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The e-commerce companies TMON and WEMAKEPRICE (WMP), currently facing delayed settlements that have raised concerns about a potential "second Merge Point incident," are said to have encountered a foreseeable outcome. Both companies were under the supervision of the Financial Supervisory Service (FSS), which had already signed a Management Improvement Agreement (MOU) two years ago due to concerns over deteriorating financial soundness, but failed to prevent the current crisis.

Moreover, since these two companies have been directly managing the amounts paid by consumers instead of using a third-party escrow account, there are no applicable laws for emergency situations, making it impossible for regulatory authorities to take measures such as management improvement recommendations, business suspension, or registration cancellation. Although the need for legislative supplementation has been continuously raised since the 2021 Merge Point incident, timely action was not taken.

① Why Are Distribution Platforms Subject to FSS Supervision?

According to financial circles and authorities on the 26th, TMON and WEMAKEPRICE are registered companies that operate as telecommunications sales intermediaries under the Electronic Commerce Act (under the jurisdiction of the Fair Trade Commission) and as electronic payment gateway (PG) service providers under the Electronic Financial Transactions Act (under the jurisdiction of the Financial Services Commission). PG businesses receive payments from consumers for goods and services and transfer the funds to sellers. In the financial sector, companies directly connected to card companies such as KG Inicis, Toss Payments, and KCP are classified as first-tier PG companies, while some distribution and platform companies like TMON and WEMAKEPRICE are classified as second-tier PG companies.

A Financial Services Commission official explained, "If a distribution company headquarters or platform company receives money electronically as payment for goods or services and settles that money with lower-tier merchants, it qualifies as a PG company under current law."

PG companies are subject to supervision by financial authorities. TMON and WEMAKEPRICE are also required to regularly report their electronic financial transaction-related operations and management performance to the authorities and are subject to various obligations. Article 63 of the Electronic Financial Supervisory Regulations specifies management guidance ratios for PG operators, such as maintaining positive net capital and ensuring that the ratio of low-risk assets to unsettled balances is at least 100%.

② Did the FSS Identify the Management Insolvency of TMON and WEMAKEPRICE?

Due to these regulations, the FSS appears to have identified the management insolvency of TMON and WEMAKEPRICE early on. WEMAKEPRICE has been in a state of capital erosion since 2020, with liabilities nearly four times its assets. Cash equivalents, which were 461.5 billion KRW in 2019, shrank to 5.5 billion KRW in four years, about one-ninth of the previous amount. Although unpaid amounts decreased somewhat from 510.1 billion KRW in 2019 to 291.5 billion KRW in 2023, the deteriorated profitability and cash flow made it difficult to improve financial soundness. Similarly, TMON's liabilities were five to six times its assets from 2019 to 2022, and its cash equivalents plunged from 41 billion KRW in 2019 to 7.9 billion KRW in 2022.

In fact, FSS Governor Lee Bok-hyun responded to a National Assembly Financial Services Committee inquiry the previous day, stating, "Since June 2022, we have identified worsening financial conditions due to intensified competition within the industry." Lee Se-hoon, the FSS Senior Deputy Governor, who held an emergency briefing the day before, also explained, "We regularly received and reviewed business reports from TMON and WEMAKEPRICE and found that they had not met capital and liquidity requirements for a considerable period."

The settlement delay issue that started at Wemakeprice, an online shopping mall operated by Qoo10 Group headquartered in Singapore, is spreading to Tmon. On the 24th, citizens are passing by the Tmon building in Gangnam-gu, Seoul. Photo by Jo Yongjun jun21@

③ Why Did the FSS Take No Significant Action?

Why did the FSS fail to take significant action despite detecting signs of insolvency at TMON and WEMAKEPRICE? At the briefing, Senior Deputy Governor Lee expressed, "Even in a state of capital erosion, there are practical difficulties in imposing business suspension or registration cancellation." This suggests that the regulatory authorities could not take direct measures against TMON and WEMAKEPRICE due to legislative gaps or limitations in related regulations.

According to the Electronic Financial Supervisory Regulations, financial authorities can enter into management improvement agreements with electronic financial operators deemed to have management weaknesses. If a company is licensed by the Financial Services Commission, the authorities can also issue management improvement recommendations, demands, or orders. The problem is that PG companies like TMON and WEMAKEPRICE are registered companies, not licensed ones. Licensed companies such as banks, securities firms, insurance companies, and card companies must obtain permits through FSC review, but registered companies like PG operators only need to fulfill formal legal requirements and register with the FSC. This is why the financial authorities' management measures for TMON and WEMAKEPRICE were limited to signing agreements.

Kim Byung-chil, Deputy Director of the FSS, told Asia Economy in a phone interview, "PG companies play only a supplementary role in payment processing, so regulations are set lightly," adding, "Only electronic money businesses that handle cash can be subject to recommendations, demands, or orders beyond management improvement agreements." He further explained, "The FSS does not have the authority to require PG companies to dispose of assets or temporarily suspend operations to improve financial structure."

④ Is It Permissible to Use Sales Proceeds at the Company's Discretion?

The settlement cycle for sellers and the method of storing sales proceeds are representative legislative gaps in the e-commerce industry. Large distribution companies must settle sales proceeds within 40 to 60 days from the end of the month in which the product was sold, according to the Large-scale Distribution Business Act. However, there are no such legal provisions in e-commerce, so the settlement cycle and storage methods vary. Some companies are known to use sales proceeds as a means of generating revenue. There are also suspicions that TMON and WEMAKEPRICE may have misappropriated sales proceeds.

As the delay in seller settlements by TMON and WEMAKEPRICE causes increasing harm to consumers, purchasing customers are visiting WEMAKEPRICE headquarters in Samseong-dong, Seoul on the 25th to submit refund requests. Photo by Heo Younghan younghan@

⑤ Will the September Enforcement of the Revised Enforcement Decree Prevent Such Incidents?

Could the current crisis have been prevented if the revised Enforcement Decree of the Electronic Financial Transactions Act, which passed the National Assembly last August and will be enforced from September, had been introduced earlier? The revised law includes provisions for protecting prepaid funds and refund obligations for merchants (sellers). Once enforced, it is expected to make "circular settlement" using gift certificate sales impossible.

However, some analysts argue that even if the revised Enforcement Decree had been introduced earlier, it would have been difficult to prevent the TMON and WEMAKEPRICE incident in advance. The revised law focuses on regulating prepaid operators, so management and supervision measures for PG businesses remain insufficient. Another financial authority official said, "Regulations on prepaid operators, who are lightly regulated electronic financial operators, were strengthened in the previous National Assembly, but regulations on PG companies have not yet been reflected."

The financial authorities are expected to initiate institutional improvements belatedly. They plan to encourage the conclusion of escrow contracts between businesses and financial institutions to ensure that funds received for settlements are used only for settlements. They are also considering measures such as raising the guarantee limits for performance liability insurance for e-commerce operators.

Kim So-young, Vice Chairman of the Financial Services Commission, responded to a parliamentary report the previous day, saying she would "actively consider" raising the minimum subscription amount for operators' performance liability insurance, which is currently 200 million KRW and considered too low. Senior Deputy Governor Lee said, "There were parts where supervision and inspection standards could not keep up with the industry's growth speed," adding, "Discussions will take place during the process of institutional improvement going forward."