Pushing Plastic

Pushing Plastic
A government campaign to stop tax evasion is shaking up the way Korea thinks about money
By John Larkin/SEOUL
Far East Economic Review
Issue cover-dated October 12, 2000
THERE'S BEEN A COUP in South Korea. Cash has been toppled; credit cards are king. The new regime's popularity is evident on the streets of Seoul, where thousands of sidewalk stalls set up by card companies entice passers-by with giveaways and special deals. The stalls have helped drive an amazing surge in card usage this year, displacing a traditional preference for paper money, and turning credit cards into Korea's newest boom industry.

Choi Sung Tak doesn't really need any extra plastic in his wallet. He already has three credit cards, but can't resist adding a Citibank Revolving Card to his collection. He has just applied at a downtown roadside stall, accepting a coffee-mug gift set for his trouble. The whole process took about five minutes, and in two weeks he will find out whether he's one of the 70% of applicants that Citibank approves. Like most adult Koreans, Choi has come to rely on his cards to pay for virtually every major purchase. He carries only enough cash to get him through the day. "I use the cards for everything. I couldn't live without them," says the 31-year-old salaryman.

Koreans have used credit cards since the 1980s, but the love affair became serious last year when card usage jumped to 91 trillion won ($81.6 billion) from 64 trillion won in 1998. There are now 50 million cards in circulation, double the number in 1994 and several million more than South Korea's total population of around 43 million. This year the government expects transactions to reach 200 trillion won, accounting for nearly two-thirds of private consumption.

The credit spree is partly the result of heavy promotion by card companies, but a more decisive influence is a government campaign to promote card usage in hopes of improving tax receipts.

The decision by so many South Koreans to make the switch from cash to credit card is good news for industry profits. But it's bad news for the growing number of households where free-spending ways are creating high levels of indebtedness. Though average Korean household-savings rates are high, some shoppers are getting buried in repayments. On September 28, Seoul's Maeil Business Newspaper ran figures from eight commercial banks showing that credit-card payments at least one month overdue reached 252 billion won in the first seven months of this year, up from 180 billion won for all of last year. The accompanying diagram showed a salaryman lashed to a rolling boulder etched with the Korean characters for "overdue bills."

DANGEROUS DEBT
It's too early to say that consumers are being crushed by credit-card bills. LG Card, for example, says its delinquency rate is falling. But bills are mounting elsewhere and that's a concern, given Korea's historic and often fatal attraction to debt. Three years ago, the entire economy nearly collapsed under the weight of huge corporate debts. Now another, albeit smaller, debt problem is emerging. "People are borrowing lots of cash from the credit-card companies as well as using their credit cards," says ING Barings analyst Mok Young Chung. "Individual creditworthiness is becoming a serious issue." He believes it's manageable at present, but could veer out of control if left unchecked.

Korea's credit-card rush is riding on the economy's remarkable economic turnaround and increasingly popular e-commerce transactions. But perhaps the greatest boost has come from the government campaign to encourage credit-card use. Where many governments urge caution, Seoul has actually encouraged shoppers since last year to use plastic, and for a very worthy reason--to catch tax cheats.

Korea has one of the smallest tax takes of any industrialized country. Small businesses routinely fail to report transactions to minimize their income, thus avoiding sales tax and income tax. Add comparatively low tax rates and you get a huge headache for policymakers trying to fund a welfare system.

Credit cards may be the solution. Unlike cash purchases, they leave a paper trail that allows the taxman to nab evaders. The National Tax Service receives data on card transactions from credit-card companies, and checks this against income declarations by small businesses. Discrepancies trigger a request for a second declaration.

The NTS doesn't see this as a violation of privacy, as the information supplied by the credit-card companies consists only of the name of the business, the date of the transaction and the amount paid. Nothing is revealed about the purchaser. There hasn't been any notable protest on confidentiality grounds. In fact, most people seem swayed by the tax service's estimate that the policy will add 2 trillion won every year to the total tax take of 70 trillion won. "This policy helps make our economy more transparent," says Kim Ho Ki, the director of the tax service's value-added-tax division.

But these gains could be compromised if overdue credit-card bills keep rising. The expected easing next year of industry entry requirements could put undisciplined spenders deeper in debt if companies respond by loosening application and repayment rules to attract customers.

Already, the competitive environment is heating up and market leaders are faced with the likelihood of shrinking market share. That prospect has persuaded some of them to take steps such as raising their monthly spending limits to attract new cardholders. This may lead to problems. "If the macro economy and GDP falls substantially, we could see many nonperforming loans from credit cards," says Jardine Fleming's Kim Chul Jung.

Kim Ho Ki of the tax office says consumers aren't being encouraged to spend extravagantly. "We want consumers to use cards instead of cash, not to spend more," he says.

The credit boom also reflects the limitations of Korea's reformed but nonetheless dated financial system. Lump-sum and instalment purchases have risen sharply. But growth has been driven chiefly by cash advances, which accounted for 53% of transactions last year, according to a recent report by ING Barings, and will rise further this year. The relaxation last September of the ceiling on advances fuelled this growth, but it also has been spurred by a personal-finance system in which cheque and mortgage services are conspicuously absent. Just under 50 trillion won was advanced last year, and a further 53.6 trillion won in the first half of this year, according to ING Barings.

Since late last year, the tax service has done everything it can think of to maximize card use. Tax deductions are available to consumers who make large credit-card purchases. Companies can get tax benefits by submitting credit-card receipts for entertainment expenses over 50,000 won. Around 54,000 small businesses, mostly shops, restaurants and cram schools, were ordered in mid-September to start accepting credit cards or face a tax audit. The taxi industry has been put on notice that card payments will soon be introduced.

The rapid rise of a card culture and the debt associated with it is starting to worry the big card companies, which have stepped up their monitoring of overdue payments. But, for the time being, overdue bills are a small blot on a ledger filled with black ink. The seven dominant players--BC Card (a consortium of commercial banks), Samsung Card, LG Card, Kookmin Card, Korea Exchange Bank, Diners Club and Tonyang American Express--did 38 trillion won worth of transactions in the first quarter of this year. Diners Club, which was owned by the ailing Daewoo Group, has big debts. But the others have posted generally steady profits. "Most of the credit-card companies are benefiting from the government's policy," says Jin Shin of Samsung Card's corporate planning team.

Tougher times may lie ahead, however. The Hyundai Group, Lotte Group and SK Group are angling to set up their own credit-card companies and may get the green light next year. Hyundai and SK, in particular, would be able to tap into their existing customers, offering them discounts at other group affiliates as a reward for becoming a cardholder. Their entry would mark the first direct market battle in Korean corporate lore between the top chaebols, or large business groups, and the banks. The chaebols' strong brands and rigid customer loyalty make them clear favourites.

Another clear favourite is Kim Ho Ki. He has gone from an anonymous bureaucrat to one of Korea's most recognizable faces. Every month, millions tune in on television to watch him draw the winner of a national lottery the tax service runs for credit-card users. A receipt is selected at random for the grand prize of up to 100 million won, a small price for the government to pay for a huge boost to the tax take. Close attention to overdue bills will help ensure the lottery is the biggest gamble on credit that Korea's charge-it generation will take.

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