the first to offer cards 1995 triggered the under the new system beginning in 1988, 0 explosive growth of and thereafter the Korean credit card 96 97 98 99 00 01 02 03 04 19 19 19 19 20 20 20 20 20 the Korean credit industry has made remarkable progress Korea Australia Hong Kong Singapore card industry both qualitatively and quantitatively. Total Number of Credit Card Transactions As shown in [Figure 1], current annual 25 - Major Asia-Pacific Nations credit card spend in Korea amounts to US$201.1 billion (230 trillion KRW, 20 Number of transactions excluding cash advances), which is (hundred thousands) considerably higher than other Asia Pacific 15 markets such as Australias US$ 92.6 10 billion, and Hong Kongs US$17.7 billion. In addition, in terms of the total number 5 of transactions, Korea registered 2 billion transactions compared to just 950 million 0 in Australia and 17 million in Hong Kong. 2002 2003 2004 Korea Australia Considering the total GDP and total Hong Kong Singapore population, these facts clearly show that [Figure 1] Credit card spend and number of credit card Koreas credit card industry has made transactions of major Asia-Pacific Nations much more significant progress both in (Source: Visa International, Korea Credit Finance Association)1 size and speed than in other Asia-Pacific nation. 1Credit card spend does not include the total amount of cash advance, and the amount has been converted into US$ denominations using the average annual foreign currency exchange rate between KRW and US$.
research background 8 Korean government policies to promote 700 credit card usage since 1995 [Table 1], 600 Credit card spend(trillion KRW) combined with the aggressive marketing 500 activities of the Korean credit card 400 companies, increased total credit card 300 spend (which was about 43 trillion KRW excluding cash advances in 1999) by an 200 average annual growth rate of almost 90% 100 from 1999 to 2002 [Figure 2]. This growth 0 trend was also evident in cash advances, 96 97 98 99 00 01 02 03 04 lump sum payments, and installment 19 19 19 19 20 20 20 20 20 Lump-sum Installment Cash advance payments. [Figure 2] Historical trend of credit card spend in Korea [1996~2004] (Source: Korea Credit Finance Association) Major Policies \ Year ~ 1994 1995 ~ 1998 1999 ~ Restrictions on the maximum proportion of Within Within Within revenues from cash 60% 50% 50% advance Limits on cash advances Restrictions Re- Restrictions amount for individuals abolished introduction Restrictions on Restriction No No recruitment methods of on street restrictions restrictions new credit card members promotions Ratio of mandatory credit Reinforced, card usage on corporate Implemented Reinforced abolished in entertainment expenses 2002 (for more detail, see Table 2) VAT credit for credit card spend (1% rebate of the total Implemented Sustained Increased VAT payments for merchants) Income deductions for credit card spend (Income deduction for 10% of - - Implemented total credit card spend that exceed 10% of annual income) Mandatory credit card usage on entertainment expense - - Implemented exceeding 50,000 KRW Using credit card receipts as lottery tickets (Monthly drawing with the - - Implemented 1st prize money of 1000 million KRW) [Table 1] Major Korean government policies related to the credit card industry
research background 9 However, the rapid expansion in cash Therefore, this research strives to analyze advances and card loan services by most both objectively and systematically the Korean credit card companies increased effects of the credit card industry on the the delinquency rate in the Korean Korean national economy. More financial system, producing more than 2 specifically, this research examines the The so-called credit million credit defaulters since 2002. This contributions of the credit card industry card crisis of 2002 economy-wide phenomenon gave birth to to GDP growth, transaction transparency, intensified negative the term Credit Card Crisis and some increases in tax revenue, increases in perceptions about credit card companies had to rely on public deposits, and development of directly and funds to sustain their operations. indirectly related industries. the credit card industry 900 300 800 Korean National Credit card spend(Trillions in Won) 250 Economy 700 GDP (trillion KRW) 600 200 500 150 Contribution to GDP 400 300 100 Improvement Increase in Increase in Development 200 50 in Transaction Tax Deposits of of Directly 100 Transparency Revenue Financial and Indirectly 0 0 Institutions Related Industries 98 00 01 04 96 02 03 99 97 19 20 20 20 19 20 20 19 19 GDP Credit card spend Development & Expansion of the [Figure 3] Historical trend of GDP and credit card spend Credit Card Industry (Source: Bank of Korea, Korea Credit Finance Association)2 This so-called Credit Card Crisis was a [Figure 4] Effects of the credit card industry on national economy temporary phenomenon caused by excessive competition between credit card firms and the very rapid development and expansion of the government policy on credit card usage. In particular, as shown in [Figure 3], from 1999 to 2002, credit card spend has significantly exceeded the GDP growth rate. As the domestic credit card industry begins to stabilize its operations and competitive activities, objective investigation of the various contributions of the credit card industry to the Korean national economy is worthwhile. 2The total amount of credit card spend does not include cash advances and credit card loan services.
