by Nicole Coates, Technical Specialist, PSR
We’re all prone, occasionally, to looking at the world around us and being unable to conceive of how it could have been very different if things had taken a different path.
This is true in payments as much as anywhere else: we know of course that there are two card schemes with major market share in the UK, and we know that one has more debit card issuing contracts and the other has more credit card issuing contracts. In 2018 I visited a country where things are very different.
A while back, I began to notice how South Korea’s cultural influence has been sneaking up on us over the last decade or so. A teenage neighbour was a big K-pop fan, beauty magazines were full of Korean 12-step skincare routines, and suddenly it seemed that London was bursting with places where you could get a bowl of bibimbap and all the kimchi you could eat. My husband and I thought that it sounded like a place that we’d like to know more about, and we were lucky enough to be able to spend three weeks travelling round the country.
Let me show you something that I noticed in the first few days of our holiday:
I should admit that I am relying here on a combination of Google Translate and common sense but I am pretty sure that what is happening here is that Paris Baguette – a bakery chain – are offering different discounts or reward points depending on the brand of the payment card that the customer uses. One of the brands here might look familiar to those of us in the UK, but others don’t.
As I tried to find out what’s going on, I learnt that it’s a confusing world out there in Korean payments. There seem to be nine domestic card networks in South Korea, run for the most part as three-party schemes. Merchants agree the price they pay to receive card payments directly with the card networks. But these contracts are administered by thirteen Value Added Networks (VANs), who provide merchants (shops etc) with connections to all card networks.
Nine card schemes! And that only covers credit cards: there are also a number of debit card networks and several prepaid e-money schemes evolved from transport cards.
The basic problem being solved by all these payment methods is the same in both the UK and South Korea: people want to have payment instruments (that may also allow them access to credit) and merchants want to gain access to as many payment accounts as possible. It seems that Korean consumers hold an average of four credit cards – here in the UK, there’s less than one credit card per consumer. How have things evolved so differently, then?
The Korean Government was trying to encourage spending in the late nineties and introduced legislation that gave tax rebates on credit card spending, and introduced a lottery based on credit card receipts: this encouraged consumers to switch to credit cards, firms to enter the credit card market, merchants to sign up with card providers. As differently as things might have turned out, the problems that the Korean authorities needed to tackle next might seem familiar and concerns emerged that merchant costs were too high, and that the levels of consumer credit were unsustainable. There is now an even bigger tax rebate on all spending on debit cards to attempt to rebalance how consumers access payment services. There is also legislation capping the amount that smaller merchants may be charged to access card services.
So it seems that even where multiple payment methods compete with each other, regulatory intervention was still thought to be a good idea to ensure that all costs weren’t passed on to merchants (and eventually to consumers in the price of goods). Where there’s nine providers to choose from, all of which have different sets of cardholders, the merchant ought to be in a stronger bargaining position when agreeing contracts for card acceptance, surely? Well perhaps not, if merchants are strongly encouraged to accept all by the government and by the packages of services available from VANs. And to hammer the point home that it really is a different environment, with different cultural considerations, it seems that credit card workers threatened strikes in response to the government’s proposals.
I’ve spent some time since our holiday thinking about what this must be like for Korean consumers. I can see that the regulatory interventions might have encouraged me to have a credit card, and to switch as much of my spending to it as I could, but would it mean I’d have four? I suspect the reason I might want four is to take advantage of as many offers at as many different shops as I could. And in turn, card issuers and the merchants they recruit would want to be able to give me offers to encourage me to spend with them or to use their card. Which might make you wonder who would pay for the offers and whether it might not end up being all consumers in the end.
And if nine card networks aren’t enough for you, last year the Korean financial services regulator announced plans for a new interbank network to connect banks, fintechs, merchants and consumers. The South Korean consumer will be spoilt for choice. But perhaps the Korean experience shows that choice and availability need to be provided to everyone, both consumers and merchants, before we can hope for benefits for all.
The views, thoughts and opinions expressed in this blog are the autor's own and do not necessarily represent those of the Payment Systems Regulator.
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