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The TMON and WeMakePrice Crisis: Key Issues and Challenges
Publication date Sep. 03, 2024
Summary
Recently, the misappropriation of sales proceeds by large open market platforms has caused significant market disruptions in Korea. To prevent such incidents from recurring, business entities, including open market platforms, should be prohibited from concurrently operating as a payment gateway (PG). Also necessary is the separation of a PG’s proprietary account from its payment funds account. The integrity of payments can only be guaranteed through a dual separation approach: separating the business entity from the PG and segregating accounts within the PG. Meanwhile, shortening the settlement period for sales proceeds by open market platforms could be considered a secondary solution as it would likely follow if the dual separation is implemented. Lastly, it is deemed undesirable for financial authorities to reinforce regulation and supervision of open market platforms.
The Korean e-commerce market, valued at approximately KRW 38 trillion in 2013, surged to KRW 227 trillion by 2023,1) representing nearly a sixfold increase over the past decade. Amid this rapid expansion, major e-commerce platforms such as TMON and WeMakePrice have been implicated in large-scale misappropriations of sales proceeds, leading to significant social and financial disruptions. In this context, this article analyzes the underlying causes of these incidents, examines the critical issues at play, and explores the challenges that the industry faces moving forward.
Role of payment gateways in e-commerce
To understand the recent incident, it is necessary to grasp the concept of payment gateways (PGs). Consider a scenario where a buyer purchases a product from an online store (see Figure 1). First, the buyer accesses the online store, selects a product, and places an order (step ①). To complete the order, the buyer has to make a payment. Upon clicking the payment button, a payment window appears on the screen, offering various payment methods, such as credit card payment, bank transfer, mobile payment, and simplified payment options. The buyer then selects their preferred payment method and enters payment information (step ①-1). In e-commerce, the system that displays this payment window and facilitates the payment process is referred to as the payment gateway (PG). PGs act as virtual cashiers. They play a critical role in simplifying and securing the payment process for buyers, ensuring transactions regardless of payment methods selected by the buyer.
Suppose the buyer selects a credit card issued by Card Company A as the payment method in the payment window. The PG then sends a payment authorization request to Card Company A (step ②). Card Company A verifies whether the card has been lost or stolen, or if it has exceeded its credit limit, and then sends the payment authorization information back to the PG (step ③). The PG, in turn, forwards this authorization information to the online store (step ④). Upon receiving the information, the online store confirms the purchase by sending a confirmation message to the buyer, thereby finalizing the transaction (step ⑤).
In the meantime, Card Company A disburses the sales proceeds to the PG within two business days after the transaction contract is finalized.2) The PG then aggregates these proceeds and periodically transfers them to the online store. Online stores choose to receive sales proceeds through a PG rather than directly from credit card companies for a good reason: using a PG allows them to avoid the complexity and effort of entering into separate contracts with numerous financial institutions, such as credit card companies and banks. Just as buyers benefit from the convenience that PGs offer during the payment process, online stores also gain significant advantages in the settlement of sales proceeds through the use of PGs.
As such, PGs serve as intermediaries between numerous buyers and sellers involved in e-commerce, not only facilitating the transmission of payment information but also handling or mediating the settlement of payments.3) In this respect, it is undeniable that PGs have significantly contributed to driving the rapid growth of e-commerce.
Dual role of open market platforms: Acting as both platforms and payment gateways
TMON and WeMakePrice are open market platforms. Unlike typical online stores that sell products through their own dedicated websites, open market operates large-scale online platforms on behalf of multiple sellers. These sellers join the platform to market and sell their products. In other words, open market functions as an online market provider,4) offering an accessible channel for small business owners or those with limited brand recognition to reach a broader audience. The proliferation of open market platforms has contributed to the growth of e-commerce. However, a significant issue arises when these open market platforms also act as PGs.
Figure 2 illustrates the transaction process within an open market platform that also serves as a PG. For example, when a buyer places an order for a product listed by Seller 2 on the open market (step ①), the buyer selects a credit card issued by Card Company A as the payment method via the payment window provided by the primary PG and enters payment details (step ①-1). The term primary PG refers to the PG that offers the payment window, distinguishing it from the secondary PG, which is operated by the open market itself.
