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South Korea’s B2B and Global Payments System Landscape

By Tony Azzara

U.S. companies looking to expand into South Korea will likely have to come to grips with a very complex range of payment systems. Many different forms of electronic credit transfers dominate the country’s B2B payment systems, while consumers’ increasing use of mobile payment systems and various electronic cash cards are driving digital payments growth. Meanwhile, the Bank of Korea (BoK), South Korea’s central bank, is in the late stages of a plan that aims for the country to become cashless in 2020.

It may be worth the learning curve, though, for U.S. businesses to consider international trade with South Korea. With $167.6 billion worth of goods and services traded between the two countries, South Korea was the U.S.’s sixth-largest trading partner in 2018, and our seventh-largest export market.1 Further, BoK forecasts continuing economic growth at 2.5 percent for 2019.2

 

Key Differences: U.S. vs. South Korea Global Payment Systems Landscape

 

Among the key differences in how U.S. and Korean consumers and businesses pay for goods and services:

 

  • While electronic payments such as wire transfers—called credit transfers in Korea—dominate both countries’ B2B payment systems by value, Korea has a multitude of different electronic payment systems suited to different specific purposes.
  • Mobile payments systems and other digital payments are growing in triple-digit percentages.
  • Korean businesses use paper-based payment instruments like checks, bills of exchange, and promissory notes in a fewer percentage of transactions than in the U.S., but for larger amounts.
  • Korea has pushed further away from cash than the U.S.
  • Use of payment cards—including reloadable “e-money” cards—is growing faster in Korea, primarily for very low-value transactions.

Korean Global Payments Systems Dominated by Credit (Wire) Transfers

 

Taken together, Korea’s many different electronic credit transfer systems accounted for 94 percent of the value of the country’s non-cash transactions in 2017—roughly equivalent to the U.S.’s 92 percent, according to each country’s Cash and Treasury Management report from the Association for Financial Professionals (AFP).3,4 Just about all credit transfers eventually settle via the Bank of Korea Financial Wire Network (BoK-Wire+), the country’s real-time gross settlement (RTGS) system, regardless of which of the special-purpose networks they start on. BoK-Wire+ is equivalent to Fedwire in the U.S.

 

Like Fedwire, only very high-value and urgent electronic payments directly use BoK-Wire+. But that’s roughly where the similarities end. Whereas Fedwire settles only U.S. dollar transactions, BoK-Wire+ settles South Korean won (KRW) as well as USD and Japanese yen. It also can settle multicurrency cross-border transactions through connections to SWIFT.

 

The Korea Financial Telecommunications and Clearing Institute (KFTC) processes non-urgent and low-value credit transfers from Korea’s nine different retail payment systems, according to the AFP. KFTC is roughly equivalent to the U.S.’s Clearing House Interbank Payments System (CHIPS). KFTC’s electronic global payment systems include a variety of different “Giro” payment systems, which essentially replace checks with a set of payment instructions, similar to the Automated Clearing House (ACH) wire transfer payments system in the U.S. Giro is popular in Europe and parts of Asia as a term for this type of electronic payment system.5 Other KFTC payment systems include:

 

  • The Interbank Funds Transfer Network, which electronically settles paper instruments like cash, checks, and bills among participating banks;
  • Multiple B2C & B2B e-commerce payment systems;
  • BankWallet, a smartphone payment and settlement service that operates as a mobile wallet to let people pay online and offline merchants and transfer small amounts without knowing receivers’ account numbers, similar to PayPal and Zelle in the U.S.;
  • A variety of different credit and debit card retail networks;
  • A nationwide ATM network that dispenses cashier’s checks as well as cash, and accepts electronic credit transfer instructions; and
  • A network for K-Cash cards, reloadable payment cards equivalent to cash for very-low-value transactions.

In addition, according to BoK, several retail payment systems run by non-financial businesses like telecommunication companies have recently begun to appear.6

 

Checks, Bills, and Notes Play Role in B2B Payment Systems

 

Aside from credit transfers, business in South Korea is also done through checks, bills, and notes. Two types of checks are used: cashier’s checks can be used in place of cash for payments such as loan installments and bank deposits, and current account checks are post-dated instruments for large-value fund or tax payments.7

 

These paper-based payment systems have low transaction rates but high values relative to the U.S., probably reflecting more B2B than consumer use in Korea. Checks and bills represented only six-tenths of one percent of non-cash Korean transactions in 2017, but nearly 5 percent of non-cash transaction value.8 For comparison, U.S. checks represented 11 percent of non-cash transactions and 2 percent of value that year.9

 

South Korea’s B2B transactions also use bills of exchange and promissory notes. Promissory notes, short-term means of financing with less than one-year maturity,10 are used by companies in a similar fashion to current account checks.11

 

Cashless 2020? Mobile Money Impacts Digital Payments

 

South Korea appears to lean hard away from cash: only Sweden and New Zealand are less cash-reliant, according to World Cash Report 2018, a study by Netherlands company G4S Cash Solutions.12 For comparison, the U.S. ranked sixth in the world in terms of least cash-reliance, three spots behind Korea. The same study cited diary surveys in which South Koreans self-reported using cash in 14 percent of their transactions, while Americans said they used cash in 32 percent of transactions.

