Lee Ju-yeol's Reason for Harsh Criticism of the Financial Services Commission... What Is the Supervision of OO Pay?

Lee Ju-yeol, Governor of the Bank of Korea, is speaking at the Monetary Policy Direction press conference held on the 26th at the Bank of Korea in Jung-gu, Seoul. [Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The conflict between the Bank of Korea and the Financial Services Commission (FSC) over the payment and settlement management authority of big tech companies such as Naver Pay and Kakao Pay is intensifying. Even Lee Ju-yeol, the usually calm Governor of the Bank of Korea, publicly opposed the FSC, calling it "excessive and unnecessary interference with the central bank" and "excessive regulation." Nevertheless, the FSC's stance remains firm, and the outcome is expected to be decided in the National Assembly. What triggered the escalation of the conflict between the Bank of Korea and the FSC?

The controversy began with the FSC's recent amendment to the Electronic Financial Transactions Act pushed through the National Assembly. The amendment proposed by the FSC includes ▲ ensuring stable management of digital payment and settlement systems and institutionalizing mandatory external clearing for big tech companies ▲ designating the FSC as the authority to appoint the electronic payment transaction clearing system, among other provisions.

Electronic payment transaction clearing refers to offsetting claims and debts during fund transfers to simplify transactions. When multiple transfer transactions occur between different banks, Bank A and Bank B calculate the net amount owed to each other to finalize the settlement amount. The Korea Financial Telecommunications & Clearings Institute (KFTC) is a representative institution that performs such electronic payment transaction clearing services.

According to the FSC's amendment, the FSC would take charge of supervising the payment and settlement management of big tech companies like Naver Pay and Kakao Pay, as well as fintech firms. It would mandate that transactions occurring within Naver, such as purchases made on the Naver shopping mall using funds charged to Naver Pay, be processed through the KFTC system, with the FSC overseeing this comprehensively. Therefore, the amendment also includes supervisory authority of the FSC over the KFTC and related entities.

However, the Bank of Korea views the FSC's move as an attempt to manage the KFTC under the pretext of electronic finance. The Bank of Korea already operates the Bank of Korea Financial Network and is responsible for the final settlement operations of the KFTC payment and settlement system, as well as monitoring (evaluation, improvement recommendations, etc.) the KFTC payment and settlement system. The KFTC was established in 1986 by the Bank of Korea and ten commercial banks, with the Bank of Korea serving as the chairman of the general meeting of members. Until recently, the head of the KFTC was always a former Bank of Korea official, but last year, for the first time, a former FSC official (Kim Hak-soo, Standing Commissioner) took the position, signaling the beginning of this power struggle.

Governor Lee stated at a press conference following the Monetary Policy Board meeting on the 26th that regarding the FSC's push for the Electronic Financial Transactions Act amendment, "Operating and managing payment and settlement stably is an inherent authority of the central bank, and no country is an exception." He added, "If a payment default occurs, the system could collapse, causing economic chaos. To prevent this, the central bank holds the final decision-making authority to reduce risk."

He continued, "According to the FSC's amendment, fintech payment activities are expected to expand, so they want to mandate that fintech internal transactions be processed through the KFTC system to reduce risk." He explained, "The KFTC is an institution that clears fund transfers between financial institutions, but they want unnecessary internal transactions to be processed through the KFTC system and for the FSC to comprehensively supervise the KFTC."

Governor Lee emphasized, "If fintech companies' internal transactions are processed through the KFTC system, stability will inevitably decline," and said that the FSC's intention to hold comprehensive operational authority is excessive regulation.

He added, "The Bank of Korea has managed the KFTC stably, but the FSC's intention to oversee the KFTC by also monitoring fintech internal transactions is excessive and unnecessary interference with the central bank." He also said, "We have repeatedly conveyed and expressed these opinions, but they were not reflected. Even in other countries where fintech is active, such cases do not exist." He mentioned that although China exists, it is not a situation to follow China.

Furthermore, Governor Lee said, "Our economy is in a very difficult situation, and I feel very sorry and regretful that conflicts between the two institutions are being exposed." He added, "We have cooperated closely with the FSC since COVID-19, and such cooperation will be needed for a considerable period, so it is unfortunate that this issue has arisen."

Meanwhile, if the FSC does not reflect the Bank of Korea's position, the Bank plans to clarify through an amendment to the Bank of Korea Act that the relevant authority lies with the Bank of Korea. Earlier, on the 20th, Yang Kyung-sook, a member of the National Assembly's Strategy and Finance Committee from the Democratic Party, proposed an amendment to the Bank of Korea Act granting the Bank of Korea management authority over the entire payment and settlement system of big tech companies. The amendment mainly grants the Bank of Korea comprehensive management authority over payment risk management and operation related to digital fund transfers and payment services. If the two bills maintain conflicting positions and pass through their respective standing committees, final coordination will be made at the National Assembly's Legislation and Judiciary Committee.