PG Industry Disconcerted by Tougher Legal Amendment Than FSS Proposal
"Need to Consider Internal Control Risks at External Institutions Like Seoul Guarantee"
Political Circles Urged to Establish Legal Basis for Mutual Aid Association
The National Assembly is set to soon pass an amendment to the Electronic Financial Transactions Act that will require 100% of settlement funds to be managed by external institutions, in order to prevent a recurrence of large-scale settlement payment failures like the so-called 'TMEP (Tmon·Wemakeprice) incident.' The electronic payment gateway (PG) industry has expressed dismay as the National Assembly has proposed a much stricter legal amendment than the existing guidelines suggested by the Financial Supervisory Service. The industry has also called for the amendment to include a provision establishing a compensation mutual aid association, a proposal previously submitted to President Lee Jaemyung's camp during the presidential election period.
According to political and financial industry sources on July 22, the National Assembly's Political Affairs Committee held the first subcommittee for bill review the previous day and, by bipartisan agreement, processed the amendment to the Electronic Financial Transactions Act containing these provisions. If the bill passes through the full committee meeting and the plenary session scheduled for July 30-31, it is expected to clear the National Assembly without difficulty.
The core of the amendment is that, starting from the enforcement date, PG companies will be required to entrust 100% of their settlement funds to external institutions over a two-year period. The plan is to gradually increase the ratio: 60% at the time of enforcement, 80% after one year, and 100% after another year.
The PG industry has expressed surprise that the Political Affairs Committee specified 100% external entrustment in the amendment. Under the regulations, PG operators must entrust settlement funds to external institutions through payment guarantee insurance, trusts, or deposits. Trusts and deposits are mainly placed with major commercial banks such as KB Kookmin, Shinhan, Hana, and Woori, while payment guarantee insurance is effectively monopolized by SGI Seoul Guarantee, which has recently been plagued by system failures.
Initially, the Financial Supervisory Service announced that it would issue administrative guidance requiring 60% of settlement funds to be entrusted to external institutions by August 13, with enforcement starting January 1 next year. Although the initial grace period was three months, industry feedback led to an extension of just over four months (from August 13 to the end of the year).
If the National Assembly passes the '100% law,' PG operators will lose the flexibility to manage up to 40% of their settlement funds internally. If internal control risks arise at Seoul Guarantee or the banks, the possibility of a 'payment crisis' cannot be ruled out. An industry insider stated, "We had hoped that the Political Affairs Committee would either lower the entrustment ratio compared to the Financial Supervisory Service's guidance, or at least maintain it at 60% with a longer grace period, but the legal amendment has turned out to be even stricter, leaving us dismayed."
The industry pointed out that simply increasing the proportion of externally managed settlement funds is not a comprehensive solution. The industry has requested that the political and financial authorities establish a legal basis for the creation of a compensation mutual aid association, as proposed by the Korea Fintech Industry Association to then-presidential candidate Lee Jaemyung in May. This would involve amending the Electronic Financial Transactions Act to provide for the establishment of a (tentatively named) Electronic Financial Transaction Accident Compensation Mutual Aid Association, to better prepare for financial accidents related to simple payments.
The logic is to establish a legal basis for the mutual aid association, make membership mandatory, prevent illegal operations by unlicensed PG companies, and expel poorly managed operators, thereby enhancing the market's self-regulatory effect. The proposal also includes the idea of creating a statutory body to manage the mutual aid association, which would collect contributions, reducing the management burden on external institutions (Seoul Guarantee and commercial banks), increasing the liquidity of contributions, and lowering fees.
An industry insider commented, "The idea for a mutual aid association, as proposed by the Korea Fintech Industry Association to candidate Lee Jaemyung at the time, has not been discussed in the Political Affairs Committee. Forcing even small and medium-sized PG companies to entrust 100% of their settlement funds to external institutions is impractical, and we must not overlook the possibility that PG operators may face internal control risks at external institutions as a result of this regulation."
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