Authorities Move to Improve Timaep-Related Systems... Key Issues Include Mandatory Escrow [Why&Next]

Consideration of Mandatory Escrow
Clarification of Third-Party Deposits and Key Regulatory Issues
Discussion on Improving Settlement Cycles
Deliberation on Establishing Sanction Grounds in the Electronic Financial Transactions Act

Financial Services Commission Chairman Kim Byung-hwan has called for institutional improvements related to the TMON and WEMAKEPRICE incidents. Discussions are expected to focus on mandatory escrow and improvements to settlement cycles. Legislation enabling timely corrective actions against insolvent electronic financial operators is also anticipated.

At the first executive meeting held after his inauguration on the 31st, Chairman Kim urged the preparation of institutional improvement measures related to e-commerce. He emphasized the need to enhance the reliability of the e-commerce industry by improving unfair business practices detrimental to sellers and consumers, such as the safety management of settlement funds and shortening settlement cycles, which were raised by the Political Affairs Committee and others. Fair Trade Commission Chairman Han Ki-jung also apologized for institutional shortcomings and began preparing countermeasures. During an urgent inquiry by the National Assembly’s Political Affairs Committee, when criticized that the autonomous regulation policy in the platform’s dominant-subordinate sector itself was problematic, he responded, “We will faithfully improve the system.”

First, measures to mandate escrow for platform companies like TMON and WEMAKEPRICE are expected to be reviewed. Mandatory escrow can prevent excessive use of sales proceeds for other purposes. Escrow refers to a method where a third party such as a bank holds the payment, and the payment is released to the seller once the delivery of goods is completed. It was revealed that the recent incident occurred because TMON and WEMAKEPRICE used sales funds for purposes other than settlement. During a recent National Assembly Political Affairs Committee inquiry, Qoo10 CEO Koo Young-bae stated that most of the sales proceeds were used for promotions during price competition. While denying that sales funds were used to acquire the North American online shopping mall Wish, he acknowledged that temporarily diverting entrusted funds by sellers could pose risks of embezzlement or breach of trust, stating, “I believe there is a problem.”

Kim Byunghwan, the newly appointed Chairman of the Financial Services Commission, is entering the Government Seoul Office in Jongno-gu, Seoul on the 31st. Photo by Jo Yongjun jun21@

Discussion on Mandatory Escrow for ‘Third-Party Custody of Settlement Funds’...Key Issues Include Prohibition of Self-Deposit and Appropriate Regulation

Escrow has already been introduced under the name “payment deposit” in the Electronic Commerce Act, which falls under the jurisdiction of the Fair Trade Commission. However, under current law, there is considerable room for interpretation that platform companies are not obligated to use escrow. According to the Electronic Commerce Act, the subject of escrow is the “mail-order seller,” which includes sellers and online shopping mall tenants. Platform companies are viewed as intermediaries in mail-order sales under current law.

Another issue arising from the platform’s status under the Electronic Commerce Act is that the responsibility for consumer refunds may lie with the tenant companies. If a business operator cannot supply a product, they must refund the amount within three business days from the consumer’s payment date. However, since the business operator is defined as a “mail-order seller,” tenant companies affected by the recent incident may bear the refund obligation to consumers.

If escrow is mandated for platform companies, the issue of whether these companies can register as escrow operators themselves and deposit settlement funds internally must also be addressed. TMON is the only company within the Qoo10 group registered as an escrow operator. It has entrusted the payment deposit service of its affiliate Interpark Commerce. If Qoo10 group affiliates designate TMON as the escrow institution, both consumer and tenant company funds would flow into TMON, allowing the Qoo10 group to misuse these funds. Therefore, a system must be established to allow a trustworthy third party, such as a bank outside the affiliate group, to hold the funds.

There is also a view that escrow should be mandated but at an appropriate level. This perspective stems from the fact that e-commerce companies like Coupang have grown by using settlement funds to manage assets or invest, thereby enhancing consumer benefits. Comprehensive legislation regulating settlement funds is rare overseas. If a system is adopted where the platform receives brokerage fees and tenant companies directly receive the remaining consumer payment, calculating the ratio of fees and amounts during split management will be a crucial point in institutional improvement. Some argue that mandatory escrow itself is ineffective, as most platform companies (Naver, 11st, Auction, Gmarket, etc.) already apply escrow voluntarily despite no obligation. Coupang, although not adopting escrow, is known to separately hold settlement funds in safe financial assets before payment.

[Image source=Yonhap News]

Settlement Cycle Improvements Also Expected...Need for New Regulatory Legislation and Grounds for Sanctions under the Electronic Financial Transactions Act Instead of the Electronic Commerce Act

Improvements to the settlement cycle are also expected to be discussed. TMON and WEMAKEPRICE had particularly long settlement cycles compared to other companies. TMON pays settlement funds 40 days after the last day of the transaction month, and WEMAKEPRICE pays on the 7th of the second month. This is very long compared to other e-commerce companies, which take 1-2 days after purchase confirmation. Coupang has also been criticized for long settlement cycles but has introduced a fast settlement system (settlement the day after purchase confirmation).

There is also an opinion that overall regulation should be addressed through new legislation rather than the Electronic Commerce Act. Since the purpose of the Electronic Commerce Act is focused on consumer protection, new legislation with a different purpose is needed for comprehensive protection, including tenant companies. For example, the “Online Platform Fairness Act” discussed in the 21st National Assembly was a bill aimed at protecting tenant companies from platforms.

The financial authorities are expected to consider establishing grounds for sanctions under the Electronic Financial Transactions Act. The Financial Supervisory Service, which intended to regulate TMON and WEMAKEPRICE?both in a state of capital erosion?through management improvement agreements, lacked the authority to issue recommendations or corrective actions. Related legislative proposals are already underway. Democratic Party lawmaker Kim Nam-geun plans to propose an amendment to the Electronic Financial Transactions Act to enable financial authorities to take timely corrective actions (such as capital increase orders) against electronic financial operators like TMON and WEMAKEPRICE that fail to comply with management guidance standards.