On August 7, 2024, the Korean Government announced the “Additional Measures for the WeMakePrice and TMON Incident and System Improvement Plan” at the Ministers’ Meeting for Economic Relations. In addition, on September 9, 2024, the Financial Services Commission announced the “Plans to Improve the Payment Gateway Business System.”

E-commerce platforms WeMakePrice and TMON have failed to settle payments with merchants on their platforms since mid-July of 2024. Consequently, consumers who used WeMakePrice and TMON are suffering damages from unilateral contract cancellations by merchants and refund refusals by credit card companies. The relevant government agencies have made efforts to respond to the incident by jointly preparing a fundamental plan to improve the system and prevent the recurrence of similar incidents.

The Government decided to prepare a regulatory and management system for a new type of payment processing services, where an e-commerce company (in the logistics sector) also acts as the payment gateway service provider (“PG” or “PGs”) (in the finance sector). Such new system will be designed to prevent the side effects of allowing e-commerce companies to use sales proceeds for liquidity purposes by extending the settlement timeline, which may expose merchants and buyers on their platform to the risk of settlement failure. The amended Electronic Financial Transactions Act (the “EFTA”), which became effective on September 15, 2024, (i) removed the standards for electronic prepayment means, and (ii) strengthened the exemption criteria for registration in the electronic prepayment means issuance and management business (the “Prepayment Business”). In light of the above mentioned circumstances, the regulations for gift card issuers have been tightened, as most mobile gift cards are now subject to these regulations. The regulations on PGs are also expected to be strengthened through future amendments to the EFTA. The main points of the future amendments are as follows:
 

• Enhancing registration requirements. In proportion to the transaction size of PGs, the minimum capital, which is one of the conditions to register as a PG business operator, will be increased.

• Securing effectiveness of supervision. Currently, there is no legal ground to require PGs to comply with the management guidelines. Therefore, the legal grounds for implementing the following measures on PGs will be established: (i) request for correction, (ii) suspension of business (in case of non-compliance with the request for correction), and (iii) cancellation of registration (if the correction is not made despite the business suspension).

• Financial soundness requirements. Stricter capital and foreign currency liquidity regulations will be reviewed for PGs that also engage in foreign exchange business.
   

• Shorter settlement period. The settlement period for e-commerce companies will be set shorter than that for large retail businesses, and corrective orders and administrative penalties will be imposed in case of violations. PGs that do not concurrently engage in e-commerce will be required to settle sales proceeds within the settlement period as stipulated under the agreement with merchants, and if they fail to do so, they will be subject to certain sanctions. The settlement period for PGs, which is not currently stipulated by law, will be set shorter than that for large retail businesses (i.e., 40 to 60 days).

• Separate management of sales proceeds. PGs and e-commerce companies will be required to separately manage a certain portion of the sales proceeds through a deposit, trust, payment guarantee insurance, among others. In addition, PGs and e-commerce companies will be prohibited from using such separately managed sales proceeds. In particular, PGs will be required to manage 100% of the unsettled funds separately (through methods such as deposits, trusts, or payment guarantee insurance). PGs must also notify merchants about the measures taken to protect the settlement funds and post this information on their website. PGs will be sanctioned/punished if they use separately managed assets for purposes other than settlement. However, to alleviate the burden of complying with the separate management obligation, PGs will be granted a certain grace period until their full compliance with this requirement. For example, they may be required to separately manage 60% of sales proceeds in the first year, 80% in the second year and 100% by the third year after the amendment takes effect.

• Strengthening legal protection of settlement funds. In order to prevent infringement on the rights to the settlement funds, PGs will be prohibited from transferring the separately managed assets, using the assets as securities, or allowing the seizure or set-off by a third party. In addition, preferential repayment rights will be introduced to ensure that the settlement payments of users and merchants are safely protected.
   

• Clarifying definition of PG business. The role of a PG business is to make continuous and repeated payments on behalf of customers in their transactions with others. However, the definition of a PG business under the EFTA is rather broad, encompassing all settlement-related activities including de facto internal settlements. Accordingly, the scope of the PG business will be clearly defined to ensure that entities such as e-commerce companies, department stores, franchises and passenger terminal operators, which receive payments and make internal settlements as part of their businesses, are not classified as PG businesses.
   

• Incentives. E-commerce companies that are recognized to be highly compliant with the requirements for a short settlement period and separate management of sales proceeds will be given preferential treatment and incentives during the Government’s evaluation of fair trade agreements between large and small companies. This may include an exemption from ex officio investigations.

• Merchant protection measures. In order to ensure transparency and fairness in the business relationship between e-commerce companies and merchants, the Government plans to consider introducing obligations to deliver and retain written agreements and standard transaction agreements, and prohibit the coercion of merchants to bear marketing costs.
   

In consideration of the regulatory direction of its system improvement plan, the Government is planning to prepare specific bills (the EFTA, the Act on Fair Transactions in Large Retail Business, etc.) through holding meetings with industry experts (including the public hearing held on September 23, 2024) for submitting them to the National Assembly.

In addition, during the second half of this year, the Government will continue to discuss ways to improve the fundamental system, including the establishment of a comprehensive management system for gift certificates. In particular, in sectors such as e-commerce and big tech, where finance and IT converge, the Government plans to devise supplementary measures for the management and supervision system. These measures will comprehensively take into account both innovative aspects and the need for effective management and supervision. If this system improvement plan is implemented as a specific legislation, it is expected to have a significant impact on the business structure of PGs, prepayment service providers, e-commerce companies, among others. Therefore, companies should closely monitor the progress of the Government’s system improvement and take appropriate measures by submitting their comments or preparing in advance for the potential strengthening of regulations.

[Korean Version]