Upon receiving the buyer’s payment information, the primary PG initiates a payment authorization request with Card Company A (step ②). After verifying the card’s validity, Card Company A sends the payment authorization information back to the primary PG (step ③). The primary PG then forwards this authorization information to the open market, which also functions as the secondary PG (step ④). Subsequently, the open market sends the order details to Seller 2 (step ⑤), who then enters into a sales contract with the buyer based on this information (step ⑥). Up to this point, the process is similar to a standard e-commerce transaction, with the exception of the involvement of two separate PGs.
The primary distinction lies in the settlement of sales proceeds. Similar to other transactions, Card Company A disburses the sales proceeds to the primary PG within two business days after the purchase contract is finalized. However, the primary PG does not directly settle the payment with Seller 2. Instead, it transfers the sales proceeds to the open market, which also serves as the secondary PG. In this arrangement, the primary PG acts merely as a conduit, channeling the sales proceeds to the open market. The entity responsible for settling sales proceeds with Seller 2 and many other sellers who list products on the platform is the open market, also acting as the secondary PG. Notably, the secondary PG is not involved in the transmission of payment information.
In summary, a typical e-commerce transaction involves a single PG that handles both the transmission of payment information and the settlement of sales proceeds. By contrast, in transactions involving open market platforms, the primary PG is responsible for transmitting payment information and transferring sales proceeds to the secondary PG, while the secondary PG manages the settlement of proceeds with individual sellers.
Settlement delays and misappropriation of sales proceeds in open market platforms
As illustrated in Figure 2, it is the sole responsibility of the open market, acting as the secondary PG, to settle sales proceeds with sellers. However, TMON and WeMakePrice have extended payment delays to sellers by up to 70 days after receiving the sales proceeds from the primary PG. Unlike open market platforms, major retailers, such as supermarkets or department stores that purchase products for resale, are subject to regulations governing settlement periods.5) These regulations are designed to prevent exploitative practices by large retailers against suppliers with weaker bargaining power.
In the past, TMON and WeMakePrice operated as large retailers, purchasing goods directly for resale while simultaneously acting as intermediaries by providing open market platforms. As a result, they were previously regulated regarding settlement periods. However, in 2019, both companies transitioned to a pure open market model, offering only online platform services, thereby exempting themselves from these regulatory requirements. Consequently, the responsibility for settling sale proceeds with sellers now lies solely with the open market platforms, leading to significant extensions in settlement periods.
Even more concerning is the fact that TMON and WeMakePrice misappropriated the sales proceeds to be paid to the sellers for their own purposes. Delayed settlement may not be a critical issue as long as the sales proceeds are securely held. In such cases, sellers may face delays, but they would not have to worry about losing their funds. However, TMON and WeMakePrice, acting as both the open market and the PG, jeopardized the seller’s funds by using the sales proceeds, along with their own funds, for other purposes.
The significant extension of settlement periods by TMON and WeMakePrice appears to have been a deliberate strategy to allow for the misuse of these funds. If the sales proceeds were not being diverted, there would be little justification for extending settlement periods to such an extreme extent. It has been reported that TMON and WeMakePrice used a portion of the funds owed to sellers to cover their marketing expenses. Additionally, a substantial amount of sellers’ funds was allegedly utilized by Qoo10, their parent company, to finance the acquisition of the US e-commerce company Wish.6)
Even if an open market platform misappropriates sellers’ funds, sellers, as creditors, could still receive their payments retrospectively as long as the platform remains solvent. However, since 2020, both companies have fallen into a state of negative equity, with liabilities exceeding assets, effectively rendering them insolvent. This insolvency means that sellers on these platforms have virtually no chance of recovering their unsettled sales proceeds. As of August 1, the delayed settlements owed by TMON, WeMakePrice, and Interpark Commerce—all subsidiaries of Qoo10 Group—amount to KRW 297.4 billion, affecting 3,395 sellers.7) The total financial damage from the delayed settlements is projected to reach KRW 1 trillion.
This damage extends beyond the sellers. Consumers who have purchased products such as vacation packages, where the actual service is consumed three to six months after payment, are also facing losses. Despite having already paid for these services, some travel agencies—unable to receive their sales proceeds from these open market platforms—are refusing to provide the purchased services.
