Payment Systems in Korea

  1. Financial Stability
  2. Payment Systems
  3. Payment Systems in Korea

General Overview

The payment and settlement system of Korea was for long heavily dependent on paper-based payment instruments. This is attributable to individuals' traditionally strong preference for cash as a payment instrument and the well-developed bill and cashiers check system. Nevertheless, the use of non-paper based payment instruments has grown steadily since the 1980s with interbank funds transfer systems such as Interbank Funds Transfer System and the Interbank CD/ATM System being established. The spread of e-commerce transactions and introduction of Internet banking in recent years are accelerating the movement toward a further diversification of the range of electronic payment and settlement systems.

The payment and settlement system of Korea consists mainly of a large-value payment system, various retail payment systems, securities settlement systems, and foreign exchange settlement systems. The main large-value payment system is the Bank of Korea Financial Wire Network (BOK-Wire+), which is a hybrid settlement system owned and operated by the Bank of Korea (BOK). Most of the retail payment systems are run by Korea Financial Telecommunications & Clearings Institute (KFTC). Representatives of such systems are the Check Clearing System, the Giro System, the Interbank Shared Network Systems, and the B2C & B2B E-commerce Payment Systems. There are credit card payment systems as well. Recently, a few retail payment systems which are run by non-financial institutions such as telecommunication companies have appeared. Securities settlement systems include the Securities Market Settlement System and the KOSDAQ Market Settlement System managed by Korea Exchange(KRX) and the OTC Bond Market Settlement System run by Korea Securities Depository(KSD). In December 2004, a Payment versus Payment (PvP) system for foreign exchange through CLS Bank was established.

General Overview

General Overview

Roles of the Bank of Korea

The roles of central banks are rapidly growing in the payment and settlement system worldwide with a view to heightening its safety and efficiency. In line with these international trends, the BOK was given the authority for the holistic management and oversight of the payment and settlement system in Korea by the revised Bank of Korea Act of 2003. Even before the revision of the Bank of Korea Act, the BOK had already been involved in various functions aimed at ensuring the safety and efficiency of the payment system, which serves not only as an important part of the financial system infrastructure but also a pivotal monetary policy transmission channel.

As is the case with most other central banks, the BOK issues legal tender, provides payment services for final settlement to financial institutions by operating the large value payment system, extends loans to financial institutions in its role as lender of last resort, and improves the payment systems by introducing new payment instruments.

Issuance of Legal Tender

The BOK has the exclusive right to issue banknotes and coins in any dimension, design or denomination determined by the Monetary Policy Board, which is the supreme policy setting body of the BOK. The banknotes and coins thus issued have the status of legal tender within the country for all transactions, both public and private, without limitation.

Currently, the BOK issues banknotes in four denominations: ₩1,000, ₩5,000, ₩10,000, ₩50,000, and coins in six: ₩1, ₩5, ₩10, ₩50, ₩100, ₩500 (₩: Korean Won).

Provision of Final Settlement Service

As the exclusive provider of payment instruments with settlement finality, the BOK provides finality of settlement to financial institutions across their current accounts with the BOK. Funds transfer across their current accounts with the BOK is used for transactions among financial institutions or transactions between the BOK and financial institutions, the net settlement of retail payment systems, and the disbursement and receipt of Treasury funds.

Operation of BOK-Wire+

The BOK has operated a large-value payment system, BOK-Wire, since December 1994, with the aim of effectively satisfying the growing demand for large-value payments amid expansion of the nation’s economy and financial markets. BOK-Wire is a real-time gross settlement system providing funds transfers for short-term financial market transactions, securities settlement, foreign exchange settlement and net settlements arising from the retail payment systems. BOK-Wire was renamed BOK-Wire+ from April 2009, when a hybrid system was added to the old system to save participants' settlement liquidity through such features as a continuous bilateral and multilateral offsetting mechanism.

Provision of Liquidity

The BOK may provide liquidity for financial institutions facing unexpected temporary liquidity shortages, in order to prevent chain defaults and ensure financial stability. In this regard, the BOK supplies settlement liquidity to financial institutions - especially banks and securities broker-dealers - lacking it, through intraday overdrafts, liquidity adjustment loans or intraday repo transactions in order to prevent delays in overall settlement caused by temporary liquidity shortages. The BOK is able to fulfil this key role not only because of its exclusive right as the central bank to issue legal tender, but also because it is entitled to promptly intervene in the market in times of crisis as a provider of liquidity to financial institutions.

Improvement and Expansion of Payment and Settlement Systems

Apart from operating BOK-Wire+ directly as a large-value payment system, the BOK also acts as the secretariat of the Financial Informatization Promotion Subcommittee to lead the nation’s financial informatization as prescribed in the Framework Act on Informatization Promotion of 1996. The BOK also supports the improvement and expansion of retail payment systems by taking part in major decision-making processes at the board of directors meetings and general meetings of KFTC, which operates most of the retail payment systems including the Check Clearing System, the Giro System, and the Electronic Banking System.

Oversight of Payment and Settlement Systems

To heighten their safety and efficiency of payment and settlement systems, the BOK exercises oversight over payment instruments, participants, operating organizations, regulations and business procedures, and computer systems, etc.

The BOK's oversight business involves the selection and classification of payment systems subject to oversight, the collection and analysis of materials related to payments and settlements, assessment of the safety and efficiency of payment systems subject to oversight, requests for improvements of payment systems subject to oversight and measures taken in the event of emergency.

See the attachments for more details.

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