[KH Explains] Card firms increasingly hesitant over Apple Pay

Uncertain impact of Apple Pay on attracting new customers complicates card firms' decision

Kim Deok-hwan, CEO of Hyundai Card (right) and Apple Korea President Mark Lee (left) and a translator attend a parliamentary audit on Oct. 11. (Yonhap)

To grab a bit of Apple or leave it on the shelf? That's the question that has been lingering among card companies here since Apple Pay was launched in Korea in March with initial local partner Hyundai Card.

Hesitation over adopting Apple Pay entered a new phase after a parliamentary audit held on Oct. 11 raised concerns about Hyundai Card, which introduced the service at the cost of paying high commission fees to Apple.

During the parliamentary audit, Rep. Yun Chang-hyun of the ruling People Power Party said that Apple Pay's high commission fee could harm customer interests.

The exact terms of the agreement between Apple Pay and Hyundai Card have not been disclosed, but the card issuer is widely believed to pay Apple a 0.15 percent fee for each Apple Pay transaction.

Rep. Yang Jung-suk said that this fee is considerably higher when compared to the 0.03 percent commission collected by Apple Pay in China and 0.05 percent commission in Israel.

Industry sources say that despite the relatively high commission fee, Hyundai Card partnered with Apple to gain a first-mover advantage as it could contribute greatly to attracting new -- and potentially young -- iPhone users.

Hyundai Card’s desperation was hinted at when it gave up its exclusive partnership with Apple Pay during the financial authority’s review process to finally earn the permit to introduce the service in Korea.

Rep. Yun claims that Hyundai Card accepted the money-losing profit structure for the sake of attracting new customers.

According to an analysis conducted by Yun's office, the average transaction revenue for a regular credit card is 1.87 percent, while it is only 1.77 percent for Apple Pay. Additionally, Hyundai Card is also paying fees to Apple and Visa for each transaction.

Rep. Yun stressed that during the first half, Hyundai Card discontinued 12 of its card products, citing "profitability deterioration" as the reason for eight of them.

“It is possible that the reduction of consumer benefits due to increased losses has already begun,” Yun said.

This is not only a problem for Hyundai Card and its members, as many local credit card issuers are also considering Apple Pay.

Rep. Yun’s office estimated that if Apple Pay takes up 10 percent of the credit card market, domestic card companies will have to pay a commission fee of 34.17 billion won ($25.16 million) per year to Apple and Visa.

“This cost burden could be passed on to customers,” Yun stressed.

Three leading credit card issuers in Korea — Shinhan Card, KB Kookmin Card and BC Card — submitted letters of intent to collaborate with Apple Pay in July, according to sources.

“There is no option to negotiate on the commission fee. It doesn't make sense for Apple to apply different fees to different credit card companies in Korea,” an industry official said on condition of anonymity.

Meanwhile, the audit has become a burden for many credit card issuers in Korea who wish to become additional Apple Pay local partners.

“The summoning of the Hyundai Card CEO and Apple Korea CEO to the parliamentary audit is already a burden on credit card issuers when deciding whether to adopt Apple Pay,” an industry official said on condition of anonymity.

The audit's revelation of a weakened profit structure that card firms have to face when adopting Apple Pay is also a matter of great concern within the industry.

"It's honestly a challenging time for credit card firms due to the high rates. In this situation, having to pay additional commission fees is a burden," said an industry official.

What further complicates the decision for credit card issuers is the uncertain impact of Apple Pay in terms of attracting new members.

When Apple Pay initially launched in March, Hyundai Card witnessed a remarkable surge in new members, with peak growth of 195,000, surpassing all local competitors.

However, Hyundai Card's new members have steadily declined over the subsequent five months.

The numbers dropped to 159,000 in April, 139,000 in May, 120,000 in June, 115,000 in July and 110,000 in August.

This August figure ranked fifth, trailing behind competitors Samsung, KB Kookmin, Lotte and Shinhan.

By Song Seung-hyun(ssh@heraldcorp.com)