'Lotte Card Fights to Retain Members Amid Business Suspension... Ramps Up Information Security'

Concerns Over Weakened Competitiveness in Credit Sales Amid Member Attrition
Chain Reaction: From Declining Net Profit to Eroded Corporate Value
Lotte Card: "Our Top Priority Is Maintaining Stability and Profitability"

On July 31, Lotte Card received a 45-day business suspension and a KRW 5 billion fine from the Financial Services Commission, prompting the company to mobilize all its resources to prevent member attrition. The company's strategy is to stably maintain its existing membership until the suspension ends on September 15, thereby preserving its competitiveness and profitability in credit card sales. Lotte Card has not yet decided whether to initiate administrative litigation. For the time being, the company plans to prioritize maintaining stability and profitability.

A Blow to Recoveries in Member Numbers and Performance

Lotte Card has become the first financial company to receive a business suspension due to a hacking incident. While the company experienced member losses and turned to the red after the incident, its membership and financial performance have recently shown rapid recovery. However, due to this penalty, recruiting new members is suspended for 45 days, making it inevitable that the company's core business, credit card sales, will be negatively impacted.

According to the Credit Finance Association, in the 11 months following the hacking incident in August last year, Lotte Card had an average of 86,000 account cancellations per month and 77,000 new sign-ups per month. In September last year, right after the incident, the number of canceled memberships surged 139% to 160,000 from 67,000 a month earlier. The number has since stabilized at around 70,000 to 90,000 monthly, dropping to 69,000 in February this year, returning to pre-incident levels.

New sign-ups fell 13.1% (11,000 members) to 73,000 in September last year from 84,000 in August. However, by January this year, the number had rebounded to 92,000, reaching normal levels again.

Net profit has also recovered. Based on controlling interest, Lotte Card posted a net loss of KRW 28.7 billion in the fourth quarter last year, immediately after the incident. Yet, in the first quarter this year, it recorded a net profit of KRW 20.6 billion, up 44.1% from KRW 14.3 billion a year earlier. Despite this normalization of membership and performance, the business suspension is expected to stall the recovery momentum.

Company Focused on Preventing a Repeat of '10% Membership Loss'

Lotte Card plans to focus resources on minimizing member attrition during the suspension period.

The company lost about 10% of its members within one year after its business was suspended for three months due to a customer information leak in 2014. At the time, membership dropped from 8.08 million at the end of 2013 to 7.23 million at the end of 2014, a decrease of 850,000. Net profit during the same period also fell by KRW 4.5 billion (3%), from KRW 151.9 billion to KRW 147.4 billion. Nine executives, including then-CEO Park Sanghoon, resigned.

Although this penalty is less severe than in 2014, the operating environment for card companies has deteriorated, making member management even more challenging. During the business suspension, new credit, check, and prepaid cards cannot be issued to new customers. However, some exceptions exist, such as new issuances for public interest purposes and renewed issuances for existing members. Current members can also newly apply for or increase limits on card loans, cash advances, and revolving credit.

Industry sources warn that if Lotte Card fails to retain its competitiveness and member base in credit sales, the company could see its net profit and corporate value fall further. There are concerns that key talent could leave due to internal uncertainty, or that momentum for new business initiatives could weaken. The company's corporate value, once estimated at around KRW 3 trillion, has decreased to the KRW 2 trillion range, with some projections suggesting it could drop into the KRW 1 trillion range.

Bolstering Data Security to Prevent Recurrence

Lotte Card is strengthening its information security framework, centered on the Financial Consumer Protection Committee led by CEO Jung Sangho, to prevent similar incidents from recurring.

Immediately following his appointment in March, CEO Jung restructured the organization, elevating the information security unit from under the Strategy Division to a direct-reporting Information Security Center under the CEO. The Information Security Center is led by the Chief Information Security Officer (CISO). CEO Jung presented the consumer protection measures prepared after the incident at the agenda subcommittee of the Financial Services Commission.

Lotte Card is currently implementing several initiatives: establishing a new four-member Financial Consumer Protection Committee (including the CEO) within the board of directors; expanding the share of the information security budget to 15% of the total IT budget; and planning an information security investment of KRW 120 billion over the next five years.

The Financial Services Commission also announced it will actively support the passage of the Electronic Financial Transactions Act amendment in the National Assembly. The amendment calls for imposing punitive fines of up to 3% of total revenue on financial companies that suffer major security breaches. It also includes provisions to strengthen the CISO's authority to proactively establish and implement security measures.

Delinquency Rate Nears '2%'... Asset Soundness Also in Focus

In addition to information security, Lotte Card also intends to focus on strengthening asset quality by better managing delinquency rates.

As of the end of the first quarter this year, Lotte Card's effective delinquency rate for receivables overdue by at least one month was 1.84%. This is down 0.38 percentage points from the post-incident peak of 2.22% at the end of the third quarter last year, but concerns remain about the company's relative asset quality compared to the industry average.

A Lotte Card spokesperson said, "We humbly accept the financial authorities' decision, and sincerely apologize for the concern this incident has caused our customers. We will do our utmost to ensure that such occurrences never happen again by taking all necessary measures, especially in information security, to restore trust as a financial institution." The spokesperson added, "No specific decisions have been made regarding administrative litigation. For now, our top priority is to maintain the company's stability and profitability."

This content was produced with the assistance of AI translation services.