Regulatory Improvements Proposed for Payment Gateway Services in Wake of Recent E-commerce Payment Failures

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Regulatory Improvements Proposed for Payment Gateway Services in Wake of Recent E-commerce Payment Failures Sep 09, 2024

The Financial Services Commission announced a set of measures intended to improve regulations on electronic payment settlement agency services (payment gateway or PG services) on September 9. The proposed measures are aimed at preventing the recurrence of payment delays involving PG services recently seen in the large-scale e-commerce payment failures. The measures have been prepared after coordinating with related government ministries and collecting opinions from experts.

First, there will a measure to safely protect the total amount of unsettled payments from PG services. To ensure stability in the payment and settlement system, PG services will be required to separately manage the total amount (100 percent) of unsettled funds in the form of deposit, trust, or payment guarantee insurance, and inform this to sellers when entering into an agreement and disclose this information on their website. However, considering the burden of regulatory compliance, there will be a grace period and the separate management requirement will be phased in gradually—for instance, 60 percent of unsettled funds during the first year of implementation, 80 percent for the second year, and 100 percent for the third year. In addition, unsettled funds being separately managed shall not be allowed for a transfer or to be used as a collateral, or put up for confiscation or setoff by a third party. Moreover, a priority right to payments will be introduced to ensure safe protection of unsettled funds even when PG services become bankrupt.

Second, there will be practical management and supervisory mechanisms designed to encourage sound operation of PG services. Since there currently exist no legal means to enforce PG services to comply with operational guidelines even when there is noncompliance, regulatory tools (corrective order, business suspension, and revocation of registration) will be introduced to enable financial authorities to take actions against noncompliance when there is a failure to follow operational guidelines or the separate management obligation. In addition, PG services may become subject to sanctions and penalties if the unsettled funds being managed separately are found to have been used for some other non-settlement purposes or if there is a failure of making payment within the agreed upon settlement period. Moreover, in line with the growth in their transactions volume, authorities will seek to increase the capital requirement of PG services.

Meanwhile, this regulatory reform proposal also aims to more clearly establish the scope of PG services. PG services provide payment transactions between different parties in a continuous and repetitive manner. However, under the current Act on Electronic Financial Transactions, PG services are defined in more general terms, including the settlement of costs or intermediation of settlement on behalf of a third party, which in practice could apply to all settlement types, including a company’s internal settlement transactions. As a result, under the current legal framework, the act of receiving funds and paying out for company’s own internal transaction purposes by an e-commerce platform, department store, franchise business, or passenger transportation service provider can also qualify as a PG service. Therefore, to address the problem of excessive and unreasonable regulatory supervision, the scope of PG services will be clearly established to make sure that the above-mentioned cases stay out of regulatory purview.

Based on the regulatory reform plan announced today, the FSC plans to have public discussions in September before submitting a final plan to the National Assembly.

• Please refer to the attached PDF for details.

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