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2023 Oct/25
Introduction of E-money and Payment Institution in Korea: Issues and Challenges Issue Papers 23-20 PDF
The discussion of introducing the E-money and Payment Institution (EMPI) has been revisited in Korea, sparking debates of pros and cons, while the issues raised so far have not been sufficiently resolved. Banks raise concerns that such an introduction may allow industrial conglomerates to enter the banking industry without a legal banking license, potentially weaken the principle of same conduct, same risk and same regulation, and pose threats to the stability of the payment settlement and financial system. On the other hand, fintech firms and credit card companies advocate for the positive impacts of introducing EMPI, foreseeing enhanced competition in money transfer services, greater competition in financial services, cost reduction in financial transactions, and increased benefits for financial consumers.
Interestingly, these issues are rooted in four primary factors that mostly have been overlooked. First, although an EMPI is distinct from a bank, it could be argued to be similar to a bank depending on the ways of providing financial services. Second, payment default risk arises because real-time money transfers are processed through deferred net settlement (DNS) and for this reason direct or indirect participation in the retail payment system in Korea is allowed only through collective decision-making of banks. Third, anticipated money movement can create a conflict of interests between EMPIs and banks. Lastly, it is uncertain whether the positive impacts claimed by fintech firms and credit card companies would materialize through the introduction of EMPI.

When looking at cases in the UK, EU, Singapore, and the US that have introduced schemes akin to the EMPI, the issues raised in Korea have not been reported. These jurisdictions do not classify or regard them as a bank. In addition, even non-banking financial institutions can directly participate in their own retail payment system or indirectly participate by making a private agreement or contract with a bank without concerns about payment stability. It is also hard to find any reports suggesting significant money movement and enhanced competition in financial services. However, as incidents of failure to manage customer funds or abuse of money laundering occur, there is a trend to improve and strengthen related regulations to protect customer funds and expand financial inclusion.

In conclusion, it may be a priority to resolve concerns about payment stability before introducing the EMPI whose positive effects are not certain. This involves adopting a real-time gross settlement system as soon as possible and improving unique features of the existing participation in the retail payment system. To introduce the EMPI first, it should revise relevant regulations such as limits on third-party operation of financial services so that positive effects can actually be realized, and strengthen related regulations to prevent problems such as potential digital run and reverse discrimination against depositors.