effects of the credit card on the Korean industry 10 Effects of the Credit Card Industry on the Korean Economy
effects of the credit card on the Korean industry 11 2.1 Enhanced Transaction Transparency Economic transparency, in general, may through Credit Card Usage be enhanced by the advancement of financial institutions and systems as well A strong underground economy generally as stronger reinforcement of government inhibits the sound growth of a nations inspections and regulations. The The use of credit development of the credit card industry, economy, weakens the foundation of cards increases taxable income, and makes economic as part of the financial system transparency in predictions and planning challenging. development, can also play a major role economic activities Hence most countries make various in promoting economic transparency. This attempts to foster economic transparency section analyzes the extent to which the by minimizing the size of underground Korean credit card industry has affected economies. the transaction transparency of corporations and sole proprietors. As shown in [Figure 5], LG Economic Research Institute (LGERI) estimates that Revenues are obvious performance the Korean underground economy had indicators for both corporations and sole increased to approximately 50 trillion proprietors, which become the basis of KRW by 2000. However, the proportion income taxes. In order to examine whether of the underground economy compared the development and expansion of the to the total GDP, which amounted to credit card industry promotes transaction For both 27.7% in the 70s, has steadily declined. transparency among economic bodies, corporations and These trends show that there has been a this research collected revenue data from merchants, the general increase in economic transparency 54 merchants in four sectors: educational in Korea during the last few decades. academies, hospitals, gas stations, and proportion of credit restaurants. This study tracked their total card sales in total 140 35% sales from 2000 to 2004 and analyzed Underground economy as a % of GDP sales is the change in percentage of credit card Size of the underground economy 120 30% continuously 100 25% sales. (billion USD) increasing 80 20% 60 15% 40 10% 20 5% 0 0% 4 9 4 9 2 7 9 3 ~7 ~7 ~8 ~8 ~9 ~9 ~9 ~0 70 74 80 85 90 93 98 00 19 19 19 19 19 19 19 20 Estimated underground economy Underground economy as a % of GDP [Figure 5] Estimated size of Koreas underground economy (Source: LG Weekly Economy 2001.04.25, LG Economic Research Institute)
effects of the credit card on the Korean industry 12 70% Unlike other corporate expenses, 58% 60% 57% 57% entertainment expenses have been 50% typically perceived as being the most Percentage of Revenue Credit Card Sales as a 50% 43% 42% 40% 37% 41% 41% difficult in terms of enforcing transparency since the nature of the transaction itself Credit card use for 31% 30% makes it challenging to keep clean records. corporate 20% Therefore, corporate entertainment entertainment 10% 5% 8% 8% 9% 9% expenses have contributed heavily to the expenses is 0% expansion of the underground economy. 2000 2001 2002 2003 2004 In order to alleviate this situation, the continuously Hospital sector Non-hospital sector Korean government adopted and increasing Total reinforced a policy wherein the use of [Figure 6] Historical trends in credit card sales as a percentage of revenue for sole proprietors credit cards is mandatory when paying for (Source: Tax return of sampled merchants) entertainment expenses exceeding a certain amount [Table 2]. [Figure 63] shows the change in revenue for sole proprietors and the percentage of credit card sales with respect to total sales. In 1991, the Korean government introduced We investigate these sectors because they a mandatory credit card usage policy on corporate entertainment expenses (For are traditionally well known for high large firms, 40% of their entertainment potential to under-report their sales. The expenses should be paid by credit cards figure shows that the percentage of credit and for small and medium firms, 30%) card sales has steadily increased from In 1995, the Korean government increased 31% in 2000 to 42% in 2004. The non- the ratio to 75% for firms in Seoul, 60% hospital sector, in particular, experienced for those in metropolitan cities, 40% for a similarly rapid growth of credit card sales those in other cities from 43% in 2000 to 58% in 2004. While In 1999, the Korean government introduced we could find very similar patterns of a mandatory credit card usage policy on change in educational academies, gas corporate entertainment expense stations, and restaurants, the hospital exceeding the amount of 50,000 KRW. If sector has shown an exceptionally low the requirement is not met, there will be no expense benefits. The Korean proportion of credit card sales. Unlike government again increased the ratio to other sectors, most of the payments in 80% for firms in Seoul, 70% for those in the hospital sector are petty payments metropolitan cities, 60% for those in large because most medical expenses are cities, and 50% for those in other areas covered by insurance. Due to the nature In 2002, the Korean government sustained of these transactions, the percentage of the mandatory credit card usage policy on credit card sales is comparatively small corporate entertainment expenses but it is nevertheless increasing at a steady exceeding the amount of 50,000 KRW but repealed the mandatory ratios pace. An increase in credit card usage may signify that sole proprietors will have fewer [Table 2] Major Korean government policies related payments opportunities to deliberately under-report of corporate entertainment expenses their sales. In summary, the increase in credit card sales will make the process of tampering sales data more difficult and subsequently decrease the size of the underground economy, promoting economic transparency in Korea. 3The Korean government introduced various policies to promote credit card use during 1998~1999, especially after the Korean financial crisis. We cannot confirm whether the credit card usage ratio was very low during the early stages of the policy introduction. This is because the record keeping for most merchants are usually limited to the maximum of 5 years. Thus, we investigated data from 2000 to 2004 only.
