S. Korea to tighten regulations on local, foreign big-tech digital financial services

[Graphics by Song Ji-yoon]

South Korea¡¯s big tech aspirants Naver Corp. and Kakao Corp. as well as their foreign rivals alike will fall under stricter scrutiny by the financial authority for financial services and related M&As.

According to a draft of Korea¡¯s revised bill on the electronic financial transaction act obtained by Maeil Business Newspaper, big tech companies, such as Naver and Kakao, registered as a comprehensive payment settlement operator that issues and manages accounts without alliance with traditional lenders will have to receive approval from the Financial Services Commission upon merger, division, and business transfer. The requirement is expected to allow the financial authority to review in advance the risk the changes will have on the financial market.

Under the revision, big tech companies will also have to settle customer deposits through Korea Financial Telecommunications & Clearings Institute to prevent them from using deposits as internal funds.

An electronic finance operator will also have to deposit a certain amount of their settled deposits with the Korea Financial Telecommunications & Clearings Institute and set aside reserve funds for any cases of financial accidents.

The revision, which will be proposed by Representative Yoon Kwan-seok, chairman of the National Policy Committee, as early as next week, is expected to provide a solid legal basis to protect consumers who are increasingly exposed to e-financial services including loans, card, and insurance provided by platform operators like Naver and Kakao.

The revision defines financial platform as a system that advertises, substitutes, compares, and recommends financial products or services online or via mobile application. Naver Financial, Kakao Pay, and Viva Republic will all be in the category.

These financial platform operators will be strictly banned from advertising financial products of their partners as if they were their own services. Naver Financial, for example, will no longer be able to advertise a cash management account of Mirae Asset Daewoo as its own bankbook. Operators will also be banned from misleading consumers about financial product types and conditions.

Global big tech operators like Facebook and Alipay will fall under the same scrutiny when they enter the Korean market. Currently, they have been avoiding regulations for their Korean services to local consumers because there is no law that mandates them to set up a local entity. Global online payment settlement operator Paypal, for example, is offering services to Korean consumers even though it has not been registered as an electronics finance operator. But under the revised law, Paypal and other foreign tech companies wishing to provide services in Korea will have to register as a local electronics finance services provider or suspend its services in Korea.

Other global big tech companies such as Amazon and Facebook will also have to set up an operation base or branch to provide financial services in Korea. Customer deposits will also have to be managed separately through a local management institution.

An unnamed official from the financial industry said that the revision signifies that even global big tech companies should register as an electronic finance operator and operate an outlet in Korea to provide products and services.

[¨Ï Maeil Business Newspaper & mk.co.kr, All rights reserved]