Fri. Sep 22nd, 2023

Regulation HK

Financial Regulator

Korea Passes Bill to Regulate Prepaid Business Operators

2 min read

The bill was prompted by a scandal at Mergepoint, which sold discount coupons but whose founders were later charged with fraud.

Korea’s National Assembly has passed a bill to amend the Electronic Financial Transactions Act, aiming to enhance the supervision and protection of users of electronic payment services.

The bill was prompted by the scandal at Mergepoint, which initially gained popularity for a discount service that allowed consumers to obtain a 20 percent discount at local retail franchises, convenience stores and coffee shops.

Mergepoint later changed its terms of service to limit how the discount points could be used, prompting users to gather at the company’s headquarters to demand refunds. Police had to be called in to restore order.

The company’s founders were later charged with fraud for causing some KRW 100 billion (USD 75 million) worth of damages to customers and merchants including through misappropriation of company funds.

The new bill expands the scope of supervision of electronic prepaid payment service providers, establishes business conduct rules for them, and strengthens protections for users.

Under the bill, electronic prepaid payment businesses would only be exempted from registration requirements if they are used at one member store, or when the total issuance amount is below a yet-to-be-determined level.

Such businesses will be required to separately manage at least 50 percent of prepaid funds in the form of a trust, deposit, or through guarantee insurance. Prepaid funds belonging to users cannot be set off, seized, transferred, provided as collateral, and users have the priority right of reimbursement.

The conduct rules specified in the bill the terms and conditions, user disclosures, financial soundness, and other areas of prepaid businesses.

The bill also provides a legal basis for small-value deferred payment services, which allow prepaid businesses to pay merchants on behalf of users who have insufficient prepaid balances. These services have been operating under the regulatory sandbox as innovative financial services. The bill would institutionalise them in the law.

The FSC (Financial Services Commission) said this revision of the law will reduce blind spots in prepayment business regulations and better protect users’ prepaid funds.

The regulator said it will establish a market discipline system, prepare detailed guidelines on the new rules, and engage with the industry before the law comes into force.

The bill is expected to come into force in September 2024, after going through the government’s promulgation process.

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