Academic journal article International Journal of Business and Society

What Factors Influence Profitability in the Korean Credit Card Business?

Academic journal article International Journal of Business and Society

What Factors Influence Profitability in the Korean Credit Card Business?

Article excerpt

I. INTRODUCTION

Until recently, the policy for disputes over reducing the fee rate for self-employed small business credit card affiliates had been progressed in Korea. Small business owners argued that 1.5-2.0% of the current credit card affiliate fee, which is to be paid to credit card firms in order to receive the proceeds of sales in advance, is too high for them to manage their businesses. In addition, small-sized credit card affiliate owners have held that credit card firms could make an operation profit regardless of the change in the card affiliate fee because they benefit from the huge interest margin from the card loan and cash advance services.

On the contrary, credit card firms have argued that the reduction in the affiliate fee places a serious burden on the credit card industry because the diversification of the Korean credit card business is not well performed.

However, the Korean financial authority recently announced a 0.7% cut in the fee rate for small business owners. To protect small credit card affiliates with sales amounts less than USD 270,000 per year, some members of the opposition party in the Korean Congress strongly argued that the government should reduce the fee to a low percentage but only for small business owners despite the opposition of credit card firms since early 2015.

In light of this controversial issue of the prohtability of Korean credit card hrms, this study aims to determine the pivotal factors in the prohtability of credit card hrms. Amid the changing business environment in the Korean credit card industry, this study could contribute to an innovative policy solution by analyzing the factors that influence prohtability.

The paper is organized in the following manner. Chapter 2 discusses the theoretical background of the prohtability of hnancial institutions such as credit card hrms by reviewing previous studies. Chapter 3 outlines the data and empirical test model, Chapter 4 analyzes the results, and the hnal chapter concludes the study.

2. THEORETICAL BACKGROUND

The determinants of prohtability of hnancial institutions are a popular topic in hnancial research because this factor is essential for the sustainable management of modem hnancial institutions. Seo (2014) regarded the prohtability of Korean credit card hrms as an essential factor in hnancial stability, in addition to capital adequacy and loan soundness. However, there are few previous studies on the prohtability of hnancial institutions other than banks. By referring to previous studies, this paper examines the hypothetically influential factors in the prohtability of hnancial institutions.

Recent studies (Akin, Aysan, Kara, and Yildiran, 2011; Islam and Ahmed, 2012; Tan and Floras, 2014) suggested that market competitiveness, which an external factor rehecting the characteristics of an industry, is a critically influential factor in the prohtability of hnancial institutions. In their examination of the Turkish credit card industry, Akin, Aysan, Kara, and Yildiran (2011) pointed out that the card rate is the proxy index for market competitiveness. Islam and Ahmed (2012) also argued that the level of competitiveness in the credit card industry in Bangladesh plays a pivotal role in determining the proht size. In addition, after examining Chinese hnancial institutions, Tan and Floras (2014) concluded that the prohtability of a hnancial institution is negatively affected by the herce competitiveness among rival companies. In addition, Demirguc-Kunt, Laeven and Lebine (2003) demonstrated a correlation between intensifying market competition and a small margin between lending and borrowing rates.

Previous studies have considered external factors such as macroeconomic and hnancial market variables. Pasiouras and Kosmidou (2007) argued that compared to manufacturing hrms, hnancial intermediaries' prohtability is influenced by hnancial markets and macroeconomic conditions. Shin (2012) showed that the prohtability of hnancial institutions is negatively affected by unexpected hnancial market turmoil and macroeconomic instability such as the global hnancial crisis of 2008. …

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