Open Banking Regulation Shakes Up Mobile Payments Market in South Korea

September 11, 2020

Open banking regulations introduced last December have made it easier for fintechs in South Korea to compete with established financial service providers around digital banking – and a single easy to use smartphone app is playing a central role.

The new rules look set to drive further adoption of mobile payments among a population that is already one of the world’s most advanced in terms of using their smartphones to conduct financial transactions. Over half of 16 to 64-year olds used banking apps (56%) last year according to GlobalWebIndex statistics for the third quarter of 2019. And since the new regulation was introduced, the NH Smart Banking app was ranked in the first place by all app downloads in January 2020 according to App Annie, with Viva Republica’s mobile payment app Toss not too far behind in third place.

Increased downloads and usage of mobile payment apps are also be driven by the COVID-19 pandemic as consumers shop online more and avoid cash transactions, however. Retail firm Lotte Group reported the volume of transactions made via its mobile payment app rose 12% in February this year compared to January for example, while the number of payments made in brick and mortar stores dropped 29% in the same period. 

Smartphone penetration, Internet use and fast networks

That a mobile payment revolution is being spearheaded in South Korea is not surprising given the country’s demographics and appetite for technological innovation. At 118% excluding the Internet of Things (IoT) devices, mobile phone connections are at saturation levels reflecting the maturity of the country’s economy and network infrastructure. Ookla speed tests suggest the average speed of fixed broadband connections is amongst the highest in the world at 144Mbit/s. Average mobile data capacity doubled between 2019 and 2020 to reach 103Mbit/s, buoyed by the rollout of the fifth generation (5G) networks in 85 South Korean cities last year.

Only a fraction (3.4%) of mobile phone owners aged 16 to 64 use handsets which are anything other than smartphones according to GlobalWebIndex statistics. But large sections of the same demographic also own laptops and desktops (84%) and to a lesser extent, tablet devices (33%). With so many different types of client hardware at their disposal, the average time that South Koreans spend using the Internet is high at five hours and 22 minutes per day, two hours and 26 minutes of which is spent browsing specifically on mobile devices.

eCommerce activity well advanced

The combination of almost complete device penetration, regular Internet use and fast network download speeds has also helped South Korea grow to be one of the biggest e-commerce markets in the world. The latest World Bank financial inclusion data available indicates that 76% of adults over the age of 15 make online purchases or pay bills online, for example.

Statista’s market outlook suggests that over 45m South Koreans purchased consumer goods online in 2019, around US$1440 per shopper with a combined value of US$65.3bn (though still less than 5% of GDP per capita). The company predicts that the total transaction value of digital payments (online and mobile POS purchases) in South Korea will hit US$113bn in 2020, and expand at a compound annual growth rate (CAGR) of 10.6% to reach US$170bn by 2024.

PPRO puts the current value of the business to consumer (B2C) e-commerce market in 2019 at US$46.7bn, up 20% year on year and representing an annual online spend of US$1300 per consumer. Mobile devices underpin the majority of that B2C transaction value (61%) estimates PPRO, with the majority of Internet users aged between 16 and 64 (59%) using shopping apps according to GlobalWebIndex statistics. In January 2020 App Annie also ranked online retailer Coupang 7th in terms of monthly active users.

The use of smartphones to conduct different types of financial transactions is similarly well advanced in the country. Almost two-thirds of South Koreans aged between 16 and 64 (65%) used their mobile phone to transfer money to friends and family in the third quarter of 2019 according to GlobalWebIndex, with 38% using or scanning QR-codes that often form the basis of mobile payments and a quarter using their devices as a ticket or boarding pass.

For the most part, digital purchases are funded by credit cards – 74% of the total according to PPRO’s payments and e-commerce reports, with the World Bank reporting that all South Korean adults have bank accounts, and 64% credit cards. Bank transfers accounted for another 11% of PPRO’s eCommerce total and eWallets 11%. The total number of people making digitally enabled transactions – defined as online or mobile point of sale (POS) purchases – was 46m according to Statista’s Digital Market Outlook for Fintech report, up 9% year to year to represent a total of US$113bn.

FSC Open Banking regulation encouraging adoption

The South Korea government has shown itself keen to expand the country’s digital economy further while simultaneously increasing the volume and nature of online and digital purchases funded by mobile payment services. And a crucial part of that strategy saw the country’s Financial Services Commission (FSC) open up South Korea’s closed inter-bank payment network to non-bank companies at the end of 2019. 

The move was designed to give a new generation of bank customers access to most financial services – including withdrawals and transfers – quickly and easily from any bank through a single smartphone application that uses application programming interfaces (APIs) to share customer data. The platform also considerably reduces previously high transaction fees – from between 34–42 cents (US$) per transaction to 3-4 cents for large service providers and 1-2 cents for small and medium-sized firms.

Ten banks – including KB Kookmin Bank, Shinhan Bank, Woori Bank and KEB Hana Bank – had signed up to offer preliminary services ahead of the formal December 19th launch date last year, by which point 16 more local banks and 31 fintech companies had started offering services to their customers. The FSC estimated that over 3.1m consumers joined the service within 50 days of its launch, creating 7.7m accounts. 

eWallet providers branching out

There were already plenty of mobile payment apps and services competing for consumer and business attention in South Korea before the FSC’s intervention, and the new open banking regulation has prompted many to diversify their portfolio.

