1. Introduction
Recognizing the significance of digital finance and the need to adapt the regulatory framework to promote digital transformation of the Korean financial industry, the Financial Services Commission (the “FSC”) has submitted a bill to the National Assembly proposing major amendments to the Electronic Financial Transactions Act (the “Amendment Bill”).
Submitted in November 2020, the Amendment Bill aims to promote competition and innovation in the industry while ensuring stability of financial systems, and introduces new systems to enhance user-protection and ease entry barriers for new innovative service providers, including: adoption of a one-stop payment service provider system, establishment of a system for payment order processing services (i.e., “MyPayment”), reclassification of electronic financial services by functionality, institutionalization of open banking and electronic payment clearance businesses and the addition of extraterritorial application provisions.
While the Amendment Bill will be revised and supplemented after ongoing canvassing of opinions from the market, the direction and major elements are likely to be maintained.
2. Major Elements of the Amendment Bill
The major elements of the Amendment Bill are summarized below.
3. Ongoing Discussions for Regulatory Improvements
Following submission of the Amendment Bill to the National Assembly, the FSC held the Fifth Digital Finance Discussion Forum in December 2020. At the forum, the FSC reviewed various requests concerning the fairness of regulations and suggestions for regulatory reform made by different participants in the finance industry, including fintech and big tech companies and financial institutions. Based on such review, the FSC issued its “Measures for Improvement of Digital Finance Regulations and Policies” on December 10, 2020 (the “Improvement Measures”).
According to the Improvement Measures and media reports, the major issues under discussion regarding the Amendment Bill are as follows:
A. Whether to permit credit card companies to provide one-stop payment services
Credit card companies have argued that if big tech companies are to be permitted to provide one-stop payment services, credit card companies should also be permitted; otherwise, credit card companies would be competitively disadvantaged since they would only have access to credit card information, whereas big tech companies permitted to provide one-stop payment services would have access to more comprehensive information from their user accounts.
The FSC has tabled the issue for review, responding only that the amendments to be made to the Enforcement Decree to the amended Electronic Financial Transactions Act based on the proposed Amendment Bill will specify in further detail the services permitted to be provided by a one-stop payment service provider, taking into account factors such as management stability, maintenance of market order and other industrial policies.
B. Managing deferred payment service risks
The credit card industry has expressed its concern that permitting payment service providers to provide deferred payment services for small amounts would infringe upon the scope of credit-based transactions, which is intrinsic to credit card service providers; it has also been noted that, for the sake of customer protection and balance with current regulations applicable to credit card service providers, a regulatory system is needed for supervising the deferred payment services to be provided by payment service providers.
The FSC has responded that deferred payment services to be provided by payment service providers will be permitted with certain limitations and in accordance with additional regulations, noting the third-party escrow requirement for customer funds and prohibition on charging interest.
Further, the Amendment Bill (i) places ceilings on the individual deferred payment amounts offered to customers and the total deferred payment amount offered by a payment service provider, to ensure the deferred payment service would not become the main business of a payment service provider; and (ii) prohibits the provision of loans to users of the deferred payment service (e.g., cash services) (Paragraphs (5) and (6) of Article 35, Amendment Bill).
C. Concerns about overregulation of big tech companies and infringement of the Bank of Korea’s intrinsic authority
The Bank of Korea has expressed its view that requiring big tech companies to clear their internal transactions through the Korea Financial Telecommunications & Clearings Institute’s clearance system for electronic payment transactions amounts to overregulation. The Bank of Korea has also expressed its concern that granting to the FSC the authority to revoke licenses for electronic payment transaction clearance services and sanction electronic payment transaction clearance institutions and their directors (Article 38-22, Amendment Bill) would infringe the Bank of Korea’s intrinsic authority to manage the payment settlement system.
4. Conclusion
It will be interesting to see how the above issues and concerns will be handled during the course of further discussions and any revisions to the Amendment Bill. It will also be interesting to see the extent to which the extra-territoriality provisions of the Amendment Bill will remain intact (there are currently no indications that these provisions would be revised or deleted) and the implications on foreign electronic financial service providers operating in Korea (in particular, the global big tech companies like Facebook, Alipay, Paypal and Amazon), who would have to establish a place of business in Korea and register or obtain a license as local electronic financial service providers in order to provide their services in Korea.
The FSC announced in the Improvement Measures that it is open to further suggestions for improvement from financial institutions and big tech and fintech companies and it is expected that some improvements to regulations and policies will be reflected based on such suggestions. However, barring any special circumstances, the direction and major elements suggested by the FSC (e.g. (i) creation of new business categories in order to promote innovative services (such as a payment processing services, one-stop payment services, etc.), (ii) reclassification of electronic financial services, (iii) expansion of business scope (such as small-scale deferred payments), (iv) institutionalization of open banking and digital clearance, and (v) extraterritorial application) are likely to be maintained.
Jipyong’s Digital Finance Group and Fintech Team have vast experience in advising on regulations pertaining to digital finance and e-commerce transactions, fintech and platform businesses, and innovative financial services (sandbox regulations). We will continue to monitor and regularly update our clients on changes in the regulations applicable to electronic finance businesses.
