At the end of 2018, eight credit card companies such as KB, Lotte, Samsung, Shinhan, BC, Nonghyup, Hana, and Hyundai agreed to carry out pilot projects of NFC (Near Field Communication) payment to expand simple payment services.
This was the first project where private credit card companies decided to work together to innovate their payment services. They established a pilot zone near Myungdong and started pilot projects through 80,000 franchise stores. However, this project fizzled out without even securing a franchise store.
When they were planning to supply NFC payment readers, they were told by South Korean Government that it would punish them for ‘illegal rebate’ if they supplied payment readers for free. As a result, they could not even start their project properly and had to end it prematurely.
South Korean Government is currently working on Zero Pay, which is a simple payment project for small businesses, to innovate simple payment services. On top of this, Financial Services Commission) included a proposal of supplying simple payment readers to South Korean Government’s measure for financial innovative infrastructures. This indicates that South Korean Government lift rebate restriction that had been strictly prohibited.
Financial authorities gave a notice on law revision so that providing simple payment readers for free does not correspond to ‘illegal rebate’. As a result, industries are concerned about revival of indirect rebate that was once used as a method of ‘Gapjil’ by major franchises.
◊Why did South Korean Government lift restriction on rebate?
Reason why South Korean Government lifted its restriction rebate despite opposition from industries is because it believes that South Korea’s financial payment market is leaning too heavily on credit cards. Hidden goals of Zero Pay project are to lower percentage of credit card payments and to shift leadership in payment market to commercial banks.
According to FSC, most of payments in South Korea are made by credit cards while most countries in the world have even percentages of payments made by cash, debit cards, and credit cards. Percentages of amount of credit card payments and number of credit card payments out of entire payments are 55% and 50% respectively. On the other hand, percentages of debit card payments in Sweden and Denmark are 69% and 70% respectively. Percentages of credit card payments are only 20% and 3% respectively.
While credit card-based payment system is convenient for consumers, it strains household budgets due to credit payments and establishes a structure of high-cost commercial transactions.
This policy is also included in FSC’s plan for innovating financial payment infrastructures announced in February. FSC’s goal is to have various simple payment providers in markets by introducing open banking system and revising Electronic Finance Act.
"Easing rebate regulation is part of our process to normalize South Korea’s payment culture that is centered on credit cards.” said a high-ranking official of FSC. “Although credit card companies may have difficult times during this process, we are planning to support them with creating other new business models as we have allowed Big Data-based consulting and others.”
Relevant industries immediately opposed such position by FSC. Twelve VAN (Value Added Network) businesses that supply payment readers recently sent a letter to FSC through Credit Card VAN Association about continuing to maintain its regulation on rebate. Credit card companies and payment reader manufacturers are also taking same stance as VAN industry.
◊Easing rebate regulation expected to cause abuse of an expedient
Industries point out that easing regulation on rebate will revive bad practice of paying excessive amount of money and valuables to major franchises.
Reason why rebate regulation was established for major franchises is because there was a bad cycle of rebates that were paid to major franchises being filled by fees on small and medium franchise stores.
Credit card companies and VAN businesses had been paying huge amount of rebates to attract major franchises and they had raised these rebates through fees on small and medium franchise stores. Rebate prohibition regulation was legislated as a law to end this bad cycle. However, South Korean Government is making an escape clause through an authoritative interpretation.
South Korean Government states that it is going to establish an escape clause for ‘devices that can read new methods of payments’. However, relevant industries state that this escape clause is very ambiguous and that there cannot be ‘simple payment readers’ since most of payment readers that are currently on markets are used for simple payment and other methods of payments together.
If this escape clause is established, major franchises that make more than $264,000 (300 million KRW) annually will receive payment readers for free through an expedient and they will receive various payments in addition to simple payments.
Fact that there can be various interpretations towards rebate prohibition clause is also a problem.
Most of new payment methods stated by FSC are balance transfer and prepaid electronic payment method and not credit card transaction. Businesses that deal with these methods are formally classified as electronic financial businesses and they are not regulated by Specialized Credit Financial Business Act. However, most of these electronic financial businesses are part of VAN businesses. This indicates that VAN businesses can avoid regulations through electronic financial business while carrying out same acts.
◊Industries point out fairness as the main problem
It is clear why relevant industries are criticizing South Korean Government’s plan as South Korean Government does not have any clear basis for easing rebate regulation and there is lack of fairness.
They are criticizing South Korean Government for contradicting itself when it prohibited credit card companies from supplying payment readers for free in the past and is now easing regulations to vitalize Zero Pay.
They even established best practices for eliminating rebate business through meetings with financial authorities.
However, their efforts are faced with becoming worthless due to South Korean Government.
“We are worried that FSC’s authoritative interpretation will change current business environment that is without rebates into markets where illegal rebates are abused again.” said a representative for a major VAN business.
FSC is planning to provide an authoritative interpretation that will only allow rebates to simple payment providers and work on preparing detailed guidelines afterwards. It is likely that guidelines will be dependent upon how laws are revised in the future.
Industries gave an example of how rebates were used in the past to a reporter of The Electronic Times and requested the reporter to tell financial authorities about their stance.
Relevant industries state that VAN rebates that take place cunningly need to be investigated very closely and cracked down strictly. This is a reason why financial authorities need to prepare detailed guidelines that are clear and well-grounded. Experts advise that there cannot be any more situation where honest businesses suffer from dishonest acts.
Staff Reporter Gil, Jaeshik | osolgil@etnews.com