The proposed amendment (the “2023 Proposal”) to the Electronic Financial Transactions Act (the “Act”) passed the plenary meeting of the National Policy Committee of the National Assembly on May 11, 2023. The 2023 Proposal was drafted with the intention to protect financial consumers, promote easy payment services system, and enhance the safety and reliability of electronic financial transactions by addressing the following key points:
(i) Manage prepaid recharge amounts separately in a safe manner through the use of trust accounts or deposit accounts.
(ii) Expand the scope of electronic prepayment means and strengthen the requirements for registration exemption.
(iii) Expand the scope of applicability of the Act.
(iv) Introduce rules of conduct to be complied with by any person who has its business registered to issue and manage electronic prepayment means ("Prepayment Service Provider").
(v) Legislate Buy Now, Pay Later (“BNPL”) service as a concurrent business under the Act instead of as an exception through regulatory sandbox.
One of the main purposes of the 2023 Proposal is to enhance the protection of the users' prepaid recharge amounts held by Prepayment Service Providers. This is in response to the growing use of electronic prepayment means. Moreover, due to the Merge Point incident in August 2021, the 2023 Proposal aims to revise and improve related regulations applicable to Prepayment Service Providers by reducing the scope of electronic financial business entities exempted from the registration requirement.
I. IMPLICATION
The 2023 Proposal is expected to pass at the National Assembly plenary session to be held on May 25, 2023 after being discussed and reviewed by the Legislation and Judiciary Committee.
As a result of the proposed amendments to expand the scope of electronic prepayment means and reduce the exemption from registration requirement, a person who is not subject to prepayment business registration under the current Act may become subject to registration under the amended Act. It should be noted that a person who becomes subject to the registration due to the enforcement of the proposed amendments shall register within six (6) months from the enforcement date (i.e., one year after the promulgation). Therefore, we recommend any business currently using electronic payment means, such as gift certificates, without being registered as a prepayment business to assess its position under the amended Act well in advance in consideration of the time required for the preparation of registration.
Furthermore, as provisions for restriction of discount issuance, and obligations for refund, etc. are to be imposed under the amended Act, businesses should prepare to take measures for compliance with the regulations, such as preparation of internal control standards and amendment of the terms of the business.
Lastly, businesses should be aware that engaging in BNPL service will require approval of the Financial Services Commission under the amended Act. Also, since most of the details regarding the provision of BNPL service to users, such as its scope, usage limit, total credit limit, management soundness control, credit information management, debt collection management plan, and user protection plan, will be entrusted under a presidential decree, businesses should pay close attention to future amendments to the Enforcement Decree of the Act.
II. SUMMARY OF KEY AMENDMENTS UNDER THE 2023 PROPOSAL
A. Expanded Scope of Electronic Prepayment Means
The 2023 Proposal:
1) expands the scope of electronic prepayment means by (i) deleting the criteria for the number of business categories and (ii) including paper-based prepayment means that are converted into electronic means within the scope of electronic prepayment means (Article 2, Subparagraph 14 of the amended Act), and
2) reduces the number of member stores, and additionally considers the total issued amount as criteria to exempt a prepayment business from the registration requirement (Article 28(3)-1 of the amended Act).
The practical effect of (1) above is that if an electronic prepayment mean can be used in at least one business category, they will fall under the definition of an electronic prepayment mean under the amended Act.
Also, under the current Act, a prepayment business is not required to be registered if the relevant electronic prepayment means can be used in 10 or fewer member stores. However, based on the suggested changes per (2) above, registration exemption is available only if the relevant electronic prepayment means is used at one member store. In addition, under the current Act, registration exemption is available if the total balance of issued amount is a minimal amount (KRW 3 billion or less) regardless of the total issued amount. Under the 2023 Proposal, a prepayment business is required to be registered if the amount of the total annual issuance is more than a certain amount, which is to be determined by a presidential decree, even if the total balance of issued amount is minimal.
Nonetheless, since the 2023 Proposal keeps the current definition of "electronic prepayment means" as "means used for payment for purchase of goods or services from a third person other than the issuer," self-issued gift certificates, for which the issuer is the member store, still do not qualify as an electronic prepayment means.