effects of the credit card on the Korean industry 13 0.50% 90% 2.2 Increases in Tax Revenue through 0.45% 80% Credit Card Usage Entertainment expense as a % 0.40% 70% % of credit card spend in 0.35% 60% This section investigates how the Korean entertainment 0.30% of revenue 50% 0.25% 40% government policies for the credit card 0.20% 30% industry affect changes in tax revenue. 0.15% 20% Due to the fact that there are a number 0.10% 0.05% 10% of sources that determine total tax 0.00% 0% revenue, factors that had little direct relationship with credit card usage, such 95 97 03 99 01 19 19 20 19 20 Entertainment expense as a % of revenue as corporate income tax and direct tax, % of credit card spend in entertainment expense were not included in the analysis. However, [Figure 7] Historical trends showing % of credit card spend value added tax (VAT) is predicted to in entertaiment expense and entertainment expense as a % of revenue show the most sensitivity to changes in (Source: Financial statements and tax returns for sampled accurate recording of sales. As VAT is an corporations) indirect tax, with minimum tax revolts and comparatively low risk involved with Detailed expense data was collected from collection, the impact of credit card usage a random sample of 40 companies from on the increase in tax revenue can be 1995 to 2004. Our analysis revealed that demonstrated more effectively. This the amount of entertainment expenses section empirically investigates whether with respect to total sales has been the development and expansion of the gradually decreasing since 1995. At the credit card industry eventually contributes s a m e t i m e , t h e p e rc e n t a g e o f to an increase in tax revenue. This study entertainment expenses paid by credit collected data on VAT payments and total card has been on a steady increase, credit card spend in the restaurant, retail, exceeding 80% by the year 2003. Such and service sectors from 1990 to 2003 trends indicate that the expansion of the where credit card payment can be credit card industry, accelerated by the expected to constitute a high proportion Korean government policy of mandatory of total sales. credit card usage, has enhanced economic transparency over the last decade. These Since the scale of the indirect tax change findings are also statistically valid (t-test: is affected not only by credit card spend significance level of 95%). but also by the overall economic trends, our statistical analysis incorporated both Due to the nature of the underground credit card spend and GDP growth rate economy, it is very difficult to measure its when analyzing their impacts on VAT overall magnitude and to cover all payment. individual activities. However, the increase in credit card usage is leading to enhanced transaction transparency in corporations. Moreover, credit card payments made to sole proprietors can also be seen as a factor that contributed to reducing the size of the underground economy.
effects of the credit card on the Korean industry 14 2.0 As shown in [Figure 8], VAT payments in the restaurant sector are more affected 1.5 by changes in credit card spend than GDP. Statistical analysis shows that while changes in GDP were not significant, credit 1% increase in 1.0 card spend significantly increased VAT credit card spend payment in this sector. Specifically, we 0.5 increased VAT found that a 1% increase in credit card payments up to spend will increase VAT payments by 0.0 0.05% to 1.56% in the restaurant sector 1.56% in the 90 91 92 93 94 95 96 97 98 99 00 01 02 03 (Significance level: 95%). These findings 19 19 19 19 19 19 19 19 19 19 20 20 20 20 restaurant sector -0.5 GDP growth rate imply that the government policy of Growth rate of credit card spend Growth rate in VAT payments in the promoting the credit card industry made restaurant sector most revenues of this sector exposable to the tax collection system. Growth rates in VAT payments in the restaurant sector and credit card spend Growth rate of VAT payments in the 1.6 restaurant sector 1.1 0.6 0.1 -0.4 -0.4 0.1 0.6 1.1 1.6 Growth rate of credit card spend Growth rates in VAT payments in the restaurant sector and GDP 2.0 Growth rate of VAT payments in 1.5 the restaurant sector 1.0 0.5 0.0 -0.5 -0.10 -0.05 0.00 0.05 0.10 GDP growth rate [Figure 8] Relationships between growth rates of GDP, credit card spend and VAT payments in the restaurant sector (Source: KAIST analysis, Bank of Korea, Yearly report on national tax statistics)
effects of the credit card on the Korean industry 15 1.4 The VAT payments made by small retailers 1.2 show similar patterns to that of credit card 1.0 spend. Statistical analysis shows that credit card spend significantly increased 0.8 VAT payment in this sector. Specifically, 1% increase in 0.6 while changes in GDP were not significant, credit card spend 0.4 a 1% increase in credit card spend has increased VAT 0.2 increased VAT payment in the retail sector payments up to 0.0 by 0.07 to 0.50% (Significance level: 95%). Hence, these findings show that 0.50% in the 90 91 92 93 94 95 96 97 98 99 00 01 02 03 -0.2 the government policy of promoting the 19 19 19 19 19 19 19 19 19 19 20 20 20 20 retail sector -0.4 GDP growth rate credit card industry increased VAT Growth rate of credit card spend Growth rate of VAT payments in the retail sector payments in the small retail sector. Growth rates in VAT payments in the retail sector and credit card spend 0.5 Growth rate of VAT payments in the 0.4 retail sector 0.3 0.2 0.1 0 -0.4 0.1 0.6 1.1 1.6 Growth rate of credit card spend Growth rates in VAT payments in the retail sector and GDP 0.5 Growth rate of VAT payments in the 0.4 0.3 retail sector 0.2 0.1 0.0 -0.10 -0.05 0.00 0.05 0.10 GDP growth rate [Figure 9] Relationships between GDP growth rates, credit card spend and VAT payment in the retail sector (Source: KAIST analysis, Bank of Korea, Yearly report on national tax statistics)
