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When the Korean government changed its discouraging stance on credit cards, the industry boomed.

Credit cards are a good business in most countries, but in Korea, the recent growth has been stratospheric. And that has opened the sector up to interest from foreign buyers.

Until recently, credit cards were a fairly dull business in Korea. The government actively discouraged their use because it (rightly) concluded they led to consumption and (wrongly) concluded that this was bad for the economy.

It pursued this policy so vigorously that if anyone spent more than $3,000 on their credit card while travelling, they faced a tax audit when they returned to Korea.

This distaste for credit cards changed when the government realized it was going to need a lot of money to bail out the financial sector. That meant improving the tax take and a bright spark realized that the great thing about credit cards was that they created a paper trail, making tax avoidance more difficult.

The government thus began pressing small retailers to accept credit cards last year, making it compulsory for any entity making more than W24 million in monthly sales. Companies were told that all entertainment (meaning karaoke) had to be put on credit cards too.

It also decided to encourage the average Korean to use plastic. If you spent more than 10% of your salary on your credit card, then these sums could be written off against tax – up to a maximum rebate of W3 million. Not bad, when the average disposable income is W21 million.

Not surprisingly, growth in credit card volumes was 120% last year. H&CB, for example, increased its number of cards from 1.9 million to 3.1 million, and its transaction volumes from W4.8 trillion to W12.5 trillion.

When they merge, Kookmin and H&CB will have the biggest credit card businesses with 11.5 million cards.

However, for the moment the top credit card players are LG and Samsung, each with around 9 million cards. While Samsung has an integrated financial services strategy and is not thought to be a seller, LG is more focused on telecoms and building a 3G network.

It has already sold 23% of its credit card business to Warburg Pincus at two times book. This compares with Standard Chartered’s acquisition of Chase’s Hong Kong credit card business at seven times book.

And LG may sell more off. Citibank, HSBC, DBS and Deutsche are among the names rumoured to be interested.

For such institutions, not only is the credit card business marvelously profitable, it also gives them 9 million Korean names that they can target as customers for their other products.

Also on the block is KEB’s credit card business. It has 3 million cards, but is regarded as a less attractive franchise than LG’s. When banks started due diligence on the business, it found that only 20% of the cards were active.

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