[Viewpoint] The Shadow Cast by the Amendment to the Electronic Financial Transactions Act

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

The amendment to the Electronic Financial Transactions Act (hereinafter referred to as the EFTA) is expected to be submitted to the National Assembly in the second half of this year. The Financial Services Commission is preparing an amendment to the EFTA that includes allowing fintech companies to offer small postpaid payment services (300,000 to 500,000 KRW) and expanding the recharge limit for simple payment services from 2 million KRW to up to 5 million KRW. This is expected to significantly enhance the convenience for users of simple payment services. Recently, with the activation of digital-based online transactions due to the novel coronavirus disease (COVID-19), the government’s commitment to fostering the fintech industry in preparation for the post-COVID era appears to be firm. However, concerns remain regarding the increase in household debt, the rising risks associated with the excessive issuance of small postpaid credit, and the worsening management conditions of existing postpaid payment service providers such as credit card companies.

The simple payment market, which is an online payment method that does not require domestic public certification, is limited to prepaid or debit payment functions. In particular, the mainstream method involves charging money in advance and then using it for payment. When the recharge amount is insufficient, electronic financial companies automatically recharge the shortfall by linking to the consumer’s bank account or credit card. Through this, credit and check card usage occurs, and collaboration between electronic financial companies and credit card companies is essential in the simple payment market.

Considering that the number of customers of major platform companies operating simple payment services such as KakaoPay and NaverPay reaches approximately 40 million, if postpaid payment services are allowed for electronic financial companies, credit worth at least 12 trillion to 20 trillion KRW will be provided. In fact, allowing small postpaid payment services effectively grants credit functions to electronic financial companies. The small credit business is a regulated industry that operates based on soundness, and in the case of the credit card industry, a capital requirement of 20 billion KRW is required for licensing. However, this is being allowed for electronic financial companies, which are quasi-financial businesses with a required capital of 2 billion KRW.

In a situation where household income is expected to decrease due to recent employment deterioration, the amendment to the EFTA could potentially lead to an increase in household debt. There are 147 registered electronic financial companies in Korea. Even if only 300,000 KRW of credit is used from each of several electronic financial companies, it corresponds to a considerable scale of household credit. This raises concerns as it could accelerate the increase in household debt. Moreover, indiscriminate use of the postpaid system by some consumers in their 20s with insufficient income could lead to household debt defaults.

Since maintaining the soundness and funding capability of electronic financial companies, which are not financial companies, could be problematic, the financial authorities appear to be discussing allowing postpaid payments only to companies that meet certain conditions. In any case, if the amendment to the EFTA passes the National Assembly, competition between credit card companies and platform companies above a certain scale will be inevitable. However, compared to credit card companies, which are subject to financial regulations such as reduced merchant fee rates, restrictions on providing additional services like cashback under the Specialized Credit Finance Business Act, and additional loan loss provisions for risky borrowers, simple payment companies have relative advantages. Electronic financial companies are only required to maintain a capital of 2 billion KRW and a capital adequacy ratio of 20% against outstanding balances, with no special regulatory requirements. There are also no financial authority regulations on the aggressive marketing of major domestic simple payment companies. Furthermore, with the recent expansion of the simple payment online market due to COVID-19, the likelihood of younger generations familiar with pay services using postpaid payment services is expected to increase significantly.

The opening of the small credit business market could cause a decrease in sales for credit card companies, which are currently supporting small and medium-sized self-employed businesses struggling due to COVID-19 by offering payment deferrals and loan interest discounts. This could deal a significant blow to credit card companies facing increased delinquency rates due to the rise in card loans for low-credit borrowers. In other words, a decrease in sales amid rising risk management costs could negatively impact the performance of credit card companies.

In conclusion, restrictions on the use of postpaid payment services, such as the hybrid check card of credit card companies (a similar postpaid payment product issued by credit card companies that limits holding more than two such cards for three years after issuance), should be established. Additionally, it is necessary to establish regulatory standards equivalent to those for credit card companies to manage risks related to small credit allowance, such as customer credit limit calculation and delinquency rate status.

[Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University]

This content was produced with the assistance of AI translation services.