Preventing misappropriation of sales proceeds: A dual-separation approach
The settlement of sales proceeds falls under the payment service category. Historically, payment services have evolved from custodial services. Custodians responsible for safeguarding customers’ funds also provided payment services by either disbursing funds directly to customers upon request or transferring funds to a third party designated by customers. In this sense, custodial and payment services are inseparably linked. This is evidenced by the fact that numerous financial business entities that provided payment services also served as custodians throughout history, a practice observed in ancient Greece and Rome.8)
A key characteristic of custodial services is that the availability of the items in custody remains entirely under the control of the client who entrusts them. Under no circumstances should a custodian misuse a client’s funds in their custody.9) This principle applies equally to payment services, which inherently constitute part of custodian services. Given the essential similarity between custodial and payment services, PGs that handle payment and settlement services should be held to the same legal standards and obligations as custodians. In other words, a PG that facilitates online payments for both buyers and sellers must not, under any circumstances, divert the flow of payment funds between buyers and sellers for its own benefit. However, the Electronic Financial Transactions Act, which governs PGs, lacks the provisions to prevent such misuse, and this regulatory gap has contributed to the current crisis.
To prevent incidents from recurring, it is necessary to prohibit business entities, including open market platforms, from concurrently operating payment and settlement services such as those provided by PGs (first separation: separation of PGs from other business entities). This measure would eliminate the risk of using business funds mixed with those designated for payment and settlement. Additionally, stricter regulations should be imposed on PGs. Specifically, PGs should be required to segregate their proprietary accounts from the accounts used for payment and settlement services (second separation: account segregation within the PG). Payment and settlement services, which are the lifeblood of the economy, must be conducted with absolute certainty. Without the separation between proprietary accounts and payment and settlement accounts, the reliability of payment and settlement services could be compromised by potential profit declines or the misappropriation of funds by PGs. This risk becomes even more significant in the absence of a ban on PG ownership by industrial capital. Therefore, to fundamentally prevent a recurrence of recent incidents, a dual-separation approach is needed: the separation of the business entity from the PG and the internal segregation of accounts within the PG. If this dual separation is implemented, the alternative proposal of requiring open market platforms to obtain payment guarantee insurance for unsettled funds would become redundant.
Similar regulations should be applied to gift certificate issuers. Whether online or offline, gift certificates allow the buyer to purchase goods or services at their convenience. In this context, the buyer entrusts the gift certificate issuer with temporary custody of their purchase funds. As custodians of these funds, gift certificate issuers are prohibited from using the funds received from gift certificate sales for their own purposes. Given the lack of regulations on offline gift certificate issuers, these issuers should be subject to regulations similar to those imposed on custodians or settlement and payment service providers. These considerations are equally relevant for gift certificate issuers. Fortunately, funds raised from online gift certificate issuance, including prepaid funds, are required to be managed separately in their entirety, starting from September 15. This measure is expected to largely reduce the risk of misappropriation of payment funds for online gift certificates.10)
Shortening settlement periods and strengthening oversight are secondary issues
One proposed solution to prevent the recurrence of recent incidents is to shorten the settlement period for sales proceeds. This suggestion is based on the notion that if open market platforms, which also function as PGs, are required to disburse sales proceeds to sellers more quickly, the risk of misappropriation would be reduced. However, while shortening settlement periods may lower this risk, it is not a fundamental solution for ensuring the integrity of payment and settlement processes as this approach does not completely eliminate the risk of misappropriation. Additionally, the unique characteristics of online transactions should be considered. Online commerce often involves reverse settlements for exchanges, refunds, misdeliveries, and incorrect shipments. In these cases, a blanket reduction in the settlement period may not be ideal.
Moreover, if the dual separation is implemented, shorter settlement periods are likely to be achieved without the need for additional regulations. If payment funds are fully segregated and not accessible to open market platforms or PGs, there would be no reason to delay the disbursement of settlement funds.
There is another reason why the shortening of settlement periods is secondary to the separation of payment funds. The primary goal of reducing the settlement period is to prevent dominant players from abusing their market power, thereby promoting fair trade. In contrast, the separation of payment funds is crucial for building the fundamental infrastructure necessary for the market’s operation. Without this separation, it is difficult to guarantee the integrity of payment and settlement services, which may lead to the collapse of the market itself. This is not to underestimate the importance of fair trade; rather, it is necessary to recognize the distinction in the impact of proposed measures. Fair trade primarily addresses the distribution of profits, determining who gains more benefits in the market. On the other hand, the integrity of payment and settlement services concerns the very foundation of the market, influencing its existence, development, or potential demise.
