[Song Seungseop's Financial Light] Why Can't South Korea Use Apple Pay Yet?

To Use Apple Pay, NFC-Enabled Terminals Must Be Introduced
Low NFC Adoption Due to Card Companies' Conflicting Interests
Terminal Distribution Costs and Additional Fees Also Obstacles
Korean-Specific Communication Standards, Not Global, Are Another Key Factor

[Asia Economy Reporter Song Seung-seop] Finance is difficult. It is tangled with confusing terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet finance is important. To understand the philosophy of fund management and consistently follow the flow of money, basic financial knowledge must be the foundation. Accordingly, Asia Economy selects one financial issue each week and explains it in very simple terms. Even those who know nothing about finance can immediately understand these ‘light’ stories that turn on the bright ‘light’ of finance.

Apple Pay (Source - TUAW)

[Asia Economy Reporter Song Seung-seop] There are rumors that Apple Pay will be introduced in Korea. But did you know that among the OECD countries, the only ones where Apple Pay is not available are Korea and T?rkiye? One in four mobile phone users in Korea uses an iPhone, so why has Apple Pay not yet been introduced in Korea? Looking beneath the surface, there are disputes over interests in the card industry and a Galapagos-like regulatory environment in Korea.

Why Apple Pay Payment Method is Difficult in Korea

First, there is a big difference in payment methods. In Korea, the ‘Magnetic Secure Transmission (MST)’ method is used for contactless payments. This is the technology principle of Samsung Pay. It is a method of wirelessly transmitting the magnetic information on a credit card. When a physical card is swiped on a reader, a magnetic field is generated. MST equips the smartphone with a function to generate a magnetic field, and as long as the credit card information is stored on the phone, it can be used. When a payment is requested, the card information is encrypted into a ‘token’ and sent to the card reader. Since it uses the magnetic information of the physical card and the same technical principle, it can be used with existing terminals.

‘Near Field Communication (NFC)’ is the technology principle of Apple Pay. NFC uses a kind of communication procedure like exchanging voices with a walkie-talkie. When the terminal sends a frequency, the antenna embedded in the smartphone receives it. The smartphone encrypts the stored credit card information and sends it to the terminal, and when the terminal accepts the information, the payment is completed. However, since it uses a completely different payment method from MST, which uses magnetic fields, a payment terminal equipped with NFC functionality is required.

An image showing a payment being made on a terminal using NFC payment method and an indicator signaling that NFC payment is available

Korea is among the countries with a low NFC terminal penetration rate of about 1%. Behind this is the sharp conflict of interests among card companies. Between 2015 and 2016, there was a transition from magnetic card terminals, which had weak security, to IC card terminals. At that time, KB Kookmin, Hana, BC Card, and others advocated for adding ‘NFC functionality’ to terminals. Their logic was to join the global trend moving toward NFC. These companies were entering the mobile carrier and mobile card markets or promoting NFC-related businesses.

However, the rest of the companies, including the industry’s top two players Shinhan and Samsung Card, opposed this. Their argument was to ‘focus on the IC terminal transition.’ Card companies that had secured the app card market were lukewarm about NFC adoption, and other card companies did not want to spend more money unnecessarily. At that time, meetings held by the Credit Finance Association were so intense that you could hear card industry officials shouting outside the meeting room. The media even used the term ‘NFC alliance.’

The conclusion was that only the IC card payment method was spread, as the major and majority card companies wished. As a result, the spread of NFC terminals was delayed, and the introduction of Apple Pay, which uses the NFC method, became difficult. The problem lies in Apple’s current position. Apple believes that domestic card companies should bear the cost of spreading NFC terminals, as in other countries. The installation cost is about 150,000 to 200,000 KRW per terminal. To commercialize it as much as Samsung Pay, it would need to be installed in at least millions of stores, which is a large expense. Therefore, card companies argue that Apple should also bear the cost of spreading NFC terminals.

Commission Rates and Communication Standards Are Also Challenges to Solve

Apple Pay

Card company commission rates are also obstacles. Samsung Pay does not incur payment fees. However, Apple collects a fee per transaction from card companies because Apple Pay is a card-not-present (CNP) transaction. It is known to take 0.15% in the U.S. The commission rate that Korean card companies receive from merchants is currently around 2%. This is the result of the government reducing it 14 times over 16 years from 4.5% in 2007. If Apple Pay is introduced, there is a high possibility that commission income will decrease further.

Communication standards are also a difficult issue. Apple Pay uses the EMV standard. This means that technology development, production, and distribution related to payments follow the EMV rules. It was created in 1993 by Europay, MasterCard, and Visa, and is the most widely used international standard. Cards with overseas payment functions also use the EMV standard, which is why they can be used abroad. However, Korea has introduced a standard called KLSC. It is a unique Korean standard created early last year by the Credit Finance Association and nine card companies.

Why did Korea create a new standard instead of using EMV? Because the cost is too high. Companies that created the EMV standard charge fees, and domestic card companies reportedly pay over 100 billion KRW annually. The key issue is whether Apple, which uses EMV, will recognize Korea’s KLSC standard. If Apple insists on the EMV method, card companies will have to continue paying huge fees after introducing Apple Pay. Since they have to pay both commission and communication standard fees, card companies are reluctant about Apple Pay.

There are rampant rumors that Apple Pay will be introduced with Hyundai Card. Hyundai Card denies this, saying “there is nothing to confirm,” but interest among iPhone users is growing. Will Apple Pay overcome the piled-up challenges and land in Korea?