Apple Pay faces challenges in Korea related to pricing and NFC

Card companies aren’t in a rush to team up with Apple Pay in Korea, citing the high commissions and an unclear profit model.

Apple Pay promotion on Hyundai Card building in central Seoul on March 21, the day the service was launched in Korea [YONHAP]

Card companies aren’t in a rush to team up with Apple Pay in Korea, citing the high commissions and an unclear profit model.

Apple Pay, the second-largest digital payment operator worldwide after Visa, introduced the service in Korea with Hyundai Card on March 21. Hyundai Card was to be the exclusive partner, according to local media reports, but the Financial Services Commission (FSC) is requiring competition.

Card companies are interested in teaming up with Apple, but they aren’t enthusiastic enough to jump right in because of the cost. Neither Apple nor Hyundai Card have disclosed the commission Apple Pay charges in Korea, but the rate is 0.15 percent per transaction, according to local media reports.

That is higher than in many other countries, including the 0.05 percent in Israel, and is the same rate Apple Pay charged banks in the United States upon the service debut in 2014.

“Credit processing isn’t a lucrative business,” said a source from the card industry. “Receiving commissions from merchants is the main source of income for this business, but the business is already in the red.”

Samsung Pay, which has 24 percent of the simple payment market, does not charge commissions.

“The number of users may grow rapidly at first because it’s in the initial stages, but we’d first like to see how prevalently the service is used,” said another source from a company. “Even if the number of people that issue our card increases, the card holders have to utilize other services, like revolving credit, for us to be able to make profit.”

Growth of simple payment services slowed to 29.4 percent in the first quarter of 2022 on year, from 39.4 percent in the same period a year earlier.

Profitability especially becomes an issue as the commission card companies can charge merchants for using the payment service is restricted by the financial regulators.

An employee demonstrates Apple Pay at a convenience store in Gangnam, southern Seoul, on March 21. [NEWS1]

The FSC allows card operators to charge between 0.25 and 1.25 percent for debit card transactions, and a range of 0.5 to 1.5 percent for credit card transactions.

The rate, which changes every three years, differs by business depending on annual revenue.

Despite the costs, Hyundai Card expects the number of new card holders and loyalty customers to increase through Apple Pay.

Around a million Apple Pay tokens were issued on the first day the payment was launched on March 21, according to Hyundai Card CEO Ted Chung. Tokens are issued based on the number of cards and the devices connected.

Hyundai Card was the fourth largest card company as of the second quarter last year, with a 15.9 percent share, followed by Shinhan Card (22.1 percent), KB Kookmin Card (19.1 percent) and Samsung Card (17.2 percent), according to the Credit Finance Association.

Apple Pay also requires the installation of a Near Field Communication (NFC) device by the merchant. The device, which costs around 150,000 won ($115) per unit, isn’t used at many establishments in Korea.

“The scenario Apple would want is for Apple Pay to grow big enough for business owners to voluntarily install the devices,” the source added.

Teaming up with Apple Pay could be more attractive for fintech companies.

“Fintech firms that run banks would be able to analyze stores that use Apple Pay and their spending, and provide corporate loans based on that data,” said Lee Jeong-hwan, an associate professor at the College of Economics and Finance at Hanyang University.

Banks that are tied with card operators can work with Apple Pay. Card companies are not authorized to issue corporate loans.

Toss, which runs a bank and payment service, said there isn’t a negotiation underway, but “we aren’t shutting out the possibility.”

Toss is providing information on stores that support Apple Pay.

Apple Pay is expected to process 15 percent of domestic simple payments by next year in terms of daily average transactions, according to market tracker Counterpoint.

BY JIN MIN-JI [jin.minji@joongang.co.kr]