effects of the credit card on the Korean industry 16 1.4 As shown in [Figure 10], VAT payments 1.2 in the service sector very much resemble 1.0 patterns of change of the GDP and credit card spend. Our statistical analyses show 0.8 that a 1% increase in GDP increases VAT 1% increase in 0.6 payments in the service sector by 0.45% credit card spend 0.4 to 4.06% (Significance level: 95%), and increased VAT 0.2 a 1% increase in credit card spend payments up to increases VAT payments by -0.04% to 0.0 0.40% (Significance level: 95%4). These 0.40% in the 90 91 92 93 94 95 96 97 98 99 00 01 02 03 -0.2 findings also reveal that the government 19 19 19 19 19 19 19 19 19 19 20 20 20 20 service sector -0.4 GDP growth rate policy of promoting the credit card Growth rate of credit card spend Growth rate of VAT payments in industry increased VAT payments in the the service sector service sector. Growth rates in VAT payments in the service sector and credit card spend In conclusion, our statistical analyses show 0.6 that a 1% increase in credit card spend 0.5 Growth rate of VAT payments in the increases VAT payments up to 1.56% in 0.4 the restaurant sector, 0.50% in the small 0.3 retail sector, and 0.40% in the service service sector 0.2 sector. These findings demonstrate that 0.1 the development and expansion of the 0.0 credit card industry increases VAT -0.1 payment and eventually increases the -0.2 Korean national tax revenue. -0.4 0.1 0.6 1.1 1.6 Growth rate of credit card spend Growth rates in VAT payments in the service sector and GDP 0.6 Growth rate of VAT payments in the 0.5 0.4 0.3 service sector 0.2 0.1 0.0 -0.1 -0.2 -0.10 -0.05 0.00 0.05 0.10 GDP growth rate [Figure 10] Relationships between growth rates of GDP, credit card spend and VAT payment in the service sector (Source: KAIST analysis, Bank of Korea, Yearly report on national tax statistics) 4Significant at 90% significance level (see appendix)
effects of the credit card on the Korean industry 17 2.3 Increase in Deposits with Financial [Figure 11] shows the correlations between Institutions through Credit Card Usage cash currency, credit card spend, and cash advance. We conducted regression Although the propagation of credit card analyses to examine how credit card spend use may not change the total amount of and cash advance affects cash currency. 1% increase in cash According to the results, a 1% increase in cash in the economy, it may reduce the advance increases need to keep cash for transactions and/or cash advance increased cash currency by cash currency but precautionary motives, decreasing the 0.02~0.11% (Significance level: 95%) but increase in credit card demand for money. In this case, the increase in credit card spend did not have proportion of cash in circulation will a significant influence on cash currency. spend didnt have a decrease while the proportion of deposit significant influence currency will increase. These processes 2.5 on cash currency are expected to eventually increase 2.0 deposits in financial institutions. As of 1.5 2004, Koreas M35 amounted to 1,286 1.0 trillion KRW, of which cash currency and 0.5 bank deposits amounted to approximately 0.0 500 trillion KRW while deposits held by non-bank depository institutions (demand 93 94 95 96 97 98 99 00 01 02 03 04 05 -0.5 19 19 19 19 19 19 19 20 20 20 20 20 20 deposits, savings account, deposits of -1.0 Growth rate of credit card spend mutual savings banks, deposits, deposits Growth rate of cash currency Growth rate of cash advance in foreign currency, money in trust, deposits of Korean securities finance Growth rates in cash advance amount corporation, etc.) exceeded 600 trillion 0.5 and cash currency KRW. In particular, deposits held by non- 0.4 bank depository institutions occupy the Growth rate of cash currency largest proportion of M3 currency, have 0.3 a comparatively lower liquidity, and 0.2 provide more opportunities for investment. This section therefore analyzed the effects 0.1 of credit card spend on cash currency, 0 demand deposits, and deposits of non- bank depository institutions6. -0.1 -1 -0.5 0 0.5 1 1.5 2 2.5 Growth rate of cash advance amount Growth rates of credit card spend and 0.6 cash currency Growth rate of cash currency 0.4 0.2 0 -0.5 0 0.5 1 1.5 -0.2 Growth rate of credit card spend [Figure 11] Relationships between growth rates in credit card spend, cash advance amount and cash currency 5The currency index in Korea has the three different categorizations, specifically M1, M2, and M3. M1 (Source: KAIST analysis, Bank of Korea, Korea Credit Finance Association) includes cash and demand deposits. M2 includes M1 and savings accounts. M3 is the most comprehensive of the three. M3 includes M2, financial bank debentures, deposits of non-bank depository institutions, and certificates of deposits. 6During the research period, the interest rate (prime corporate bond rate with 3 year maturity) continuously decreased from 12.42% in the first quarter of 1993 to 3.87% in the fourth quarter of 2004. While the rate increased significantly during the end of 1997 till the beginning of 1998, it moved to the opposite direction compared to other macro economic variables. Thus, during our research period, it is not reasonable to assume that high interest rates will increase deposits. Therefore, in our research, we did not consider interest rate variables when we analyzed changes in cash, demand deposit, and derivative money.
