Authorities to investigate whether two firms are abusing market position

Financial authorities plan to order Visa and MasterCard to slash some of their service charges, officials said on Wednesday.

The two giant companies have allegedly made dubious contracts with Korean credit card issuers, which could put an excessive burden of membership and settlement service fees onto cardholders, according to officials at the Financial Supervisory Service.

“Many local consumers, who only use their cards in the domestic market, currently have to pay Visa and MasterCard the service charges,” said a regulatory official.

He said the authorities will take stern action against them after looking into irregularities involving possible exploitation of their duopolistic status as the two biggest global settlement brokers.

A Korean credit cardholder must pay 3,000 won ($2.70) to 5,000 won per year for international settlement services.

The FSS plans to pressure the two firms to cut the annual membership fees by more than 20 percent.

According to FSS data, Korean cardholders paid an extra 36 billion won in overseas purchases in 2012 by making transactions based on the Korean won, and not the currency at the purchase destination.

Local cardholders and issuers pay tens of billions of won every year in royalties and commission to the multinational credit card giants. The two firms capture more than 90 percent of the Korean market.

Visa or MasterCard-branded credit card holders pay 1 percent of the amount they spend abroad as commission to the duopoly.

Inspectors are also considering instructing the two firms to scrap irregular practices in their operation of the “dynamic currency conversion” system, under which consumers shoulder any foreign exchange losses and service charges for buying goods in foreign countries.

Some market insiders argue the DCC system is conducted by local and foreign credit card firms to seek mutual benefits.

As an alternative, Korean credit card firms are working to build their own international networks to reduce their dependence on Visa and MasterCard.

BC Card, Korea’s banking-based payment services provider, has been at the forefront of efforts to find alternative international partners.

It has created the BC Global Card partnership with credit card companies in 103 countries including Japan’s JCB, China UnionPay and Discover Financial Service of the U.S. which acquired Diners Club International.

By Kim Yon-se (kys@heraldcorp.com)