Korean Fintech Update: Key Provisions in the Proposed Amendment to the Electronic Financial Transactions Act (“EFTA”)

On July 27, 2020 the Korean financial authorities announced “Comprehensive Innovation Plan for Digital Financial” which included a plan to bring significant amendment to the EFTA. Following such announcement, on November 27, 2020, the legislative bill for the amendment to the EFTA was submitted to the National Assembly (“Proposed Amendment”).

We explain below the key provisions in the Proposed Amendment that may affect global fintech players.

Chapter 2: Key Regulatory Changes for E-Wallet Businesses in Korea

Under the Proposed Amendment, the issuers of “electronic prepayment means” (i.e. stored value facility) and “electronic debit payment means” will be newly categorized as “payment service”. Below we set forth key regulatory changes affecting these businesses

• The scope of “electronic prepayment means” will be expanded, and identity verification will become obligatory in principle.

– Under the current EFTA, for a means of payment issued by e-wallet service provider to be deemed to be an “electronic prepayment means” (i.e. stored value facility), it must be able to purchase goods or services in at least two business categories (referring to mid-level classification business categories of the Korean Standard Industrial Classification). Article 2(14) of the Proposed Amendment on the other hand, does not limit the definition of “electronic prepayment means” based on the number of business categories, and thereby increases the scope of what may be defined to be an “electronic prepayment means” under the Act.

– By concept, “electronic prepayment means” should be prepaid (i.e. e-wallet should be charged) before they can be issued and used. However, the Proposed Amendment provides that customer reward points accumulated based on purchase records can also be recognized as stored value, as the purchase record can be viewed as a form of payment, as long as it is possible for the merchant to claim cash payment from the issuer.

– It is important to note that, under the current EFTA and the Proposed Amendment, “electronic prepayment means” is issued by an e-wallet business to be used to purchase goods or services from a third party (i.e. merchants). Therefore, coupons that are issued by the merchants themselves to be used at those same merchants are not regulated as “electronic prepayment means.”

– Also, the Proposed Amendment intends to make identity verification obligatory for the electronic prepayment means issuers as a matter of principle, although there will be certain exemptions based on the total charged balance amount.

• E-Wallet businesses will no longer be permitted to provide “money transfer service” based on their “electronic prepayment means” license. A separate “money transfer” license will be required.

– Proposed Amendment specifically prohibits using prepaid electronic means to provide money transfer service by combining transfer and withdrawal functions (Article 36-3(2)(iv) of the Proposed Amendment).

– In other words, it will not be possible to offer “money transfer” or similar service by allowing the users to transfer electronic prepayment means to a third person and allowing that third person to withdraw cash. The e-wallet service providers who are currently conducting this business will be given a grace period of 6 months from the enforcement date of the Proposed Amendment. During this period, they will need to obtain a “money transfer” license. 

• “Deferred payment service” will be permitted for the “payment service” providers within a limited scope.

– Pursuant to Article 35(1) of the Proposed Amendment, a “deferred payment service” is defined to be a service that may be provided by a payment service provider should there be a deficiency in the amount of pre-charged balance, by paying the merchant the deficient amount with its own funds. Such “deferred payment service” may only be carried out as a concurrent business by a payment service provider with the approval of the FSC.

– Under the Proposed Amendment, “deferred payment services” are to be subject to strict regulations, including limitations on deferred payments per user, and limitations on the total amount of deferred payment provided by the payment service provider (Article 35(5) of the Proposed Amendment). Detailed guidelines on how to determine such limitations will be provided by the FSC.

– Payment services providers are prohibited from using users’ deposits as funds for deferred payment services, and are further prohibited from collecting interests for the deferred payment amount (however, it is possible to collect compensation for late payment). Also, since the provision of loans to users of deferred payment services is prohibited, in principle, services such as cash services, revolving loan services, or hybrid-payment model based on credit loan services are all prohibited.

Key Takeaways 

E-wallet service providers should closely monitor the development of the Proposed Amendment and its sub-regulations, and assess how they may affect their business activities, such as money transfer related service, deferred payment service, and identity verification obligations. 

Also, it should considered whether any of the business activities are affected by the definition of “electronic prepayment means” under the Proposed Amendment. What is currently outside the scope of “electronic prepayment means” could be newly regulated under the Proposed Amendment.

By Yulchon, Korea, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact korea@transatlanticlaw.com 

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