effects of the credit card on the Korean industry 18 The relationship between demand 2.5 deposits held by banks and variables 2.0 related to credit card spend are shown in 1.5 [Figure 12]. Cash advances seem to 1.0 influence demand deposits more than Credit card spend credit card spend. In order to further 0.5 and cash advances examine these multidimensional 0.0 have no significant relationships, we conducted regression 93 94 95 96 97 98 99 00 01 02 03 04 05 -0.5 19 19 19 19 19 19 19 20 20 20 20 20 20 impact on demand analyses. The findings show that demand -1.0 Growth rate of credit card spend deposits arent significantly influenced by deposits of banks Growth rate of demand deposits both credit card spend and cash advances Growth rate of cash advance in general. Growth rate in cash advance amount and demand deposits 0.8 0.6 Growth rate of demand deposits 0.4 0.2 0 -0.2 -0.4 -0.6 -0.5 0 0.5 1 1.5 Growth rate of cash advance Growth rate in credit card spend and demand deposits 0.8 0.6 Growth rate of demand deposits 0.4 0.2 0 -0.2 -0.4 -0.6 -0.5 0 0.5 1 1.5 Growth rate of credit card spend [Figure 12] Relationships between growth rates in credit card spend, cash advance and demand deposits (Source: KAIST analysis, Bank of Korea, Korea Credit Finance Association)
effects of the credit card on the Korean industry 19 Finally, we examined how changes in cash 2.5 advances and credit card spend affected 2.0 deposits with non-bank depository 1.5 institutions [Figure 13]. Results from the 1.0 regression analyses show that a 1% 1% increase in credit increase in credit card spend increased 0.5 card spend deposits in non-bank depository 0.0 increased deposits institutions by 0.00~0.13% while a 1% 93 94 95 96 97 98 99 00 01 02 03 04 05 -0.5 19 19 19 19 19 19 19 20 20 20 20 20 20 with non-bank increase in cash advances decreased -1.0 Growth rate of credit card spend deposits in non-bank depository depository by Growth rate of demand deposits in institutions by 0.06~0.15% (Significance non-monetary banks 0.13%, but 1% level: 95%). Growth rate of cash advance increase in cash Growth rates in cash advance and deposits in non-monetary banks advance decreased All the above results provide the following 0.3 deposits with non- key findings: 0.25 0.2 Growth rate of deposits in bank depository by Increases in credit card spend do not non-monetary banks 0.15 0.15% significantly influence cash currency, 0.1 nor demand deposits, but influence the 0.05 increase in deposits in non-bank 0 depository institutions -0.05 Increases in cash advances cause an -0.1 increase in cash currency, but have a -0.15 -1 -0.5 0 0.5 1 1.5 2 2.5 tendency to decrease deposits in non- Growth rate of cash advance bank depository institutions Growth rates in credit card spend and The phenomenon of increased deposits deposits in non-monetary banks 0.3 due to increases in credit card spend 0.25 further generates derivative money, 0.2 subsequently provides the necessary Growth rate of deposits in non-monetary banks 0.15 liquidity for the national economy, and 0.1 eventually promotes economic 0.05 activities 0 -0.05 -0.1 -0.15 -0.5 0 0.5 1 1.5 Growth rate of credit card spend [Figure 13] Relationships between growth rates in credit card spend, cash advance and deposits in non-monetary banks (Source: KAIST analysis, Bank of Korea, Korea Credit Finance Association)
effects of the credit card on the Korean industry 20 2.4 Development of Directly and 3-2. Wiring of 3-1. Wiring of Approval Approval Indirectly Related Industries through the Credit Card Industry Card- Merchant Van Credit Card holder or PG Operators Company The development of The rapid growth of the Korean credit card 1. Purchase 2-1. Authorization 2-2. Authorization Request Request the credit card industry since 1995 affected not only the 4-1. Transfer of credit card industry but also had Van Service Fee industry may help widespread impacts on directly and Bank Account Bank Account Bank Account Bank Account growth of directly indirectly related industries. In addition to and indirectly the firms that engage in the credit card 4-2. Transfer of Purchase Amount (net of fee) related industries transaction process, various other 5. Payment or Transfer of Purchase Amount industries such as retail, electronic Transaction Flow commerce, and travel and leisure are Money Flow (Flow of Economic Value) closely related to the credit card industry. This section examines the effects of the [Figure 14] Credit card transaction process purchases (Source: Korea Credit Finance Association) credit card industry on directly and indirectly related industries. [Figure 15] illustrates a typical cash advance process. When a customer 2.4.1 Transactions Processes Using Credit requests cash service through Automated Cards Teller Machines (ATM), an approval request is typically forwarded to credit In order to better comprehend industries card companies through the Interbank directly related to the credit card industry, Shared Network. Cash advances depend we provide detailed illustration of the on the result of the authorization request. credit card transaction processes for both credit purchases and cash advances. 3-2. Transfer 3-1. Transfer [Figure 14] illustrates the typical of Approval of Approval transaction processes for payments made Card- ATM Inter-bank Credit Shared Card at stores using credit cards. In this credit holder Terminal Network Company purchasing process, as soon as customers 1. Cash 2-1. Authorization 2-2. Authorization make a purchase at a store, POS terminals Withdrawal Request Request send transaction information to Value 4-1. Network Service Fee Added Network (VAN) service providers. Bank Shared Network Bank Account Account Account In the case of small e-commerce businesses, the transaction information 5. Payment (Payment + Interest + Fee) is sent to the VAN usually through the Payment Gateway (PG) service providers. VAN service providers transmit requests Transaction Flow Money Flow (Flow of Economic Value) for transaction approval from merchants to credit card companies and the [Figure 15] Credit card transaction process cash advance authorization information back to the (Source: Korea Credit Finance Association) merchants to complete the transaction.