A survey conducted by Statista in August 2019 found Samsung Pay to be the most electronic wallet (eWallet) at that time, used by almost 20% of respondents, with others including Naver Pay (12.6%) and Kakao Pay (11.8%). Samsung Pay was launched in 2015, allowing users to link debit, credit and loyalty cards to Samsung’s own smartphones. Its key advantage was in its support not only for NFC, but also magnetic stripe and EMV technology, which means it is accepted at almost any contactless-enabled POS terminal in the country – the FSC estimates it accounted for 80% of South Korea’s domestic offline payments in 2018. Reports suggest Samsung Pay accounted for over US$33.7bn of payments by April 2019, 25% of which were online, with subscribers exceeding 14m. The company also partnered Woori Bank to add a currency exchange feature in 2019, has announced plans to launch its credit card and a mobile-first money management platform.

South Korean web portal and search engine Naver launched its own Naver Pay eWallet in 2015, supporting payments through the app and online checkouts similar to PayPal. As of October 2018, it had an estimated 26m users, with average monthly transactions of around US$800m. Naver also owns the Japanese messaging app Line which integrated its Line Pay eWallet in 2014, allowing users to request and send money from users in their contact lists and make mobile payments in-store. It later added features including offline wire transfers and ATM deposits and withdrawals. The company finalised plans to spin off Naver Pay into a dedicated financial services subsidiary – Naver Financial – in November 2019 as it expands into loans and insurance, backed by a reported US$418m of investment from Mirae Asset Daewoo. 

Kakao Pay has expanded from being an eWallet provider to offer its own debit card, bank account and investment service, as well as adding the ability to send remittances and invoices and complete online mobile transactions. The service is estimated to have exceeded US18.3bn of transactions and 30m users in 2019. The ability to make payments directly from its own KakaoTalk messaging platform has helped drive adoption, as has the addition of the service as a payment option for Google Play Store and YouTube Premium forged in 2019. 

PayPal signed a deal with Kakao Pay earlier this year that will allow its merchant network to process transactions from more international travellers that want to make payments at retailers using its QR code system. Kakao Pay recently partnered Baro Investment Securities to launch its own mobile currency and “wealth management platform” dubbed Kakao Investment, a Korean version of Alipay’s Yu’ebao. The company has close links with Chinese eWallet Alipay having received US$200m of funding from Alipay owner Alibaba’s Ant Financial in 2017. 

Local players dominate

The dominance of Samsung Pay and the proliferation of local providers has deterred or delayed international players from delivering their own services in South Korea. Google Pay may have abandoned plans to launch in the country following protracted negotiations with local credit card issuers in 2017/18, leaving transactions limited to those from its own Google Play apps, content and subscriptions. Apple Pay too has thus far not managed to negotiate terms on transaction fees and NFC-enabled payment terminal infrastructure costs with South Korean card issuers.

Operated by erstwhile South Korean games developer and now IT company NHN Entertainment, PayCo Point too became a payment option for YouTube’s Premium streaming service last year having been adopted by Google Play in 2017. Earlier this year it was integrated with Apple platforms, allowing users to link their accounts with Apple Store, Apple Music and iCloud via their Apple ID settings to make purchases on their iPhones and other Apple devices.

Founded in 2015 Viva Republica’s Toss Pay counted 10m registered users in 2018 and was on track to process US$18bn of transactions by the end of that year. Like others, it started as a mobile peer to peer (P2P) payment and money transfer app before adding extra features like credit access and management, loans, insurance and investment through partnerships with banks and other financial service providers. 

Electronics manufacturer LG also launched a mobile wallet service (LG Pay) in South Korea in 2017, which like Samsung Pay is tied to the company’s own handsets. South Korean retailers have launched their own payment services to improve their customers’ shopping experience and fund transactions. Online market Gmarket launched its payment system – Smile Pay – in 2004 before eBay acquired it for US$1.2bn in 2009 while online retailer Coupang launched its Rocket Pay online payment system in 2018. Retailer Lotte Group too launched a mobile payment service (L.Pay) based on a bar code solution for smartphone payments to offline merchants in 2015. In late 2018, three South Korean credit card companies, namely BC Card, Shinhan Card and Lotte Card, unveiled plans to commercialise a solution called Joint QR Pay that would be compatible at 8m franchise stores in South Korea.

The South Korean government itself launched a mobile payment system called Zero Pay in March this year. Initiated by the City of Seoul and the Ministry of Small and Medium-Sized Enterprises (SMEs) and Startups in partnership with local banks and finance companies, Zero Pay allows users to make payments by scanning a vendor’s QR code. It can be accessed through the mobile apps of major banks, including KB Kookmin Bank and Woori Bank, as well as Bank Pay, a multifunctional app that links to 19 local banks.

Flexibility and convenience critical assets

Mobile payment services and eWallets generally fund transactions by linking to the customer’s debit or credit card, but customers’ continuing quest for flexibility and convenience may demand that additional options are provided in the future. 

Analyst estimates place Japan and South Korea as two of the top three countries for direct carrier billing (DCB) transactions in the world for example, with low value payments for digital content such as mobile games and in-game downloads particularly popular for people funding purchases directly from their mobile phone accounts (Statista puts the average DCB transaction amount at US$5.1 in April 2020).

As the volume and average value of contactless payments increases both during the COVID-19 crisis and in its socially distanced aftermath, South Korean telcos and mobile operators now have an opportunity to create stickier relationships with their subscribers, particularly those without credit/debit cards, by delivering smooth and secure payment services.

Payments can also be backed by sophisticated fraud analysis provided by third-party payment service providers that handle negotiation and onboarding across multiple eWallet providers and merchants as well as customer disputes and refunds on behalf of the operator in different countries. That leaves telcos to concentrate on their core product and service innovation while helping eWallet providers reach new smartphone-enabled customers through their own large subscriber bases.

South Korea is leading the way in terms of mobile payment adoption and DCB – combining the two would be a natural evolution that helps develop the country’s digital economy further and gives telcos a more significant role in its expansion.

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