Finally, it is worth considering the argument that financial authorities should strengthen prudential regulation and supervision of open market platforms. Currently, open market platforms that also function as PGs are required to register with the Financial Services Commission (FSC). As registered entities, rather than licensed entities, they are subject to relatively lenient regulations. Consequently, some argue that open market platforms acting as PGs should be reclassified as licensed entities, with stricter entry requirements, and even be subject to timely corrective measures similar to those imposed on major financial institutions like banks. However, this approach overlooks a more fundamental issue.
Financial authorities are regulatory and supervisory bodies that specialize in the financial industry. When it comes to non-financial entities like open market platforms, financial authorities lack the expertise and information that the relevant ministries possess. Furthermore, with the increase in the type and number of financial services companies, the available resources are insufficient to regulate and oversee all entities within the financial sector. In this regard, it is neither feasible nor desirable for financial authorities to regulate and supervise non-financial entities like open market platforms, simply because they also provide PG services. Financial authorities should focus on ensuring the safety of payment funds by prohibiting open market platforms from concurrently functioning as PGs, thereby allowing non-financial entities like open market platforms to operate outside the scope of financial regulation and supervision.
Innovation should be pursued through core business functions
The lesson learned from this incident is that the same regulations should apply to any business entity performing identical functions, regardless of the type of business. Whether a financial services company or a non-financial company, whether operating online, offline, or through a hybrid model, any business entity that provides custodial and payment services for unspecified individuals should be regulated as a financial business entity. The underlying principle guiding such regulations should be strict separation of funds. Based on this principle, delivery apps, accommodation apps, and any other businesses that manage clients’ payment funds in their custody, as well as companies like TMON and WeMakePrice, must rigorously separate these funds from their own corporate funds. In the same vein, business entities that issue gift certificates are no exception.
Some are concerned that if platform operators are prohibited from utilizing payment funds, it could hinder the growth of the platform market. However, this is a misguided belief. Distributors including open market platforms should create added value by pursuing innovation in their core business, distribution. Disrupting the payment market by using clients’ payment funds for their own interests and growth cannot be considered innovative activities. True innovation should be pursued within the boundaries of the essential infrastructure that ensures the proper functioning of the market. At this juncture, it is crucial to closely examine whether actions for private gains, disguised as innovation, threaten the foundation of the market.
1) Statistics Korea.
2) Credit card companies are required to pay sales proceeds within two business days after a sales contract is finalized under the Standard Terms and Conditions of Credit Card Member Stores.
3) In Article 2, Paragraph 19 of the Electronic Financial Transactions Act, a PG is defined as an electronic payment settlement agency service provider.
4) In Article 2 of the Act on the Consumer Protection in Electronic Commerce, an online commerce business entity is defined as a mail-order distributor, while open market that provides an online market is specified as a mail-order brokerage.
5) Article 8 of the Act on Fair Transactions in Large Retail Business.
6) Urgent inquiry into the unsettlement and delayed refunds by TMON and WeMakePrice (State Affairs Committee, July 30, 2024).
7) Additional session regarding countermeasures and policy improvements for the TMON and WeMakePrice incident (government announcement, August 7, 2024).
8) Shin, B.S., 2024, World of Debt, ECON.
9) Shin, B.S., Ibid; Soto, Jesus, 1998, 『Money, Bank Credit, and Economic Cycles』, Mises Institute.
10) Amendment to Article 13-2, Paragraph 1 of the Enforcement Decree of the Electronic Financial Transactions Act.
Role of payment gateways in e-commerce
To understand the recent incident, it is necessary to grasp the concept of payment gateways (PGs). Consider a scenario where a buyer purchases a product from an online store (see Figure 1). First, the buyer accesses the online store, selects a product, and places an order (step ①). To complete the order, the buyer has to make a payment. Upon clicking the payment button, a payment window appears on the screen, offering various payment methods, such as credit card payment, bank transfer, mobile payment, and simplified payment options. The buyer then selects their preferred payment method and enters payment information (step ①-1). In e-commerce, the system that displays this payment window and facilitates the payment process is referred to as the payment gateway (PG). PGs act as virtual cashiers. They play a critical role in simplifying and securing the payment process for buyers, ensuring transactions regardless of payment methods selected by the buyer.
In the meantime, Card Company A disburses the sales proceeds to the PG within two business days after the transaction contract is finalized.2) The PG then aggregates these proceeds and periodically transfers them to the online store. Online stores choose to receive sales proceeds through a PG rather than directly from credit card companies for a good reason: using a PG allows them to avoid the complexity and effort of entering into separate contracts with numerous financial institutions, such as credit card companies and banks. Just as buyers benefit from the convenience that PGs offer during the payment process, online stores also gain significant advantages in the settlement of sales proceeds through the use of PGs.