effects of the credit card on the Korean industry 21 2.4.2 Directly Related Industries As seen in [Figure 16], the growth of the VAN service sector has been directly Activities creating economic value in the affected by the total amount of credit card credit card transaction process itself are spend (excluding cash service). According the following: to the Korean Association of Information With the growth of Provision of VAN service and Communication (KAIT), total revenue the credit card for the whole industry was a mere 26 Provision of PG service industry, the VAN billion KRW in 1998 but increased to 214 Manufacturing and installment of POS billion KRW in 2003. service sector grew terminals to a 214 billion KRW Provision of money remittance service Competition in VAN services has market intensified recently, but profitability between banks stabilized due to the Mutual agreement Provision of Public Key Infrastructure to establish a market environment for fair (PKI) for e- commerce competition in November 2003. Furthermore, with the introduction of This chapter aims to analyze the effects alternative payment methods such as of the credit card industry on each of the mobile payments or smart cards, the directly related industries. single service market for credit card inquiry was restructured as a compounded service market, creating greater room for further VAN Service Providers growth. The VAN service providers connect credit card companies and POS terminals at 300 250 merchants to relay requests for credit VAN service revenue (billion KRW) 250 Credit card spend (trillion KRW) 200 purchase authorizations and the 200 subsequent authorization results. 150 Commissions resulting from such 150 authorization relay services are one of the 100 100 main revenue sources for VANs. VAN 50 services were privatized in 1987 by Korea 50 Information & Communications Co., Ltd 0 0 (KICC) after the full-scale deployment of 98 99 00 01 02 03 the credit card business. Currently KICC, VAN service revenue Credit card spend KS NET Inc., Korea Mobile Payment Services Co., Ltd (KMPS), and KISVAN [Figure 16] Credit card spend and VAN service revenue (Source: Korea Credit Finance Association, Korea Inc. are the major players, and they Association of Information and Telecommunication) account for over 80% of market share.
effects of the credit card on the Korean industry 22 Manufacturing and Sales of POS Terminals 1996 2003 The credit card POS terminal, a necessary USA component of credit card transactions, is Number of credit card usage per person manufactured and sold by companies such USA With the growth of as HANCHANG Systems Corp., KICC, and the credit card National Information & Credit Evaluation, Korea 50 UK Inc. (NICE). As shown in [Figure 17], industry, the sales of revenues of the industry leaders increased these sectors at an average rate of 70% until 2002, JPN UK increased to 80 spurred by the rapid increase in credit JPN GER billion KRW at its card usage. Although revenue has been Korea GER decreasing since reaching its peak of 78.2 peak 40,000 64,092 billion KRW in 2002, future growth is POS Terminal (per million people) anticipated due to the increase in exports [Figure 18] POS terminal installation and credit card usage to Japan, China, and the Middle East. Such (Source: Korea Financial Telecommunications and Clearings Institute) rapid growth of the POS terminal sector led by the growth of the credit card According to the statistical analysis of the industry is expected to contribute to POS terminal manufacturing sector obtaining foreign currency and improving conducted by the Korea Financial the trade balance. Telecommunications & Clearings Institute (KFTC), the number of POS terminals 300 90 deployed per million people increased 80 from 14,945 in 1996 to 64,092 in 2003, Sales of POS terminals (billion KRW) Credit card spend (trillion KRW) 250 70 exceeding that of all major developed 200 60 countries. In addition, the frequency of 150 50 credit card usage exceeded 50 40 transactions per person, placing Korea in 100 30 second place right behind the U.S. 20 50 10 0 0 1998 1999 2000 2001 2002 2003 2004 Sales of POS terminals Credit card spend [Figure 17] Credit card spend and sales of POS terminals (Source: Korea Credit Finance Association, Annual report & auditors report of POS terminal manufacturing companies)7 7We collected revenue data of POS terminals from audit reports and/or business reports for seven companies including HANCHANG Systems Corp, KICC, and NICE.
effects of the credit card on the Korean industry 23 Payment Gateway (PG) Service Providers Other Directly Related Industries 300 80 PKI is an electronic signature used for 70 personal identification purposes and PG service revenue(billion KRW) 250 Credit card spend(trillion KRW) 60 functions as the equivalent to a legal seal 200 With the growth 50 in offline transactions. To deal with the of credit card and 150 40 safety issues in typical online financial transactions, more and more financial e-commerce 100 30 institutions are mandating the use of PKIs. 20 industries, the 50 Currently, PKI institutions authorized by 10 sales of this sector 0 0 the government include KFTC, Korea increased to 75 1999 2000 2001 2002 2003 2004 Information Certificate Authority Inc., Koscom Corp., Korea Electronic billion KRW PG service revenue Credit card spend Certification Authority Inc., National [Figure 19] Credit card spend and PG service revenue Computerization Agency, and Korea Trade (Source: Hana Economic Research Institute, Korea Information Service Corp, Annual Network. Since the policy to charge the and auditors report of PG service companies)8 issuing of PKI came into effect in September 2004, 803,000 PKIs have PG service is a proxy for credit card been issued as of July 2005. Considering transactions of small-size e-commerce the cost of 4,400 KRW per PKI issuance, companies. Similar to the transactions for this amounts to 3.5 million KRW in With increased typical merchants, a PG service provider revenue. As of April 2005, the total credit card use, usually sends requests for credit card number of PKIs that have been issued PKI demand will also transactions generated by small-size e- reached 10,150,000. Due to the law commerce companies to VAN companies mandating the use of PKIs for all online increase in order to and forwards the authorization results transactions exceeding 300,000 KRW, secure authorized back to the requestor. the PKI service sector is expected to transactions continuously grow. As of 2004, INICIS Co. Ltd., Korea Cyber Payment Inc. (KCP), and KSNet Inc. were 1000 the major PG service providers, accounting 900 Transaction volume (ten thousands) 800 for more than 70% of market share. As 700 shown in [Figure 19], the total revenues 600 for the major PG companies reached 1.3 500 billion KRW in 1999 but increased to 75 400 billion KRW in 2004 due to the expanding 300 e-commerce market. 200 100 0 2001 2002 2003 2004 [Figure 20] Public Key Infrastructure transaction volume (Source: Ministry of Information and Communication) 8Because revenues of Korea Cyber Payment Inc. (KCP), KSNet Inc, and Allat Inc. were very small, we used total revenue data from their income statements. In the case of Cyberpass Inc. and KS NET Inc. we used their PG service revenue data.
