Interest-free Installment is no longer offered


Revision on Specialized Credit Financial Business Act

– No More Interest-Free Installment by Credit Transaction

Hi guys! I hope each and every of you are spending the best days of your winter vacation. While taking a nice holiday at home, are you updated about recent financial news? If you are so, you would have heard of the issue about ‘Specialized Credit Financial Business Act’ (click the link).  Just in case you are interested in this legislation itself, you may have a look at it from FSC’s official website. It is available at ‘Financial Laws’ tap, which is categorized under ‘Non-banking law’.

This Act was recently revised, which led to a big change in transactions by credit. With the recent amendment to the Act, large-scaled chain stores and other distribution industries cannot offer ‘interest-free installment’ for credit transactions. Since this amendment was recently introduced, some businesses have not settled installment commission yet. With regard to the issue, the Financial Supervisory Service (FSS) called an emergency meeting with Board of Directors (BOD) from major credit card companies. The meeting was held on 7th of January, 2013, for the purpose of hearing real voices from the field.




At the meeting, the main issue was about expected problems when interest-free installment is abolished. The other issue was how to set installment commission rate. One of the FSS personnel said in an interview, “Interest-free installment is a service derived from cutthroat competition between credit card companies.” He further pointed out that credit card companies offering interest-free installments are heavily burdened with costs. That is, interest-free installments provide financial consumers with benefits, while companies should bear the costs. This is considered as imposing too much cost on companies only, which is not rationally balanced.





In fact, most countries do not have interest-free installment. In those countries, financial consumers should pay a late charge if they postpone credit card payment. Then why did Korea implement interest-free installment? Credit card companies in Korea have excessively competed against each other. Moreover, there has been a great demand for interest-free installment requested by powerful franchise businesses. There was no other alternative for credit card companies, but offering interest-free installment. To cover the costs incurred by interest-free installment, credit card companies have injected about KRW 1.2 trillion. This figure, which is unbelievably huge, is approximately 24 percent of the overall marketing costs.

With the revised version of Specialized Credit Financial Business Act being effective as of Dec 22, 2012, credit card companies started to request large-scaled chain stores to share the burden of interest free installment costs by half. However, the large-scaled chain stores took a very obstinate stance, by removing the service of interest-free installment. They expressed their position not wanting to share the cost.




Responding to the current situation, Korean financial authorities stated that interest-free installment by credit card should be gradually abolished. This is because interest-free installment is likely to encourage financial consumers to overspend, as well as it is unfair for financial consumers making transactions by debit cards. “It is unreasonable to get rid of interest-free installment all at once, as it has been so widely used. Credit card companies should settle down their own regulations regarding installment commission rate to avoid further confusion and noise. To alleviate financial consumers’ complaints, credit card companies might adopt ‘temporary’ interest-free installment policies. For example, they can do promotions such as interest-free installment for holiday deals”, said one of the personnel from a credit card company.




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