This article is a contribution by Attorney Sanghoon Kim of Choi & Lee Law Firm. If you would like to share quality content for startups in the form of a contribution, please contact the Venture Square editor team at editor@venturesquare.net.
“We are planning to add a point function to our service, but do we need to register as a financial business?” This is a question that startups often face during their initial planning stages. Points, cash, and savings systems that increase user loyalty are features used by almost all platforms, but if certain requirements are met, they are considered “prepaid electronic payment methods” under the Electronic Financial Transactions Act and are subject to registration with the Financial Services Commission. Failure to do so can easily result in fines or administrative sanctions.
The problem is that the scope of application of this law is wider than expected, and in practice, it is not clear what is ‘subject to registration.’ In this column, we will go beyond simple theoretical explanations and examine specific examples of cases where registration is necessary and cases where it is not, and present legal strategies that startups can design wisely.
1. Prepaid electronic payment method, a familiar yet unfamiliar term
These days, startups are considering various reward methods from the beginning of their services to enhance user retention and loyalty. In the process, they naturally benchmark the points, savings, and coupon systems operated by major platforms such as Toss, Carrot Market, and Musinsa. This is because the method of designing a system where users recharge a certain amount or participate in events and activities and receive rewards and use this to make payments or receive discounts within the service is already considered an industry standard. However, if this function goes beyond the level of a simple reward and falls under the category of a ‘prepaid electronic payment method’ under the Electronic Financial Transactions Act, the business operator will have legal obligations of a completely different level.
The important concept here is the 'prepaid electronic payment method'. Under the Electronic Financial Transactions Act, the 'prepaid electronic payment method' refers to a certificate (including a certificate converted and stored electronically) or information about the certificate that has transferable monetary value stored electronically and is used to purchase goods or services from a third party other than the issuer and pay for them. Simply put, it is a system that allows you to pay for the services of a company or a third party using points, cash, or savings that have been charged or issued in advance.
However, the important point is that the registration obligation varies depending on whether the business operator issues it and whether the usage is limited to the business operator's services or whether it extends to third parties. In other words, the legal responsibility varies depending on whether it is a simple reward system or an electronic financial business.
2. Structures that cannot avoid registration requirements
According to Article 28, Paragraph 2 of the Electronic Financial Transactions Act, anyone who intends to issue or manage a prepaid electronic payment method must register with the Financial Services Commission. The important thing here is that the registration obligation does not arise simply from the fact that points are provided, but rather the key criteria are how the points are used, specifically who can use them and where they can be used.
Registration is required mainly in the following cases. First, if points or cash are designed to be used for payment of third-party products or services. For example, if the structure allows 'A points' issued by platform A to be used at affiliated stores such as stores B, C, and D, this is a structure in which electronic value is transferred to a specific number of people, so it may be subject to registration as an electronic financial business.
Second, there is a method in which users purchase points by charging with actual cash. For example, a structure designed so that a customer pays 1,000 won in B service, converts it to 'B Cash', and then later purchases a service using the cash is a typical prepaid electronic payment method. In this case, the need for the storage and operation of the funds and consumer protection arises, so the Financial Services Commission registration requirements must be met.
In this way, if it is judged to be a prepaid electronic payment method and registration is required, the requirements are by no means light. First, the capital requirement of 2 billion won or more is required, so it can be a realistically high barrier for startups to meet the registration requirements. As a result, many startups are considering a structure that can operate without registering a prepaid electronic payment method, or they are choosing to partner with a registered electronic financial service provider.
3. Structures that can operate without registration
The Electronic Financial Transactions Act requires, in principle, those who issue or manage prepaid electronic payment methods to register with the Financial Services Commission, but exempts them from registration requirements in exceptional cases where certain requirements are met. The following three types of registration exceptions are representative of those that startups can frequently utilize.
First, it is a closed structure that is only used at one affiliated store. Specifically, the prepaid electronic payment method is only used at 'one affiliated store', and 'one affiliated store' does not mean one physical store, but rather the business owner considers multiple stores with the same name as one affiliated store. For example, points or cash that can only be used by the company can only be used at the company's directly managed stores, online malls, etc., and may not be subject to registration if they are not transferred to a third party or used for external payments.
Second, if the issuance scale is small. This is a structure that corresponds to the so-called small issuer exception, and if the issuance balance is less than 3 billion won and the annual total issuance amount is less than 50 billion won, there is no registration obligation. The 'issuance balance' refers to the amount that has been issued but has not yet been used, and the 'total issuance amount' is the total amount of points or savings issued in the relevant year. However, if either of the two requirements is exceeded, it is subject to registration, so periodic monitoring and confirmation of the calculation method according to the Financial Services Commission's notice are necessary. In particular, in the case of platforms that repeatedly pay savings or points as a marketing means, the total issuance amount can accumulate quickly, so legal advice is essential at the preliminary planning stage.
Third, if the user has received points, etc. without paying in advance, and has subscribed to a guarantee or insurance for the outstanding balance, for example, if points are automatically accumulated based on events or work performance, and a payment guarantee or repayment guarantee insurance is subscribed to in order to fulfill the corresponding financial responsibility, the registration obligation may be exempted. In this case, the scope of the guarantee varies depending on the intended use. If the prepaid electronic payment method is structured to be used only by third parties, a guarantee is required for the entire outstanding balance, and if it can be used by both the company and third parties, the guarantee amount is calculated based on the third-party usage ratio as of the previous year.
In this way, if any one of the risk covers such as closedness, small amount, and insurance is met, the registration obligation can be exempted, and in practice, it is a very effective means for startups to reduce legal risks according to their service structure. However, even if it is exempted from registration, it should be noted that the requirement may be lost when the business structure is expanded in the future, so regular legal reviews and risk management should be conducted in parallel.
4. To avoid mistakes, legal review is necessary during the design phase.
It is a very natural strategy for startups to introduce a point or coupon system to their services. However, depending on whether this structure is a simple reward or converted into an electronic payment method, there may be a wall of financial regulation. If the service you are providing is a prepaid electronic payment method, there may be a risk of sanctions if you overlook the registration obligation.
The assumption that 'it's okay because it's an incentive for customers' can be the most dangerous, and legal review must be received at the early stage of service planning. The important thing is not to avoid regulations, but to accurately understand the legal requirements and design a realistic implementation plan within them.
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