effects of the credit card on the Korean industry 24 While banks operate credit card 2.4.3 Indirectly Related Industries businesses themselves, they also earn B2C E-Commerce added revenues from transaction 7 76% commissions because all credit card 74% transactions are made through bank 6 Percentage of credit card spend Banks may collect accounts. In addition, since cash advances 72% Revenue (trillion KRW) 5 service fees by utilize the Inter-bank Shared Network, 70% 4 68% participating in banks generate revenues by charging 66% 3 credit card payment credit card companies an average 64% commission of 1,500 KRW per cash 2 processes 62% advance service. 1 60% 0 58% As shown in [Figure 21], the revenue of 2000 2001 2002 2003 2004 Percentage of credit card usage Korean banks related to credit cards Revenue increased to 4.99 trillion KRW in 2004, [Figure 22] E-commerce sales and credit card spend recording a 300% increase since 1999. (Source: Direct Marketing Strategy Research Institute, National Statistical Office) This growth rate is very meaningful since total revenues of Korean banks declined The propagation of credit cards and the by 4.3% during the same period. development of IT infrastructure provided Furthermore, the proportion of credit card a foundation for the rapid growth of e- The credit card has related revenue to total Korean bank commerce businesses in the late 90s. As become a critical revenue increased from 3.1% in 1999 to shown in [Figure 22], while revenue payment system as 9.9% in 2004, which is more than a 300% generated by B2C e-commerce amounted increase within five years. These facts the number of credit to a mere 460 billion KRW in 2000, it has indicate that the credit card business has card users have since experienced an average annual become an essential source of revenue growth rate exceeding 108% and reached increased for banks. 6.36 trillion KRW in 2005. Additionally, 56 6 the proportion of electronic purchase payments using credit cards reached 74% Gross revenue of commercial banks 54 5 in 2003. Such facts indicate that the Credit card related revenue 52 4 propagation of credit card use has (trillion KRW) significantly affected the growth of the e- (trillion krw) 50 3 commerce industry. 48 2 46 1 44 0 1999 2000 2001 2002 2003 2004 Credit card related revenue of commercial banks Gross revenue of commercial banks [Figure 21] Gross revenue and credit card related revenue of commercial banks (Source: Financial Supervisory Services)
effects of the credit card on the Korean industry 25 Growth of Other Indirectly Related 2.4.4 Establishment and Propagation of Industries a Credit Bureau (CB) through Accumulation of Credit Information The integrated services delivered by credit cards can help some industries enlarge Active discussion regarding a CB took Credit cards will their potential markets and services. place in Korea over several years. Finally, increase market These industries include travel, leisure, Korea Information Service, Inc. (KISinfo) transportation, accommodation, and in collaboration with TransUnion of sizes of other entertainment sectors. The amount of America started a CB business in 2002. indirectly related credit card spend in the following seven National Information & Credit Evaluation, industries sectors amounted to a total of 80 trillion Inc. (NICE) entered the business in the KRW in 2004: 2.4 trillion KRW in same year. In February 2005, a consortium accommodation, 5.3 trillion KRW in travel, consisting of six banks, three credit card 4.9 trillion KRW in leisure, 990 billion companies, two insurance companies, KRW in culture, 38.8 trillion KRW in retail, Seoul Guarantee Insurance, VISA, and 2.6 trillion KRW in academic institutions, Korea Ratings launched the Korea Credit and 24.9 trillion KRW in restaurants. The Bureau, Inc. (KBC). KCB obtained official inherent easy payment functions of permission from the Financial Supervisory credit cards combined with internet Commission and has started providing CB infrastructure have significantly scores from February 1, 2006. contributed to the growth of these The credit bureau indirectly related industries over the last The core of credit risk management and will play a critical two decades since a large portion of their credit evaluation is the credit information role in managing revenues occur as advance-purchases obtained from individuals and companies. credit risk of using credit cards. As seen in [Figure 23], effective financial institutions communication and information sharing among various financial institutions, non- financial institutions, the National Tax Service, and other public institutions are prerequisites to a systematic credit risk management and credit evaluation. Credit Card Companies Specialized Tele- Credit Credit card Finance Communication Firms transaction data is Institutions Credit the most important Bureau Savings data for establishing Banks (Credit Government Institutions Report, an efficient credit Scoring) (NTS) bureau Insurance & Other Institutions Others Banks [Figure 23] Circulation of credit information using a Credit Bureau9 9Specialized Credit Finance Institutions include credit card companies, facility rental businesses, short-term lease companies and new technology finance companies. Thrift institutions include trust accounts of banks, mutual savings banks, the credit union, and the Korean Federation of Community Credit Cooperatives. Insurance and other financial institutions include insurance companies, securities companies, and credit guarantee institutions.
