My partner, Bryan Derman, and I just returned from a week in South Korea and a deep immersion in the local card market.
As consultants serving clients across the globe—including payments -related companies in Europe, Africa, Latin America, and Asia—we are repeatedly reminded of the remarkable differences between adjacent countries in any given region. A very common conversation we have with clients goes like this:
Client: “We need an Asian payments strategy”
Glenbrook: “Well, to be a bit more precise, you need an Australia strategy, a Japan strategy, a China strategy, …”
Amongst all of those countries, I have to admit to a special fascination with the South Korean market. With a population of 50 million people and some 20 million households, the Korean market is highly penetrated by electronic payments.
A few facts:
- There are over 100 million cards
- An average of 4 cards per household
- Total card volume is almost US $600 billion in purchases
- Some 76% of retail payments are made with cards, a far higher proportion than in the U.S
Not in Kansas, Tokyo, or Sydney
South Korea’s payments business has eye-opening structural differences from the other markets we’ve worked in. Take a look:
Structural Differences. The familiar Western payments concept of “issuers, acquirers, and interchange” doesn’t exist in South Korea. Each merchant fills out a separate application and is individually approved by each issuer to accept its cards.
There are some 13 card processors that enroll merchants for card acceptance. Merchants are provided with direct connectivity to each of the major issuers, all without the benefit of a branded domestic payment network, along the lines of Glenbrook’s “three box” model.
Sales agents work for the 13 or so card processors to sign up the merchants, install POS equipment, and provide fairly standard services.
Regulated Pricing. Pricing, however, is managed by regulation. Korean law dictates that the discount rate for small merchants (less than US$200K in sales per year) cannot exceed 1.5%. Merchants with annual volume greater than US$100 million cannot exceed 2.0% per year. For those of us used to working in other countries, it’s interesting to see that in Korea, large merchants pay more than small ones!
As noted above, each merchant signs an agreement with each issuer to enable acceptance of each issuer’s cards. The full amount of the regulated merchant discount (either 1.5% or 2%) goes back to the issuer. There is no interchange!
Bilateral Processor Pricing. Each card processor negotiates fees with each of the issuers to compensate them and their sales force for their efforts to sign and service merchants.
Network Branding, Local Switching. As in a number of countries, cards generally have Visa and MasterCard badging, but those networks do not do domestic switching. Again, each of the 13 or so card processors has a direct, bilateral connection to each of the major issuers
Domestic Card Brands. In addition to Visa and MasterCard, there are several other card brands operating in Korea – BC Card, Lotte Card, and T-Money
- BC Card is a domestic bankcard consortium with over a dozen participating issuers that also leverages the domestic merchant processing network. As with the other banks, BC Card issuers retain the merchant discount and negotiate for processing services with the 13 companies serving domestic merchants
- Lotte is a conglomerate with a rather large retail presence (department stores, C-stores, restaurants, etc.) that has issued its own card, widely accepted at Korean merchants and incorporating a unique loyalty program. We are reminded of Hipercard, a Brazilian domestic card brand that expanded from a retail store card to a major domestic card brand
- T-Money is a domestic prepaid card brand that has expanded beyond its core transit application to acceptance at convenience stores, taxis, and other merchants equipped with contactless readers
Chip-and-Signature EMV. The country is well along in its migration to EMV and has made the decision to go with chip-and-signature vs. chip-and-PIN. Signature debit and credit are the norms, and it is common to see electronic signature capture pads at everyday merchants.
Early Days for eCommerce and Mobile. eCommerce and mobile commerce are somewhat less established, but emerging as growth areas.
We’re really excited about serving our new clients and the opportunity to help global merchants do business with South Korean consumers, as well as helping South Korean payments companies adopt global best practices.
If you’re involved with the South Korean payments market, we’d love to hear from you. It’s always fun to share perspectives!
This Payments Views piece was written by Glenbrook’s Allen Weinberg.