Financial Authorities: "'○○Pay' Prepaid Funds Must Be Entrusted to External Institutions Such as Banks"

Guidelines for User Fund Protection by Electronic Financial Service Providers Effective from the 28th

[Asia Economy Reporter Jo Gang-wook] From now on, simple payment and remittance providers such as Naver Pay, Kakao Pay, and Toss must entrust the money customers have charged, so-called prepaid funds, to external institutions such as banks. In particular, when providing simple remittance services, the funds that must be entrusted are the entire amount of prepaid funds. In addition, the operation details of user funds must be continuously inspected and the operation status must be regularly disclosed.

The Financial Supervisory Service announced on the 27th that it will implement such administrative guidance from the 28th to protect user funds of electronic financial businesses.

As the scale of payment services such as simple payment and remittance expands, the amount of user funds held by electronic financial businesses has also increased significantly. The transaction amount of electronic financial businesses increased from 89 trillion won in 2014 to 135 trillion won in 2016, and jumped to 308 trillion won last year. During the same period, the size of prepaid funds increased from 780 billion won to 910 billion won, and then to 1.67 trillion won.

However, there have been concerns that the protection system for user funds is insufficient in case of payment inability due to deterioration of management or bankruptcy of electronic financial businesses, and the establishment of related systems has been urgently needed.

According to the guidelines, first, trust or payment guarantee is mandatory, and prepaid funds must be separated from proprietary assets and entrusted to external institutions such as banks as a principle. When entrusting, prepaid funds must be operated as safe assets such as government bonds and deposits, and if prepaid funds are operated as non-liquid assets making it difficult to immediately subscribe to trust products, payment guarantee insurance can be subscribed only in such cases.

Prepaid businesses providing simple remittance services must entrust 100% of prepaid funds. Prepaid businesses not providing simple remittance services must entrust at least 50% of prepaid funds. Simple remittance services refer to services that cause economic results similar to fund remittance by transferring prepaid electronic payment instruments purchased by customers to others or refunding them to accounts.

In the case of non-remittance businesses, the remaining prepaid funds other than funds subscribed to trust or guarantee insurance can be directly operated, but investable assets are limited to assets that are easy to liquidate and have low risk of loss.

Also, the ‘restriction on investable assets’ applies to newly included prepaid funds after the guideline implementation, but non-safe assets currently held must be converted into safe assets step by step with a grace period.

Safe assets include government bonds, local bonds, debt securities guaranteed by the government, local governments, or financial companies (guaranteed financial companies under Article 2, Paragraph 1 of the Depositor Protection Act), postal deposits, bank deposits or negotiable certificates of deposit, bonds issued by banks excluding subordinated bonds and equity-related bonds, and mortgage-backed securities issued by the Korea Housing Finance Corporation according to bond securitization plans.

Prepaid businesses must check daily whether the total amount of prepaid funds matches the entrusted funds and other actually operated funds, and post the size of prepaid funds, trust details, subscription to payment guarantee insurance, and guaranteed amounts on their websites at the end of each quarter.

A Financial Supervisory Service official explained, "Although the amendment of the Electronic Financial Transactions Act is underway to establish legal and institutional measures to protect user funds, we intend to prepare and implement the ‘Guidelines for Protection of User Funds by Electronic Financial Businesses’ to minimize regulatory gaps even before the law is amended." He added, "However, for existing companies, a three-month grace period will be applied considering the time required to build IT systems and organize related tasks."