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Seoul Mayor Park Won-soon and Hong Jong-hak, Minister of SMEs and Startups, attend the agreement ceremony on July 25 at the Korea Chamber of Commerce and Industry in Seoul to introduce a payment service that would enable direct wire transfers via smartphone.
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Experimental payment system liberates small business owners from burden of credit card fees
After polishing off his dinner one evening in 2019, “Payment Kim” pulls out his smartphone and swipes the restaurant’s QR code. At that, a message pops up asking him to input the payment information. After typing in 8,000 won (US$7.15) and pressing “process transaction,” he gets a message confirming that the transaction has occurred, directly transferring 8,000 won from his bank account to that of the restaurant owner. This payment method is similar to credit cards and debit cards, with one big difference – the restaurant owner doesn’t have to pay anything in fees to the credit card company or payment platform. This is what things are expected to be like once Seoul Pay is implemented. An experiment in no-fee payments has begun on behalf of small business owners who have been weighed down by credit card fees. On July 25, Seoul officially announced the introduction of Seoul Pay, an alternative payment system that could ease the burden of card payment fees for small business owners. A range of local governments – including Busan, Incheon, South Jeolla Province and South Gyeongsang Province – have announced plans to introduce the system, while the central government has also decided to extend the system around the entire country by 2020. The big question is whether a cheaper payment system can transform current payment practices, which are dominated by credit cards. On Wednesday, the Ministry of SMEs and Startups; local governments including Busan, Incheon, South Jeolla Province and South Gyeongsang Province; eleven commercial banks including Shinhan, KB Kookmin and KEB Hana; and five private-sector payment platforms including Kakao Pay signed an agreement at the Korea Chamber of Commerce and Industry in downtown Seoul to introduce a payment service by the end of the year that will waive fees on small business owners. The program will begin in Seoul, with Busan and three other local governments launching their own trial programs within the year. The program was also part of the campaign platform of Seoul mayor Park Won-soon during the June 13 local elections. Seoul Pay is a payment method that uses fintech (financial technology) to directly transfer money from the customer’s bank account to the seller’s bank account when the customer’s smartphone recognizes the seller’s QR code. Simply put, this makes it easy for the customer to directly wire money by smartphone from his or her account to the business owner’s account. But while bank account transfers require going through the hassle of accessing a bank application, entering the recipient’s account number, and inputting a password and security card number, Seoul Pay simply requires users to scan a QR code and input an amount. Another option – as seen in the case of “gifticons” – involves sellers setting up QR readers at the point of sale (POS), which scan QR codes on a customer’s smartphone app. No separate app exists for Seoul Pay; customers can simply use one of the simplified payment apps available on the market, such as KakaoPay or Naver Pay. The city of Seoul explained that because the money is transferred directly from the customer’s account to the seller’s, this “allows for transaction fees under one percent, since there are no more of the card transaction fees small business owners previously had to pay as part of the credit card payment process.” Private payment platform fees and bank account transfer fees may of course be incurred – but the July 25 agreement had platform providers and banks agreeing not to charge usage or transfer fees in connection with payments for affiliated small businesses. Some are predicting small business owners could escape the burden of card transaction fees once Seoul Pay becomes established. Under the current payment structure, credit card transaction payments eat into a large chunk of operating profits for small businesses. Credit card transaction fees amount up to 50% of operating profits for some SMEs Findings released in April from a Seoul city survey of credit card transaction costs for small business operations showed their fees amounting to anywhere between 3 to 50 percent of operating profits. In the case of the ubiquitous convenience store, the results showed average yearly sales of 679 million won (US$607,000) and operating profits of 29 million won (US$26,000) - while credit card fees averaged 9 million won (US$8,000). In other words, the card fees amounted to nearly 30 percent of operating profits. The model for Seoul Pay is the success of China’s mobile payment service Alipay. Alipay is considered China’s top simplified payment service. According to figures from the city of Seoul, Alipay had 520 million users in China as of late 2017, giving it a 54 percent share of the payment service market. Last year, Alipay was used for a total of 10.67 quadrillion won (US$9.53 trillion) worth of transactions within China. “With South Korea registering the world’s highest rate for smartphone usage, Seoul Pay has a lot of potential to expand within the domestic market,” said Kim Tae-hee, an economic planning officer for the city. The city of Seoul is currently pursuing an effort to add transportation card functions to Seoul Pay and offer incentives such as discounts on the use of various public culture and sports facilities. It also plans to encourage Seoul Pay use for Onnuri gift certificates, government employee welfare points, and other services paid for by the city. Incentives will be needed to encourage members of the public who are accustomed to using their credit cards to use Seoul Pay instead. New payment system needs consumer benefits to substitute those of credit cards Experts suggested that rather than focusing solely on the short-term solution of reducing the burden on small businesses, the greater policy target should be on remedying a payment market where credit cards account for an abnormally large scale of transactions. “The credit card industry has a market structure where card companies receive transaction fees from businesses while offering points and cash back to customers and reducing product prices,” said Lee Jae-yeon, a senior research fellow at the Korea Institute of Finance. “We need to increase businesses’ transaction fee bargaining power against the credit card companies by doing away with the mandatory acceptance system [requiring all member businesses to accept credit cards], while improving an environment of de facto price discrimination between cash and cards,” Lee suggested. The South Korean government plans to take steps to establish nationwide compatibility for small business payment systems like Seoul Pay. To this end, the Ministry of SMEs and Startups finalized and announced three implementation principles on July 25: usability with all bank and payments apps, shared use of QR codes, and payment fees of close to zero. To introduce a payment system based on these principles, the ministry plans to set up a joint government-private sector task force with private experts and representatives from the Financial Services Commission, the Ministry of the Interior and Safety, local governments, the Bank of Korea, and the Korea Financial Telecommunications & Clearings Institute to find solutions on legal and institutional hassles and irrational regulations. The South Korean government previously finalized a plan to offer a 40 percent income tax deduction for funds using exclusive small business payment systems. By Kim Kyung-wook and Park Soon-bin, staff reporters Please direct comments or questions to [english@hani.co.kr]
