RFi Group Insight - Asia: Travel bug bites Korea

It has long been a goal for financial institutions in Asia to increase the level of online commerce and along with it, the usage of their payment cards and wallets as the preferred barter system. The vision of creating a cashless utopia, rid of the various costs associated with carrying cash, is on the agenda of many governments in Asia. India’s Modi government made a splash recently in the papers with its demonetisation policy and the roll out of its United Payments Interface, while Thailand is rolling out its own national digital payment system, PromptPay.

Then there is South Korea, a country that has neared saturation in the online commerce space, with a government looking to suppress the usage of credit cards to curb household debt. It has one of the most dynamic economies in the world with the ability to ignite consumer trends as quickly as it can shred them. Its fast-paced nature provided a growth bed for payment cards to reach epidemic status, with RFi Group research indicating 86% of the banked population having used a check card (debit card) or credit card in the last 12 months.

Korea sits in the top echelon when it comes to the most cashless societies in the world driven by a staggering 91% penetration of online commerce yet only 7% of online shoppers using cash for payment. However, its payment system is as closed as China’s with the market dominated by local incumbents which act as both issuers and acquirers in a three-party model, commonly known as the “on-us” model. This means that card schemes such as Visa or Mastercard do not play a part in domestic transactions. Credit cards with lower annual fees without the logo of an international scheme are available to cardholders intending to use it solely in Korea.

So how do the likes of Visa, Mastercard, American Express, and other payment services operate in one of the world’s most saturated credit card markets?

Cross border transactions are key revenue streams for the international players, which come in two main forms. The first being online purchases from international merchants, which was a craze back a few years ago, when the USD bottomed out against the Korean Won and consumers could purchase the same Samsung smartphone at a cheaper price from international websites. Also fuelling this phenomenon was the fact that most of the global Korean conglomerates, or chaebols, put premiums on their prices back at home, while most of the Western world often associated brands such as Hyundai with good value.

The second, and fast trending form of cross border transactions with much room to grow is travel. RFi Group research found that 2 in 5 Koreans went on a vacation in 2016, and this stat jumps to 3 in 5 when looking at the affluent segment. Just last month, my 60-year-old Korean mother went for a week holiday with her sister and friend to sink their feet (and knees) in Eastern European snow. Her friend, displaying the typical digital prowess of a 60 year old Korean lady, booked their flights and accommodation through Interpark, an online travel agency used by many Korean jetsetters.

Over the last ten years I had accumulated enough miles on my Korean Air Lines membership status to finally be upgraded to SkyTeam Elite last year, so when my mother in law was driving me to Incheon airport for my flight back home to Singapore, I nonchalantly told her not to rush knowing I had access to the priority lanes. When we got to the airport, to my utter disbelief, there were two priority lanes both around 30 pax deep. This was the moment I realised a lot of Koreans travel abroad, and those that do, do so quite frequently.

When it comes to inbound traffic, Korea is a hot tourist destination, obvious to one who’s been on ground having to deal with the crowds in Seoul’s tourist shopping mecca, Myeong Dong. I remember back ten years ago, when I was an exchange student at Seoul National University, most of the sales people there would be calling out to tourists in Japanese or English. Today, it has significantly evolved with all the signage and sales people calling out in Chinese, and the most popular payment method used by the bus load of tourists? Alipay. The high level of travel in Korea was also confirmed by the International Air Transport Association (IATA), when it announced Korea’s 450km Seoul to Jeju route as the busiest air route in the world back in 2015 with more than 11 million journeys having been made.

Korea is a fiercely competitive market for both local and international players in the payment space. Its high digital engagement allows consumers to make informed decisions on product choice and usage. The wide range of products to compete with and low margins stretch the economics of the customer value proposition and pose quite a challenge for financial institutions. However, Korea is one of the most fertile environments for trends and epidemics, and one of the key shifts in behaviour lie in the travel industry. Both inbound and outbound vagabonds present valuable opportunities for local and international payment providers to tap into.

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