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Commercial lenders are registering lower-than-expected foreign exchange (FX) conversion income, stymied by fierce market competition whereby card firms and banks are rushing to introduce free such services to lock in a greater number of outbound travelers, market watchers said Monday.

Further dampening the lenders' prospects of rising non-interest income is dwindling fee income ㅡ the aftereffect of mis-soldx financial derivatives worth trillions of won, including funds tied to the Hong Kong Hang Seng Index (HKHSI) and equity-linked securities (ELS).

According to market data, the FX conversion income of the country's four leading banks — KB Kookmin, Shinhan, Hana, and Woori — amounted to a combined 38.09 billion won ($27 million) in the first three months of this year, marking a decline of 4.5 billion won from the previous three months.

The 10.6 percent quarter-on-quarter drop came despite over 7.4 million in outbound travelers in the January-March period, an increase of 900,000 from three months earlier.

The number of outbound travelers in the first three months of last year was nearly 5 million. The figure has since registered a quarterly increase of 800,000, reaching over 6.5 million as of December.

The FX conversion fee income soared to 42.63 billion won in the fourth quarter of last year, up from 34.27 billion won in the first quarter of that year.

Propelling the sharp decline was the widespread adoption of fee-waived FX conversions, a collective promotional campaign embraced by state-run and commercial lenders, as well as card issuers charging higher fees.

Internet-only Toss Bank initiated the waiver service in January, and amassed 300,000 new customers within only six days of the announcement.

The bank also offered an account that would provide a lifetime waiver of currency exchange fees.

However, the internet-only lender implemented a restriction on fee-free per-day currency conversions, limiting them to 10 million won starting from April 1. This marked a tightened rule compared to the previous cap of 10 million won per transaction.

Woori Bank services only up to $30,000 per month in FX trading. The limit will be $100,000 per year.

Similarly, KB Kookmin Bank introduced a 30-day $30,000 cap on May 20.

The tightening was aimed at curbing currency scalping, an investment technique whereby investors make a small profit after holding a sell or buy position for a very short time.

The move coincided with volatility in the valuation of the Korean won against the U.S. dollar, powered by the escalation of global geopolitical volatility, including concerns of a wider war in the Middle East.

"We are aware that some of our service users are engaging in scalping. Worse yet, cases of using the converted currency to invest in cryptocurrency are reported. These are the reasons why we placed the cap," an industry official said.