As such, PGs serve as intermediaries between numerous buyers and sellers involved in e-commerce, not only facilitating the transmission of payment information but also handling or mediating the settlement of payments.3) In this respect, it is undeniable that PGs have significantly contributed to driving the rapid growth of e-commerce.
Dual role of open market platforms: Acting as both platforms and payment gateways
TMON and WeMakePrice are open market platforms. Unlike typical online stores that sell products through their own dedicated websites, open market operates large-scale online platforms on behalf of multiple sellers. These sellers join the platform to market and sell their products. In other words, open market functions as an online market provider,4) offering an accessible channel for small business owners or those with limited brand recognition to reach a broader audience. The proliferation of open market platforms has contributed to the growth of e-commerce. However, a significant issue arises when these open market platforms also act as PGs.
Upon receiving the buyer’s payment information, the primary PG initiates a payment authorization request with Card Company A (step ②). After verifying the card’s validity, Card Company A sends the payment authorization information back to the primary PG (step ③). The primary PG then forwards this authorization information to the open market, which also functions as the secondary PG (step ④). Subsequently, the open market sends the order details to Seller 2 (step ⑤), who then enters into a sales contract with the buyer based on this information (step ⑥). Up to this point, the process is similar to a standard e-commerce transaction, with the exception of the involvement of two separate PGs.
The primary distinction lies in the settlement of sales proceeds. Similar to other transactions, Card Company A disburses the sales proceeds to the primary PG within two business days after the purchase contract is finalized. However, the primary PG does not directly settle the payment with Seller 2. Instead, it transfers the sales proceeds to the open market, which also serves as the secondary PG. In this arrangement, the primary PG acts merely as a conduit, channeling the sales proceeds to the open market. The entity responsible for settling sales proceeds with Seller 2 and many other sellers who list products on the platform is the open market, also acting as the secondary PG. Notably, the secondary PG is not involved in the transmission of payment information.
In summary, a typical e-commerce transaction involves a single PG that handles both the transmission of payment information and the settlement of sales proceeds. By contrast, in transactions involving open market platforms, the primary PG is responsible for transmitting payment information and transferring sales proceeds to the secondary PG, while the secondary PG manages the settlement of proceeds with individual sellers.
As illustrated in Figure 2, it is the sole responsibility of the open market, acting as the secondary PG, to settle sales proceeds with sellers. However, TMON and WeMakePrice have extended payment delays to sellers by up to 70 days after receiving the sales proceeds from the primary PG. Unlike open market platforms, major retailers, such as supermarkets or department stores that purchase products for resale, are subject to regulations governing settlement periods.5) These regulations are designed to prevent exploitative practices by large retailers against suppliers with weaker bargaining power.
In the past, TMON and WeMakePrice operated as large retailers, purchasing goods directly for resale while simultaneously acting as intermediaries by providing open market platforms. As a result, they were previously regulated regarding settlement periods. However, in 2019, both companies transitioned to a pure open market model, offering only online platform services, thereby exempting themselves from these regulatory requirements. Consequently, the responsibility for settling sale proceeds with sellers now lies solely with the open market platforms, leading to significant extensions in settlement periods.
Even more concerning is the fact that TMON and WeMakePrice misappropriated the sales proceeds to be paid to the sellers for their own purposes. Delayed settlement may not be a critical issue as long as the sales proceeds are securely held. In such cases, sellers may face delays, but they would not have to worry about losing their funds. However, TMON and WeMakePrice, acting as both the open market and the PG, jeopardized the seller’s funds by using the sales proceeds, along with their own funds, for other purposes.
The significant extension of settlement periods by TMON and WeMakePrice appears to have been a deliberate strategy to allow for the misuse of these funds. If the sales proceeds were not being diverted, there would be little justification for extending settlement periods to such an extreme extent. It has been reported that TMON and WeMakePrice used a portion of the funds owed to sellers to cover their marketing expenses. Additionally, a substantial amount of sellers’ funds was allegedly utilized by Qoo10, their parent company, to finance the acquisition of the US e-commerce company Wish.6)
Even if an open market platform misappropriates sellers’ funds, sellers, as creditors, could still receive their payments retrospectively as long as the platform remains solvent. However, since 2020, both companies have fallen into a state of negative equity, with liabilities exceeding assets, effectively rendering them insolvent. This insolvency means that sellers on these platforms have virtually no chance of recovering their unsettled sales proceeds. As of August 1, the delayed settlements owed by TMON, WeMakePrice, and Interpark Commerce—all subsidiaries of Qoo10 Group—amount to KRW 297.4 billion, affecting 3,395 sellers.7) The total financial damage from the delayed settlements is projected to reach KRW 1 trillion.