effects of the credit card on the Korean industry 26 In essence, while over-issuing credit cards 24 110 Economically active population (million) produced a large number of credit 23 95 defaulters in Korea, the more fundamental 22 Credti card issued (million) 80 problem was that there was no effective 21 65 system required for obtaining credit 20 information. Given the fact that the records 19 50 18 of credit card spend are important sources 35 17 of credit information, the credit card 20 16 industry will play a crucial role in 15 5 establishing a CB - a necessary component 19 0 19 1 19 2 19 3 19 4 19 5 19 6 19 7 19 8 20 9 20 0 20 1 20 2 20 3 04 9 9 9 9 9 9 9 9 9 9 0 0 0 0 of the financial infrastructure and Korean 19 Credit card issued economy. Economically active population As seen in [Figure 24], if the CB can 18 5.0 systematically manage the 2 billion annual 16 4.5 credit card transaction information Number of merchants (million) 14 4.0 Credit card per 1 EAP generated by 100 million credit cards in 12 3.5 3.0 circulation and 17 million merchants, it 10 2.5 will considerably contribute to the financial 8 2.0 advancement of the Korean economy. 6 1.5 4 1.0 2 0.5 0 0.0 19 0 19 1 19 2 19 3 19 4 19 5 19 6 19 7 19 8 20 9 20 0 20 1 20 2 20 3 04 9 9 9 9 9 9 9 9 9 9 0 0 0 0 19 Credit card per 1 EAP Number of merchants [Figure 24] Changes in total number of credit cards issued and number of merchants (Source: Korea Credit Finance Association)
conclusion - contributions to GDP 27 Conclusion Contributions to GDP
conclusion - contributions to GDP 28 This report has so far analyzed the qualitative and quantitative effects that the Korean credit card industry has on the national economy by employing various research methods including statistical analyses. The overall results of this research indicate that the industry influences the national economy in various positive ways: increasing transaction transparency, tax revenue, deposits, and contributing to the development of directly and indirectly related industries. The key findings of this research are summarized in [Table 3]. Enhanced transaction transparency Increases in both the proportion of credit card spend to total corporate revenues and credit card usages for corporate entertainment expenses enlarged the size of measurable economic activities, which subsequently enhanced the overall transaction transparency in the Korean economy Increases in tax revenue Credit card usage increased indirect tax revenue, specifically VAT in several business sectors Increases in deposits As credit purchases increase and cash advances decrease, deposits held by non-bank depository institutions increase, creating investment opportunities Development of directly and indirectly related industries Unlike cash transactions, credit card transaction processes for credit purchase and/or cash advance involve various activities creating economic value in both directly and indirectly related industries Directly related industries such as VANs and PGs were introduced by and developed together with the credit card industry, and have made a big leap towards growth The credit card industry played an important role in the development and expansion of indirectly related business sectors such as e-commerce, accommodation, travel, and leisure [Table 3] The effects of the Korean credit card industry on national economy
conclusion - contributions to GDP 29 Converting these positive impacts into After investigating the credit card economic value provides a foundation to transaction processes and the net analyze the effects of the Korean credit economic value created through these card industry on national economy. In processes, we found that the total value order to calculate the economic value of created by both purchases on credit and The Korean credit the credit card industry, it is necessary to cash advances totaled up to 21.19 trillion card industry investigate what roles and functions the KRW in 2002. generated 21.5 industry plays in various economic sectors. trillion KRW worth These various analyses allow us to explore Total revenue of directly related industries the absolute amount of the economic that include VANs, the POS terminal of economic value value created by the Korean credit card manufacturing sector, and PGs amounted for the national industry, as well as the different paths to a maximum of 358 billion KRW in 2002. economy in 2002 leading towards sound economic This total revenue can be recognized as a development. portion of the economic value created by the credit card industry. Direct Contribution Indirect Contribution (Economic Value (Sound Economic The Korean credit card industry also Creation) Growth) significantly contributes to the growth of Enhancements in closely related industries such as e- Credit Card commerce, accommodation, travel, Transaction Industry Transparency leisure, and entertainment industries. The total amount of the credit card spend in Directly Related Increases in some sectors amounted to 80 trillion Industry Tax Revenue KRW in 2004. However, the accurate magnitude of this contribution is difficult Indirectly Increases in to quantify and therefore has not been Related Industry Deposits included in the results of this research. [Table 4] The Korean credit card industrys direct and indirect On the other hand, although we found effects on the national economy statistically significant contributions of the Korean credit card industry in terms Thus, this research analyzed the absolute of increases in deposits, tax revenue and economic value of the Korean credit card transaction transparency, this research industry by taking the sum of the did not include their estimated economic economic values generated in three values due to the difficulties to quantify different areas: the credit card industry such values. Instead, we highlighted the itself, directly related industries, and positive impacts on the national economy. indirectly related industries.
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