Amendment to the Electronic Financial Transactions Act Alone Cannot Prevent a 'Second Merge Incident' (Comprehensive)

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Pending Electronic Financial Transactions Act, Targeting Registered Companies

Unregistered Platforms like Merge Difficult to Manage

Only 50% Deposit Required for Payment Settlement Businesses, User Deposit Ratio Also Problematic

Bank of Korea Urges Priority Discussion on Consumer Protection Provisions in Electronic Financial Transactions Act Amendment

[Asia Economy Reporters Kiho Sung, Eunbyul Kim] As the mobile discount payment platform ‘Merge Point’ has been embroiled in a controversy over alleged fraud, calls for the passage of amendments to the Electronic Financial Transactions Act (EFTA) aimed at consumer protection are rising. However, the industry expresses concerns that the amendment alone may not be sufficient to prevent a ‘second Merge Point incident.’ The bill currently pending in the National Assembly targets the management and supervision of registered electronic financial operators, making it difficult to manage unregistered operators even if the bill passes. Additionally, the ratio of user deposits held externally is also controversial, highlighting the need for more meticulous legislative review.

According to the Financial Supervisory Service as of the end of March this year, there are a total of 65 registered prepaid operators, with prepaid balances issued by them reaching 2.4 trillion KRW. However, this figure only estimates registered companies. For unregistered operators, it is difficult to even ascertain details such as issuance amounts and the number of companies. In fact, Merge Plus, which operates Merge Point, has been conducting business for three years without registering as a ‘prepaid electronic payment instrument issuer and manager (prepaid operator)’ as stipulated under the current EFTA.

While the Merge Point incident has emphasized the need for amendments to the EFTA for consumer protection, some in the industry argue that the amendment is not a complete solution. The amendment includes consumer protection measures such as requiring electronic financial operators to separately deposit customers’ prepaid funds with external institutions, but there is no effective way to supervise ‘unregistered operators’ like Merge Plus. According to Article 49, Paragraph 5 of the current EFTA, unregistered operations can be punished with imprisonment of up to three years or a fine of up to 20 million KRW. However, this is a criminal penalty enforced by investigative agencies, and there are no administrative sanctions from financial authorities.

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An industry insider stated, "Merge Point only gained attention recently because of the issue, but the real problem is that it has been operating unregistered for three years already," adding, "Even if the EFTA is amended, it is practically impossible for financial authorities to monitor all companies, so cooperation with investigative authorities will be necessary to manage unregistered operators."

Alongside this, the user deposit ratio stipulated in the EFTA amendment is also expected to come under scrutiny. Since prepaid funds entrusted by customers have the nature of deposits, they should be protected. However, the current EFTA does not require prepaid funds to be separately held by external institutions. The amendment includes provisions to protect prepaid funds by segregating deposits from proprietary assets and entrusting them to external financial institutions such as banks. However, while fund transfer service providers are required to manage 100% of deposits, payment settlement businesses are only required to deposit 50%.

Even if Merge Plus registers as a payment settlement business after the amendment, it would not need to deposit half of the prepaid funds. Therefore, if users simultaneously demand refunds, a ‘second Merge Point incident’ could recur. This issue has been consistently pointed out since the amendment was proposed.

Conflicts between the Bank of Korea and the Financial Services Commission over the EFTA amendment are also resurfacing. The Bank of Korea issued a position statement urging, "The amendment excluding payment and settlement-related matters should be discussed promptly," and called for prioritizing consumer protection provisions in the amendment. Considering that major countries such as the UK, Germany, and China mandate 100% external deposits of payment amounts, the Bank of Korea argued that strengthening consumer protection measures in the amendment should also be considered. Ko Seung-beom, the nominee for Financial Services Commission Chairman, also participated in the Bank of Korea’s Monetary Policy Committee meeting last February, expressing support for ‘prioritizing consumer protection discussions.’

Jo Hyekyung, Senior Researcher at the Political Economy Research Institute Da-an, diagnosed, "Prepaid account customer deposits were excluded from the application of the Banking Act on the grounds that they are not bank deposits," adding, "The EFTA amendment is further deepening the fragmented regulatory system concerning electronic payment services."

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