Shadowy economy: Regulation blind spot facilitated Qoo10 crisis

The failure to pay out sellers of TMON and WeMakePrice stemmed from a regulation blind spot that allowed Qoo10 to over-extend in aggressive expansion.

WeMakePrice's headquarters in Gangna District, southern Seoul on Tuesday. [NEWS1]

TMON and WeMakePrice's ongoing delay in payments to sellers is revealing cracks in the core business strategy of e-commerce platforms once touted as "revolutionary." Age-old criticism of the operators — that they do not take responsibility for what happens on their platforms despite receiving fees for working as the intermediary distributor — has once again surfaced.

Refunds to customers have been somewhat resolved as credit card companies, mobile payment services and payment gateways have begun cooperating in the reimbursement process. However, a clear-cut solution for the merchants on TMON and WeMakePrice — who have not been paid their earnings as the platform’s operator, Qoo10, suffers a liquidity crunch — has not come to light. According to financial authorities on Thursday, the unpaid sum amounted to 128 billion won ($92.5 million) owed to sellers on TMON and 85.4 billion won to vendors on WeMakePrice.

This amount has only taken into account the delayed payments in May; it is expected to grow in size after the unpaid earnings from June and July are added. Behind the winner-takes-all business model

E-commerce platforms connect merchants to customers, and so they aim to become a monopoly. Their strategy is to create a network effect: having more sellers on the platform increases products that attract customers, and more buyers leads to even more suppliers clamoring to join. This is why platform operators attempt to expand their businesses despite the risks involved.

A merchant listed on Qoo10-owned e-commerce platforms TMON and WeMakePrice grabs his head at a meeting for the sellers held at Gangnam District, southern Seoul on Sunday. [YONHAP]

Major online platforms that have essentially monopolized the retail market have been constantly criticized for their anticompetitive practices, especially for excessive attempts to make profit. This is also why the Fair Trade Commission (FTC) pursued the passage of the Platform Competition Promotion Act, which designates dominant platform operators and prohibits them from engaging in unfair practices by placing them under stronger scrutiny.

But the ongoing Qoo10 debacle at hand is different from other issues in that problems have stemmed from a weakly performing marketplace, not a strong one. Payment problems occurred at TMON and WeMakePrice after Qoo10 CEO Ku Young-bae aggressively acquired businesses despite the company's financial woes.

Ku is accused by industry insiders of using the two domestic platforms only as a means to obtain liquid assets. TMON went through a structural overhaul in April of last year to integrate its engineering headquarters into Qoo10, and in June, its development and accounting teams were absorbed by the parent company. WeMakePrice's development and accounting teams were integrated upon its acquisition in May 2023. This means the core functions of the platforms had been taken over, leaving them to focus only on marketing and expanding sales transactions.

“[Ku] engaged in a bleed-out competition in an attempt to expand in the fiercely competitive e-commerce scene, leading to a point beyond control,” an insider at a major e-commerce platform told the JoongAng Ilbo, an affiliate of the Korea JoongAng Daily.

Qoo10 founder and CEO Ku Young-bae appears for a hearing at the National Assembly in western Seoul on Tuesday on Tuesday. [NEWS1]

Though the fault is with the parent company, everyone involved is shouldering the damages from the fallout.

“The platform operator has become insolvent but has not been taking proper responsibility, and the losses are being shouldered by the consumers, merchants and payment service providers,” said a high-ranking employee in the credit card industry, adding that “the customers’ losses at least have been covered by the payment service providers, but there doesn’t seem to be an easy fix for the damages to sellers.”

"With the insolvent platforms not making payments in time, there has been a chain reaction inflicting damages on the accounts we do business with, not just us,” the CEO of a company listed on TMON and WeMakePrice said.

Regulation needed, problem lies in the details

The cause of the issue may be different, but the need has been voiced for legal amendments to regulate platforms that act as middlemen but shoulder relatively little responsibility. TMON and WeMakePrice have, in fact, been operating in a regulation blind spot. Under the Act on the Consumer Protection in Electronic Commerce, sellers must issue reimbursements within three working days to any customer who asks for a refund or withdraws from a subscription. But under the current transactional structure within the platforms, the responsibility to make the refunds lies with the sellers, not the platform operator. The FTC pushed for a bill in 2021 that would place more responsibility on online platform operators, but it did not pass in the National Assembly.

TMON customers wait to get register for refunds at the e-commerce platform's offices in Gangnam District, southern Seoul, on Friday. [YONHAP]

Legislation regulating the time period between receiving payment from customers and remitting to merchants is also needed. In the case of TMON and WeMakePrice, listed sellers were paid more than 70 days after transactions. Retailers operated by large firms must pay their listed merchants within 40 to 60 days in line with the Act on Fair Transactions in Large Retail Business, but there is no such legislation for e-commerce transactions. This is also why there is speculation that TMON and WeMakePrice were misusing the earnings to solve Qoo10's liquidity crisis before issuing the payments.

“TMON and WeMakePrice were operating in a blind spot as they are [classified as] mail order brokers and do not have to adhere to the Act on Fair Transactions in Large Retail Business,” Lee Jung-hee, an economics professor at Chung-Ang University, said.

“It must be discussed whether brokers such as TMON and WeMakePrice should also be included on the list of businesses subject to retail regulations. If they are not included, they must be required to pay the earnings [to sellers] as soon as the delivery of goods to customers has been confirmed,” Prof. Lee added.

The two platforms also operate as payment gateways in addition to being marketplaces. Under the Electronic Financial Transactions Act, a firm approved by the Financial Services Commission (FSC) could be ordered to improve its management when caught with problems in its operations. But payment gateways, including TMON and WeMakePrice, are registered to, but not approved by, the FSC, making them exempt from regulation.

“If financial authorities had a basis to regulate the business operations of payment gateways, damages could be lessened,” Seo Ji-yong, an economics professor at Sangmyung University, said.

Talks of hastening the voting procedure for the Platform Competition Promotion Act are being underway in political circles, but some industry insiders say the bill is unrelated to the current Qoo10 issue as it was made to regulate online platforms’ monopolistic practices.

“The exact cause of the problem has not yet been identified. Applying stricter regulations to platforms in general could only give out a negative signal to the innovative economy,” Sejong University business professor Lee Dong-il said. "Don't throw the baby out with the bathwater."

BY KANG KWANG-WOO, KIM MIN-JEONG, KIM JU-YEON [kim.juyeon2@joongang.co.kr]