Proposed Amendments to Electronic Financial Transactions Act

On October 31, 2024, National Assembly member Minkuk Kang from the People Power Party, along with ten other members, proposed a partial amendment to the Electronic Financial Transactions Act (the “Bill”).

The Bill incorporates the improvements announced by the Government to address the WeMakePrice and TMON incident – namely, the “Additional Measures for the WeMakePrice and TMON Incident and System Improvement Plan” dated August 7, 2024, and the “Plans to Improve the Payment Gateway Business System” dated September 9, 2024 (Link). The Bill aims to clarify the definition of payment gateway services (“PG Services”) and strengthen regulations on payment gateway service providers (“PGs”).

Specifically, the key provisions of the Bill include (i) clarifying the definition of PG services, (ii) establishing legal measures to protect funds to be settled, (iii) enhancing the minimum capital requirement for PGs, (iv) introducing obligations for PGs to settle sales proceeds within the designated settlement period, (v) ensuring the effectiveness of management guidelines for electronic financial business entities, (vi) requiring electronic financial business entities to register any changes in their majority shareholders, and (vii) imposing criminal penalties for misappropriation of settlement or prepaid funds.

1.	Clarifying Definition of PG Services

Definition of PG Services: The Bill defines PG Services as those “receiving, providing and settling payments on behalf of third parties when payments for goods or services are made between such parties through electronic payment means.” However, this definition excludes “receiving, providing and settling payments on behalf of third parties if such activities are associated with another business, such as a sales brokerage business.”

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The current version defines PG Services as “any services to transmit or receive payment settlement information when purchasing goods or using services by electronic means, or to execute as an agent or intermediate the settlement of prices thereof.” In comparison, the Bill clarifies that the core function of PG Services is to act as an agent to settle payments between third parties.

Scope of applicability: According to the Bill, the Electronic Financial Transactions Act (the “EFTA”) is not applicable to a business entity that receives, provides and settles payments on behalf of third parties as ancillary services to other businesses under specified laws (other than the EFTA), including the Act on Fair Transactions in Large Retail Business or the Act on the Consumer Protection in Electronic Commerce.

2.	Establishing Legal Measures to Protect Settlement Funds

Management by third parties: PGs must have all settlement funds managed by third-party fund management agencies (i.e., banks) through deposits, trusts or payment guarantee insurances. These settlement funds must be handled securely.

–	At least 60% of the settlement funds must be managed by third parties starting from the effective date of the Bill. This percentage increases to 80% starting from the first anniversary of the effective date of the Bill, and to 100% from the second anniversary of the effective date of the Bill.

Protection of settlement funds: Settlement funds under third-party management cannot be seized or used for set-offs. PGs are also prohibited from transferring or using these funds as securities, except in unique circumstances such as mergers or business transfers. Furthermore, merchants with claims on settlement funds will have preferential payment rights over the settlement funds under third-party management.

Enhancing Minimum Capital Requirement for PGs

The Bill raises the minimum capital requirement for PGs to ensure that they have the necessary human resources and physical facilities to provide large-scale PG Services. Specifically, it establishes a new threshold of “persons intending to offer PG Services with a total quarterly electronic financial transaction amount exceeding KRW 30 billion.” PGs meeting this threshold must have “the amount prescribed by Presidential Decree” in capital, which will be over KRW 1 billion. The specific capital requirement will be determined by the Presidential Decree.

Introducing Obligations for PGs to Settle Sales Proceeds Within Designated Settlement Period

PGs must settle and pay the sales proceeds they receive within the settlement period specified in the relevant PG agreements unless there is a justifiable reason not to do so. Failing to meet this obligation may result in an administrative fine of up to KRW 20 million.

Ensuring Effectiveness of Management Guidelines for Electronic Financial Business Entities

The Financial Services Commission (the “FSC”) can currently issue a correction request only to electronic financial business entities that have obtained “permission” to engage in their business. The Bill expands this authority, allowing the FSC to request corrections necessary for management improvement even to “registered” electronic financial business entities (including PGs) if they do not meet management guidelines. The FSC will also have the power to impose penalties for non-compliance with its requests, such as business suspension and cancellation of registration, depending on the severity of non-compliance.

Requiring Electronic Financial Business Entities to Register Changes in Majority Shareholders

An electronic financial business entity will be required to register any change in its majority shareholders with the FSC within 15 days of such change. If new majority shareholders meet any of the disqualification criteria, their registration may be cancelled.

Imposing Criminal Penalties for Misappropriation of Settlement Funds or Prepaid Funds

If an electronic financial business entity misappropriates any separately managed prepaid funds or settlement funds under third-party management, it may be punished with imprisonment for up to ten years or a fine of up to KRW 100 million.

As the Bill amends the definition of PG Services and the scope of applicability under the EFTA, some business entities previously required to register as PGs will no longer fall under this category. For example, an e-commerce business entity that engages in mail order brokerage business, as regulated under the Act on the Consumer Protection in Electronic Commerce, and receives, provides or internally settles payments as part of that business, will no longer be subject to the EFTA. However, it should be noted that online brokerage platforms exceeding a certain size may be regulated under the proposed amendments to the Act on Fair Transactions in Large Retail Business announced by the Korea Fair Trade Commission (Link). Given that the Bill is expected to bring significant changes to the regulatory environment for PGs and relevant industries such as the e-commerce industry, business operators in these sectors should take note of any further updates and thoroughly prepare for potential regulatory changes.

Meanwhile, the Bill stipulates that PGs must manage settlement funds separately, in a manner similar to how prepaid funds concerning electronic prepayment means are handled. Accordingly, PGs must review their fund management systems to ensure compliance with the separate management requirement under the Bill. Additionally, the Bill generally strengthens regulations for electronic financial business entities, covering areas such as management guidelines and changes of majority shareholders. Therefore, electronic financial business entities should thoroughly review further developments on the Bill and take appropriate measures, such as submitting their comments and preparing for the strengthened regulations.

[Korean Version]

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