 

According to a BoK 2018 survey reported in the Korea Times, non-cash payment methods such as credit and debit cards and mobile payments systems rose to 52 percent of household spending in 2018 from 37 percent in 2015. The same BoK survey noted that South Koreans carried an average of $67.55 worth of cash won in 2018, down 33 percent from 2015. The amount of cash carried increased with the age of the surveyed: those in their 20s had the least and those in their 50s had the most.13

 

The BoK’s “coinless society project” can be credited for much of the transition away from cash. The project aims to create a cashless Korea by 2020.14 Among the many ways BoK hopes to accomplish its goal are approaches that allow consumers to deposit small change into prepaid mobile cards that can be later used at convenience stores and department stores,15 and tax deductions for using certain non-cash payments systems.

 

The use of mobile payments systems also is increasing rapidly. Another BoK survey indicates that as of 2017, a quarter of all South Koreans were using their phone to make mobile payments.16 According to the Korea Herald, the BoK’s 2017 Electronic Pay Service Usage study reported that the value of daily mobile payment system transactions went up 147 percent in 2017 over 2015, while transaction volume rose 158 percent.17

 

Credit and Debit Card Payments for Very-Low-Value Transactions

 

In both the U.S. and Korea, credit and debit cards make up a large majority of total non-cash transaction volume—73 percent in Korea and 70 percent in the U.S.—but less than one percent of the value.

 

In Korea, credit cards accounted for approximately 45 percent of transactions and 0.67 percent of value in 2017. The value of those credit card payments was about 703 trillion won, or roughly $603 billion.18 In the U.S., credit cards represented 24 percent of transactions valued at about $3.1 trillion, or 2 percent of non-cash transaction value.19 In the same year, all forms of Korean debit cards rose in use thanks to tax credits,20 but still amounted to 28 percent of transactions and 0.16 percent of value.21 In the U.S., debit cards represented 46 percent of transactions but only 0.19 percent of value.22

The

Takeaway:

A large variety of global payments and settlement systems help make South Korea a challenging import-export opportunity for U.S. businesses. But the two countries’ payment systems practices appear to be moving closer toward alignment, each converging around various forms of electronic credit/wire transfer and digital/mobile payment systems.

Tony Azzara - The Author

The Author

Tony Azzara

Tony Azzara is a business technology writer and researcher based in Queens, NY, whose work focuses primarily on financial services technology.

Sources

1. “Korea,” Office of the United States Trade Representative; https://ustr.gov/countries-regions/japan-korea-apec/korea#
2. “Latest Global Payment News For Period 17-24 April 2019,” One Road Payments; http://www.oneroadpayments.com/news.html
3. Ibid.
4. “USA,” Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
5. “Bank Giro Transfer,” Investopedia; https://www.investopedia.com/terms/b/bankgirotransfer.asp
6. “Payment Systems in Korea,” Bank of Korea; https://www.bok.or.kr/eng/main/contents.do?menuNo=400045
7. “South Korea,” Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
8. Ibid.
9. “USA,” Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
10. “Korea’s promissory note market projected to top W10tr,” Korea Herald; http://www.koreaherald.com/view.php?ud=20190513000643
11. “South Korea,” Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
12. World Cash Report 2018, G4S Cash Solutions; https://cashessentials.org/app/uploads/2018/07/2018-world-cash-report.pdf
13. “In digitized Korea, going cashless not an option,” TheKoreaTimes; https://www.koreatimes.co.kr/www/biz/2019/07/513_271598.html
14. World Cash Report 2018, G4S Cash Solutions; https://cashessentials.org/app/uploads/2018/07/2018-world-cash-report.pdf
15. “South Koreans increasingly prefer cashless payments, BoK survey shows,” The Paypers; https://thepaypers.com/payments-general/south-koreans-increasingly-prefer-cashless-payments-bok-survey-shows/778346-27
16. “South Korea,” Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
17. “Going walletless: Korea’s mobile payment market diversifies as competition grows,” The Investor; http://www.theinvestor.co.kr/view.php?ud=20190127000189
18. “South Korea,” Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
19. “USA,” Association for Financial Professionals;https://www.afponline.org/publications-data-tools/data-tools/country-profiles
20. “How Cashless Payments Help Economies Grow,” BCG;https://www.bcg.com/publications/2019/cashless-payments-help-economies-grow.aspx
21. “South Korea,” Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
22. “USA,” Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles

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