This damage extends beyond the sellers. Consumers who have purchased products such as vacation packages, where the actual service is consumed three to six months after payment, are also facing losses. Despite having already paid for these services, some travel agencies—unable to receive their sales proceeds from these open market platforms—are refusing to provide the purchased services.
Preventing misappropriation of sales proceeds: A dual-separation approach
The settlement of sales proceeds falls under the payment service category. Historically, payment services have evolved from custodial services. Custodians responsible for safeguarding customers’ funds also provided payment services by either disbursing funds directly to customers upon request or transferring funds to a third party designated by customers. In this sense, custodial and payment services are inseparably linked. This is evidenced by the fact that numerous financial business entities that provided payment services also served as custodians throughout history, a practice observed in ancient Greece and Rome.8)
A key characteristic of custodial services is that the availability of the items in custody remains entirely under the control of the client who entrusts them. Under no circumstances should a custodian misuse a client’s funds in their custody.9) This principle applies equally to payment services, which inherently constitute part of custodian services. Given the essential similarity between custodial and payment services, PGs that handle payment and settlement services should be held to the same legal standards and obligations as custodians. In other words, a PG that facilitates online payments for both buyers and sellers must not, under any circumstances, divert the flow of payment funds between buyers and sellers for its own benefit. However, the Electronic Financial Transactions Act, which governs PGs, lacks the provisions to prevent such misuse, and this regulatory gap has contributed to the current crisis.
To prevent incidents from recurring, it is necessary to prohibit business entities, including open market platforms, from concurrently operating payment and settlement services such as those provided by PGs (first separation: separation of PGs from other business entities). This measure would eliminate the risk of using business funds mixed with those designated for payment and settlement. Additionally, stricter regulations should be imposed on PGs. Specifically, PGs should be required to segregate their proprietary accounts from the accounts used for payment and settlement services (second separation: account segregation within the PG). Payment and settlement services, which are the lifeblood of the economy, must be conducted with absolute certainty. Without the separation between proprietary accounts and payment and settlement accounts, the reliability of payment and settlement services could be compromised by potential profit declines or the misappropriation of funds by PGs. This risk becomes even more significant in the absence of a ban on PG ownership by industrial capital. Therefore, to fundamentally prevent a recurrence of recent incidents, a dual-separation approach is needed: the separation of the business entity from the PG and the internal segregation of accounts within the PG. If this dual separation is implemented, the alternative proposal of requiring open market platforms to obtain payment guarantee insurance for unsettled funds would become redundant.
Similar regulations should be applied to gift certificate issuers. Whether online or offline, gift certificates allow the buyer to purchase goods or services at their convenience. In this context, the buyer entrusts the gift certificate issuer with temporary custody of their purchase funds. As custodians of these funds, gift certificate issuers are prohibited from using the funds received from gift certificate sales for their own purposes. Given the lack of regulations on offline gift certificate issuers, these issuers should be subject to regulations similar to those imposed on custodians or settlement and payment service providers. These considerations are equally relevant for gift certificate issuers. Fortunately, funds raised from online gift certificate issuance, including prepaid funds, are required to be managed separately in their entirety, starting from September 15. This measure is expected to largely reduce the risk of misappropriation of payment funds for online gift certificates.10)
Shortening settlement periods and strengthening oversight are secondary issues
One proposed solution to prevent the recurrence of recent incidents is to shorten the settlement period for sales proceeds. This suggestion is based on the notion that if open market platforms, which also function as PGs, are required to disburse sales proceeds to sellers more quickly, the risk of misappropriation would be reduced. However, while shortening settlement periods may lower this risk, it is not a fundamental solution for ensuring the integrity of payment and settlement processes as this approach does not completely eliminate the risk of misappropriation. Additionally, the unique characteristics of online transactions should be considered. Online commerce often involves reverse settlements for exchanges, refunds, misdeliveries, and incorrect shipments. In these cases, a blanket reduction in the settlement period may not be ideal.