B. Protection of Prepaid Recharge Amount
The 2023 Proposal requires a Prepayment Service Provider to separately manage an amount not less than 50/100 of a prepaid recharge amount by way of trust, deposit, or payment guarantee insurance with banks or financial companies as set forth in a presidential decree. The banks or financial companies are required to manage such prepaid recharge amounts in a safe manner. Any violation of the foregoing may be subject to suspension of business or a fine. Moreover, the 2023 Proposal prohibits the prepaid recharge amounts under separate management from being subject to set-off, attachment (or provisional attachment), transfer, or hypothecation. A user who has the right to claim a prepaid recharge amount, an assignee of such claims, and other persons designated by a presidential decree will have a preferential claim over other creditors to be repaid with priority (Article 25-2, Article 43(2)-1 and Article 51(1)-2 and 3 of the amended Act).
The proposed changes to protect prepaid recharge amount is adopted from the "Guidelines for the Protection of User Funds of Electronic Financial Business Entities," which has been implemented by the Financial Supervisory Service as merely an administrative guidance that is not legally binding on Prepayment Service Providers. With this protection becoming legislated, if a Prepayment Service Provider fails to take adequate protective measures for the prepaid recharge amounts, it may be subject to administrative sanctions or fines. Also, even if a Prepayment Service Provider becomes bankrupt, the relevant users will have priority to claim from the separately managed prepaid recharge amounts.
C. Refund of Electronic Prepayment Means and Regulation on the Conducts of Prepayment Service Providers
The 2023 Proposal requires financial companies and electric financial business entities to include, in its standardized terms and conditions, a full refund provision upon:
1) the number of member stores where its electronic prepayment means can be used is reduced without justifiable reasons, or
2) the terms and conditions of the use of the electronic prepayment means are changed to the user's disadvantage without justifiable reasons.
Financial companies or electric financial business entities are also required to notify users of the occurrence of such instances. Any violation of the foregoing may be subject to an administrative fine (Article 19(2)-4; Article 36-2, Subparagraph 3; and Article 51(1)-7 of the amended Act).
In addition, Prepayment Service Providers will be permitted to give economic benefits, such as issuing at discount or giving credits, to its users only if it has sufficiently sound financial strength as well as separately managing the amounts of the economic benefits. Any violation of the foregoing may be subject to an administrative fine (Article 36-2 and Article 51(1)-5 and 6 of the amended Act). This seems to be in response to the Merge Point incident, where Mergepoint Co., Ltd issued its points at excessively discounted prices despite its insufficient financial soundness and, consequently, abruptly reduced its services and suspended or delayed refund of its customers’ balances. Therefore, the 2023 Proposal intends to legislate the obligations in respect of refund of balance of electronic prepayment means to prevent reoccurrence of such incident and enhance the protection of users’ prepaid recharge amount.
D. Introduction of BNPL Service
Under the 2023 Proposal, the BNPL service, which had been permitted through regulatory sandbox, are being legislated to expressly permit a Payment Service Provider to engage in BNPL service as a concurrent business by obtaining an approval from the Financial Services Commission. The BNPL service may be provided to users with insufficient prepaid recharge amount whereby Payment Service Providers uses its own credit to pay the amount equivalent to the shortfall of a user to the member stores for the goods or services provided to the user.
It should be noted that prepaid recharge amount shall be restricted from being used as a financial resource for the BNPL service, and any loan or financing to a BNPL service user is prohibited under the 2023 Proposal (Article 35-2, Article 43(2)1, Article 49(5)6-2 and Article 49(5)9-2 of the amended Act).
E. Introduction of the Concept of Representative Member Store
The following wording is added to the definition of “member stores”:
“a person acting on behalf of financial companies or electronic financial service providers under an agreement to conduct transactions by electronic debit payment means, electronic prepayment means or electronic money for those who provide goods or services to users and is prescribed by the Presidential Decree” (Article 2(20) of the amended Act).”
This concept is adopted from the payment agency clause under the Specialized Credit Finance Business Act. The added wording is to address the issue in the existing definition of ‘member store’ under the Act where Payment Service Providers are deemed to be directly executing contracts with each member stores despite the Payment Service Providers transacting with member stores through their representative member store.
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Juho Yoon
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Youngju Park
T 82.2.3404.0451
Chris Kim
T 82.2.3404.0291