On November 27, 2020, the proposed amendment (the “Proposed Amendment”) to the Electronic Financial Transaction Act (the “EFTA”), which was based on the Financial Services Commission’s “Plan for Comprehensive Reform of Digital Finance,” was submitted to the National Assembly.  The Proposed Amendment is expected to be approved in the plenary session of the National Assembly by the first quarter of 2021.

To further the digital transformation of the financial industry and increase financial security in Korea, the Proposed Amendment includes, among others, new regulations simplifying the existing licensing regime for electronic financial businesses, improving the current system for user protection, establishing additional infrastructure for electronic banking transactions, and enhancing financial security systems.

Set forth below are the key aspects of the Proposed Amendment: 

1.   Introduction of New Electronic Financial Business Licenses and Consolidation of Types by Function 

• The Proposed Amendment introduces (i) the new “MyPayment” business license that will allow licensees to deliver, on behalf of its customers and without holding customer funds, transfer instructions for payment and wire transfers through a single website or mobile app for all accounts of the customer; and (ii) a comprehensive payment and settlement service provider license that will allow licensees to issue and manage customer payment accounts and provide various one-stop digital financing services, including payment and wire transfer services.

• The current seven electronic financial business licenses under the EFTA will be consolidated and simplified into the following three electronic financial business licenses: fund transfer, payment service and payment gateway.

2.   Improvement of Customer Protection System

• To protect customer funds, electronic financial business entities will be required to separately manage an amount greater than 50% of customer funds through a trust, deposit or any other safe instrument.  Upon bankruptcy of an electronic financial business entity, its customers will have priority in repayment.

• To allow for the remedy of damages to be more widely available to customers who incur any loss due to wrongdoings by financial companies and electronic financial business entities, the Proposed Amendment expands the scope of liability for financial companies and electronic financial business entities.  The current scope of liability, which is generally limited to certain offenses such as forgery or alteration, will expand to cover any transaction by companies without proper authority or consent, or any contactless transaction processed without proper authority or consent.

3.   Institutionalization of Open Banking and Digital Clearing

• The Proposed Amendment sets out the legal grounds to ensure the continuity, stability and scalability of Korea’s open banking system. 

• In addition, digital clearing will be institutionalized by designated institutions specialized in confirmation and transmission of payment instructions and netting of receivables and payable amounts.  As such, “big tech” companies involved in payments will also be required to use this digital clearing system.

4.   Enhancement of the Financial Security System

• The Proposed Amendment sets out the legal grounds, including applicable penalties, for direct monitoring and inspection of cloud service providers and outsourcing companies that work for financial companies.

• An operator of a financial platform that advertises, arranges, compares and recommends financial products or services online or through a mobile app will be prohibited from misleading consumers about financial product types and conditions and abusing their market dominant position.

In addition, the Proposed Amendment covers a wide range of areas in connection with the Korean government’s initiative in the digital transformation of the financial industry and increasing financial security in Korea.  The Proposed Amendment will likely lead to comprehensive and significant changes in the financial industry that will affect not only the currently regulated financial companies but also IT companies, such as cloud service providers, that support them.