Moreover, if the dual separation is implemented, shorter settlement periods are likely to be achieved without the need for additional regulations. If payment funds are fully segregated and not accessible to open market platforms or PGs, there would be no reason to delay the disbursement of settlement funds.
There is another reason why the shortening of settlement periods is secondary to the separation of payment funds. The primary goal of reducing the settlement period is to prevent dominant players from abusing their market power, thereby promoting fair trade. In contrast, the separation of payment funds is crucial for building the fundamental infrastructure necessary for the market’s operation. Without this separation, it is difficult to guarantee the integrity of payment and settlement services, which may lead to the collapse of the market itself. This is not to underestimate the importance of fair trade; rather, it is necessary to recognize the distinction in the impact of proposed measures. Fair trade primarily addresses the distribution of profits, determining who gains more benefits in the market. On the other hand, the integrity of payment and settlement services concerns the very foundation of the market, influencing its existence, development, or potential demise.
Finally, it is worth considering the argument that financial authorities should strengthen prudential regulation and supervision of open market platforms. Currently, open market platforms that also function as PGs are required to register with the Financial Services Commission (FSC). As registered entities, rather than licensed entities, they are subject to relatively lenient regulations. Consequently, some argue that open market platforms acting as PGs should be reclassified as licensed entities, with stricter entry requirements, and even be subject to timely corrective measures similar to those imposed on major financial institutions like banks. However, this approach overlooks a more fundamental issue.
Financial authorities are regulatory and supervisory bodies that specialize in the financial industry. When it comes to non-financial entities like open market platforms, financial authorities lack the expertise and information that the relevant ministries possess. Furthermore, with the increase in the type and number of financial services companies, the available resources are insufficient to regulate and oversee all entities within the financial sector. In this regard, it is neither feasible nor desirable for financial authorities to regulate and supervise non-financial entities like open market platforms, simply because they also provide PG services. Financial authorities should focus on ensuring the safety of payment funds by prohibiting open market platforms from concurrently functioning as PGs, thereby allowing non-financial entities like open market platforms to operate outside the scope of financial regulation and supervision.
Innovation should be pursued through core business functions
The lesson learned from this incident is that the same regulations should apply to any business entity performing identical functions, regardless of the type of business. Whether a financial services company or a non-financial company, whether operating online, offline, or through a hybrid model, any business entity that provides custodial and payment services for unspecified individuals should be regulated as a financial business entity. The underlying principle guiding such regulations should be strict separation of funds. Based on this principle, delivery apps, accommodation apps, and any other businesses that manage clients’ payment funds in their custody, as well as companies like TMON and WeMakePrice, must rigorously separate these funds from their own corporate funds. In the same vein, business entities that issue gift certificates are no exception.
Some are concerned that if platform operators are prohibited from utilizing payment funds, it could hinder the growth of the platform market. However, this is a misguided belief. Distributors including open market platforms should create added value by pursuing innovation in their core business, distribution. Disrupting the payment market by using clients’ payment funds for their own interests and growth cannot be considered innovative activities. True innovation should be pursued within the boundaries of the essential infrastructure that ensures the proper functioning of the market. At this juncture, it is crucial to closely examine whether actions for private gains, disguised as innovation, threaten the foundation of the market.
1) Statistics Korea.
2) Credit card companies are required to pay sales proceeds within two business days after a sales contract is finalized under the Standard Terms and Conditions of Credit Card Member Stores.
3) In Article 2, Paragraph 19 of the Electronic Financial Transactions Act, a PG is defined as an electronic payment settlement agency service provider.
4) In Article 2 of the Act on the Consumer Protection in Electronic Commerce, an online commerce business entity is defined as a mail-order distributor, while open market that provides an online market is specified as a mail-order brokerage.
5) Article 8 of the Act on Fair Transactions in Large Retail Business.
6) Urgent inquiry into the unsettlement and delayed refunds by TMON and WeMakePrice (State Affairs Committee, July 30, 2024).
7) Additional session regarding countermeasures and policy improvements for the TMON and WeMakePrice incident (government announcement, August 7, 2024).
8) Shin, B.S., 2024, World of Debt, ECON.
9) Shin, B.S., Ibid; Soto, Jesus, 1998, 『Money, Bank Credit, and Economic Cycles』, Mises Institute.
10) Amendment to Article 13-2, Paragraph 1 of the Enforcement Decree of the Electronic Financial Transactions Act.