The unsettled amount is 1.279 trillion won, affecting 48,124 corporations. After the 'Timf (Timon · Wemep) incident' that struck the financial sector last July remains unresolved, another similar crisis known as the 'Balaan incident' has occurred. The leading luxury e-commerce firm, Balaan, filed for corporate rehabilitation on the 1st, and sellers who have not received their payments are preparing legal action. Before the Timf incident, there was the 'Merge Point incident' in 2021. In just five years, similar unsettled situations have arisen three times.
Hyun Jeong-hwan, a professor in international trade at Dongguk University, who has researched domestic and international payment services for a long time, pointed out that the recurrence of unsettled situations is not mere chance but a clear 'market failure.' Professor Hyun noted, 'Since the sales proceeds are unrelated to the e-commerce platform, the platform should be strictly prohibited from controlling or exploiting them,' and emphasized that 'the sales proceeds should be managed rigorously as if they were advance payments.'
The Electronic Financial Transactions Act has not seen significant amendments since its first enactment in 2007. At the time of its enactment, the e-commerce industry was rather insignificant, but it has rapidly grown in the 2010s, with e-commerce revenues now reaching half of total retail revenues. Initially, payment services fell under the jurisdiction of deposit-taking institutions like banks, but with the increase in digital finance and non-face-to-face transactions, non-banking corporations and e-commerce companies have started providing payment services.
Nevertheless, regulations and supervisory systems that do not reflect market trends have led to the current recurring situation. On the 3rd, I met Professor Hyun in his office at Dongguk University in Jung-gu, Seoul. Professor Hyun emphasized that proper amendments to the Electronic Financial Transactions Act and strengthening supervision over payment gateway (PG) companies could prevent the recurrence of unsettled situations in e-commerce. Below is a Q&A with Professor Hyun.
─What are the causes of the recurring unsettled situations in e-commerce?
'Currency is a liability. For example, from the depositor's perspective, deposits are assets, but for the bank that issued them, they are liabilities. When we deposit cash in a bank and use it as a basis for card usage or money transfers, it is because deposits are currency. Since banks manage currency, they are under strict oversight and regulations, such as the Depositor Protection Act. Similarly, the sales proceeds in e-commerce are liabilities and are treated as currency. They are essentially deposits owed to sellers, which necessitates regulation. However, due to insufficient monitoring and regulatory frameworks under current laws, e-commerce companies have failed to protect the funds of customers who prepaid for payment transactions.'
─Was the negligence of protecting customer funds by e-commerce companies due to inadequacies in the regulatory system?
'It is a limitation of the current Electronic Financial Transactions Act. The act was enacted in January 2007, and since its introduction, the licensing system has remained unchanged. Despite the entry of non-financial corporations such as fintech and big tech into the payment services market since 2010, these changes have not been well incorporated. As a result, fintech companies in Korea can provide services without qualifying as electronic currency operators or electronic fund transfer providers. Furthermore, when large retail companies like Timf or Balaan conduct settlement operations, they fall outside the purview of the Electronic Financial Transactions Act and are only required to separately deposit and manage 50% of the sales proceeds. Under such a system, the recurrence of unsettled situations is inevitable.'
─If you were to identify aspects of the current Electronic Financial Transactions Act that need immediate improvement, what would they be?
'It is the distinction and separate regulations for first and second-tier PG companies. From a financial supervisory perspective, the principle of 'same actions - same risks - same regulations' should be applied to differing activities. The current law does not differentiate between first and second-tier PG companies, and there are some individuals in the financial industry who cannot distinguish between them. First-tier PG companies only provide simple payment services. Second-tier PG companies provide settlement services concerning seller funds. First-tier PG companies act as conduits for processing payment data, and financial entities, like card companies, often use multiple first-tier PGs to avoid payment delays or errors. While first-tier PGs can be easily replaced, second-tier PGs carry the significant responsibility of fund management. Therefore, separate regulations should be applied because the nature of their services and the risks involved are inherently different.'
─Could addressing just this issue be sufficient to prevent recurring situations?
'If the distinction of PG companies and the separate deposit obligations for seller funds are introduced, most situations similar to Timf can be prevented. Two aspects need further discussion: first, the method of separate deposits. In cases where funds are managed separately through trusts or payment guarantees, they should be managed to minimize operational losses, and the insurance coverage limit should exceed the deposited amount.'
'The second issue is the scope of prepayment providers or e-commerce platforms subject to the separate deposit obligation. The revised Electronic Financial Transactions Act from last year exempts registration obligations for companies with a balance of prepaid electronic payment methods of less than 3 billion won and an annual total issuance of less than 5 billion won to prevent the regulation from encompassing small businesses. While it is reasonable to exclude small businesses from registration, it would be preferable to have a system in place that monitors companies likely to require registration and guides them through the registration process rather than leaving it entirely to the companies themselves.'
─What is the urgent reason for amending the Electronic Financial Transactions Act?
'Korea needs a legal framework that encompasses payment services beyond the Electronic Financial Transactions Act. Because the current law is limited to regulating electronic finance, there is a potential for regulatory arbitrage, where the regulations differ based on whether the same services are provided electronically or otherwise. The recent issue regarding 'cultural gift certificates' is a reflection of the current law, where online gift certificates face regulatory issues, while paper gift certificates do not. Although the functions of both are completely identical, the regulations differ based on the method of provision.'
'The fundamental improvement method is to establish legislation regarding payment services rather than digital finance. This is a global trend. The same content was included in the Payment Services Directive (PSD) in Europe, introduced in the same year, and now Europe is executing the revised PSD2, with discussions ongoing for the introduction of the further amended PSD3. Singapore abolished its existing electronic finance and payment transaction supervision system in 2019 and enacted a payment services law to comprehensively oversee the payment services market. It can be said that Korea is significantly lagging behind.'
─Are there examples of major countries restructuring their regulatory systems to align with digital finance?
'Yes, many countries including Europe, India, Japan, Singapore, and China. In Singapore, if an e-commerce company intends to provide direct payment settlement services to sellers, it must obtain permission from the Monetary Authority of Singapore (MAS). In the e-commerce nation of China, it has formalized a structure where e-commerce companies do not conduct direct settlements but use separate payment agencies for settlement (second-tier settlement). The settlement funds are separated as customer funds and are required to be fully deposited with the Central Bank. This shows that as e-commerce becomes more active, stricter regulations are placed to protect financial consumers.'
'Although Korea's e-commerce market is not as large as China's, it is bigger than that of Europe and the U.S., yet the regulations are in the early stages. The damage amount from the Timf incident (approximately 1.279 trillion won) is close to half of the damage amount during the savings bank crisis in 2011 (approximately 2.8 trillion won). A similar market failure has occurred three times. This hasn't been fixed even after problems arose. As the domestic economy worsens, the recurrence of third and fourth Timf-like incidents is inevitable.'