Authorities to tighten controls on e-commerce financial services

The South Korean government is considering tougher regulations on e-commerce platforms’ involvement in financial services, in a bid to avoid another payment default crisis amid ongoing investigations into Tmon and WeMakePrice.

According to industry sources, local financial regulators are considering introducing measures that would prevent platforms from controlling suppliers’ capital by legally separating payment gateway (PG) services from e-commerce platforms.

A payment gateway facilitates electronic transactions by transmitting payment data from customers to merchants. In Korea, e-commerce platforms can offer PG services by registering as electronic financial service providers with the Financial Services Commission.

The push for tighter regulation intensified after suspicions emerged that the recent payment delay crisis at local online platforms Tmon and WeMakePrice was linked to the misappropriation of unpaid items by their Singaporean parent company, Qoo10.

Both Tmon and WeMakePrice, as registered electronic financial services providers, managed sales, delivery and settlement while controlling the funds before they were transferred to suppliers.

Until now, both companies had been settling payments about two months after the transactions. But in early July, they failed to deliver the funds from the May transactions, triggering a severe payment delay crisis. The government says the delayed payments to suppliers total about 213.4 billion won ($170 million), potentially rising to nearly 1 trillion won with future payments.

Local prosecutors are investigating Qoo10 for possible misappropriation of funds, and signs of significant illegal activity have been found in the flow of capital between Qoo10 and its Korean units. Qoo10 CEO Ku Young-bae admitted to obtaining about 40 billion won from two Korean units to acquire global e-commerce company Wish earlier this year, with unpaid settlements with suppliers included in the lawsuit.

To prevent similar problems, regulators are considering requiring e-commerce companies to either split their PG platform into a subsidiary, as local companies Coupang and Naver have done, or enter into agreements with third-party PG companies.

The regulatory framework will also require updating.

Existing regulations allow the FSA to regulate “licensed” institutions, such as banks, but not “registered” ones, such as Tmon and WeMakePrice. As a result, despite signing agreements with debt-laden e-commerce companies in 2022 to improve their financial stability, the FSA has not been able to effectively enforce these measures.

FSS Governor Lee Bok-hyun pledged to consider options for improving regulation, including establishing a special organization to oversee financial services in the e-commerce industry.

Representative Kim Nam-geun of the main opposition Democratic Party plans to propose an amendment to the Electronic Financial Transactions Act next week. The amendment would allow the FSS to impose administrative sanctions similar to those for licensed providers on registered providers with annual sales exceeding 100 billion won.

Local prosecutors are also investigating potential Ponzi schemes involving Tmon and WeMakePrice, accused of deliberately maintaining contracts with merchants and continuing to operate despite knowing of an impending payday crisis.

Meanwhile, the Seoul Bankruptcy Court on Friday granted Tmon and WeMakePrice a month to independently restructure their debts. They can avoid forced rehabilitation if they reach an agreement with their creditors. If the talks fail, the court will decide whether to resume the process.