New electronic payment system threatens credit card firms

A new type of electronic payment system with lower commissions than credit cards is due to launch around the end of this year, portending a major shakeup in the market for money transfers.

Consumers will be able to buy products and services using just their phone numbers or smartphone applications, according to sources at the Financial Services Commission and in the electronic finance industry.

“The technologies for the service are ready,” an FSC official said. “We expect to unveil the service once the related law revision is completed by Nov. 6.”

The payment methods vary among the service providers. Some are based on bar codes, others on automated response systems.

Customers can make debit payments by downloading an app on their smartphones, typing in their account numbers to create a bar code and having a barcode reader at the counter scan it.

If a customer signs up at a website for ARS-based payment and enters his phone number, he will get a phone call before each payment. The money is transferred from his account once he enters his personal identification number through his cell phone.

The new electronic direct payment system is likely to charge stores commission rates of below 1.5 percent, the average rate charged by credit card issuers.

“Whereas it often costs money to get credit cards issued, you can sign up for the new service for free, and the commissions are lower compared to card companies since there can’t be any overdue payments under the debit payment system,” said an official at one of the new service providers.

Payments are possible only when there is enough money in the accounts.

The service was unavailable until now because under the current rules, customers couldn’t sign up for an electronic debit payment method without having to visit the bank.

Financial authorities and electronic finance companies are in talks over the payment ceiling.

The FSC plans to limit the daily payment using the new service at 300,000 won per person for security reasons, but some firms want to cap it at 500,000 won.

Convenience will be the biggest merit of the new service as consumers won’t have to carry wallets.

Financial authorities would also welcome the increase in debit payments as it could help keep Korean household credit card debt under control.

Korea’s credit card transactions account for 41.4 percent of the nation’s gross domestic production, much higher than the 15.2 percent of the U.S. and 8.1 percent of Britain.

The new payment means is different in many ways from the electronic wallet systems using Near Field Communication technology sought by banks and telecommunication firms.

Unlike the mobile payment service which pays commissions to credit card companies, the new service does not involve card issuers.

Payment gateway companies will facilitate the transfers, and leading mobile payment service providers such as Inicis and Danal are likely to jump into the offline transaction business.

By Kim So-hyun (sophie@heraldcorp.com)