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Research Monograph Digital Payment Innovation and Financial Consumer Protection August 29, 2022

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Series No. 2022-02

Research Monograph KOR Digital Payment Innovation and Financial Consumer Protection #Financial Supervisory and Policy #Banks and Financial Institutions #Market Regulation: Entry, Pricing, Quality Regulation
DOIhttps://doi.org/10.22740/kdi.rm.2022.02 P-ISBN979-11-5932-726-1 E-ISBN979-11-5932-746-9

August 29, 2022

  • 프로필
    HWANG,Sunjoo
Summary
○ Even with weak legislative support, the digital economy is gaining momentum, propelled by the recent progress in contactless financial services and digital finance’s growing convergence with other sectors.
- As the primary legal framework for digital finance, the Electronic Financial Transactions Act (EFTA) had an amendment proposal in November 2020, but the bill is still pending at the National Assembly.
- Despite its vital importance in the Korean economy as a legal foundation for financial innovation, the EFTA has remained largely intact since its enactment in 2006 and has not been sufficient institutional support for critical technological changes like the rise of fintech and big tech.

○ Key point of the amendment is opening up payment services to non-banking financial institutions, such as tech firms (big tech) and credit card firms.
- Payment services are an essential amenity in our everyday life, encompassing payment for goods and services, cash deposit and withdrawal, salary transfer, domestic and foreign remittance, and utility bill payment.
- The amendment bill introduces a license of Comprehensive Payment Service Provider (CPSP), which is allowed to provide all payment services by directly offering a checking account like banks.
- Once the bill passes, some big tech firms as well as conventional nonbank financial institutions like credit card issuers are expected to get the license of CPSP.

○ The significance of payment services lies in that this sector is the basis for nonbank entities to expand into other areas, such as banking, insurance, and financial investment in the mid-to-long term.
- Because every economic activity involves the act of paying, CPSPs can accumulate vast user data.
- Also, these operators can bring in a massive amount of funds that customers deposit for payment transfers. Such funds can be used to launch new customized investment products or expand their business to other financial markets.

○ In the longer term, opening up digital payment services may thrust the financial industry to the next level by stimulating competition from within.
- A single app or metaverse platform is all it takes for users to carry out the whole array of financial services and e-commerce, not to mention payment transfers. Also foreseeable are crumbling barriers between different subsectors within the broad financial sector and spurring competition across the entire industry.

○ Some are rather pessimistic about the open-up because they perceive it as flinging open the door of banking; however, this study does not regard it as harming financial stability.
- The required regulatory level should be on par with banking regulations when deeming CPSPs as banks, but as nonbank payment service providers the degree of restrictiveness and protection would decrease.
- This study views the core function of banks as financial intermediation, which transfers customer deposits into illiquid loans. Since payment service operators cannot provide loans, it is reasonable to regard them as nonbank payment institutions (refer to Chapter 4).

○ On the other hand, financial consumer protection remains crucial agenda.
- Since most payment service users place their funds in demand deposit accounts, protecting these funds and guaranteeing service users’ rights are critical.
- The amendment bill contains some protective measures, but in the UK, where a similar scheme has been in operation, several payment service providers went bankrupt without returning customer funds.
Contents
Publisher's Note
Summary

Chapter 1 Introduction

Chapter 2 Amendment to The Electronic Financial Transactions Act and Opening of the Payment Market
 2. 1. Key contents of the amendment to the Electronic Financial Transactions Act
 2. 2. Overseas case studies

Chapter 3 Importance of Payment Systems from a Medium-to-Long-Term Perspective: The Starting Point of Comprehensive Banking
 3. 1. Historical perspective: Goldsmith Bankers
 3. 2. Overseas cases of fintech firms with payment systems evolving into banks
 3. 3. How will the revenue model of payment service providers change in the long term?

Chapter 4 Perspective on Current Issues: Are Payment Service Providers Banks or Non-Bank Entities?
 4. 1. Identity of payment service providers and their relevance to current issues
 4. 2. Current issue: Financial stability or consumer protection?

Chapter 5 Current Status of Payment Systems in Korea
 5. 1. Comparative status by country
 5. 2. Current status of digital payment systems in Korea

Chapter 6 Expected Effects of Opening Up Payment Systems
 6. 1. Increased convenience and reduced payment fees through the convergence of finance and technology
 6. 2. Increased consumer welfare through competition in payment system funding

Chapter 7 Controversial and Problematic Issues Related to Opening Up Payment Systems
 7. 1. Issues of user fund protection
 7. 2. Issues related to the prohibition of interest payments
 7. 3. Issues of user and general creditor protection: Priority repayment issues
 7. 4. Other issues
 7. 5. Discussion on the possibility of restricting fund intermediation
 7. 6. Acceleration of the trend of reducing bank branches

Chapter 8 Policy Recommendations
 8. 1. Application of depositor protection system
 8. 2. Maintenance of separate deposits obligation
 8. 3. Consideration of separate deposit methods, focusing on intermediation-type deposits
 8. 4. Evaluation of the need for universal duty regulations for offline payment system infrastructure

Chapter 9 Conclusion

References
Appendices
Abstract
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