South Korea has always been on the cutting edge of technology, giving rise to firms that have become household names such as Hyundai, LG and Samsung. These corporate giants are helping to usher in a high-tech future for the country, with everything from food delivery to booking travel to scheduling COVID-19 vaccinations being done through digital means.
South Korea saw the same surge in eCommerce popularity as the rest of the world when brick-and-mortar shopping ceased. Foreign investors and merchants hoping to pounce on the South Korean market opportunity, however, face stiff regulatory and institutional challenges.
This month, PYMNTS Intelligence explores the growth of eCommerce in South Korea over the past several years, the challenges it presents to foreign merchants and how application programming interface (API)-driven, full-service payment solutions can help the latter get their foot in the door.
Exploring the South Korean eCommerce Boom
eCommerce is king in South Korea, with brick-and-mortar stores often just serving as in-person showrooms for products that shoppers then purchase online. Mobile commerce in particular reigns, accounting for 71% of total online shopping value. The South Korean online shopping market was valued at 17 trillion won ($14 billion USD) in March of this year, up 11% from March 2021. These transactions totaled 193 trillion won ($160 billion USD) in 2021, up 21% from 2020. Over the course of 2021, electronics sales grew 26%, groceries 26% and food delivery 48%.
A variety of factors have played into this astronomical growth, including the concerns and restrictions related to the pandemic limiting customers’ opportunities to patronize brick-and-mortar retailers. Trends specific to South Korea, however, include citizens’ overwhelming connectivity, with almost all South Korean households having access to the internet via computers, mobile phones or other devices. Another key factor is the speedy delivery systems available to South Korean shoppers, including those from eCommerce giants such as Coupang, Marketcurley and 11th Street, which promise the arrival of their goods within mere hours. While these services are available only in the Seoul greater metropolitan area, this region encompasses more than half the South Korean population.
New payment services such as buy now, pay later (BNPL) are also fueling meteoric eCommerce growth. These services, which allow customers to split up purchases over several installments at the point of transaction, have grown 76% year over year to reach $5.4 billion in 2022. Experts project this market segment to top $35 billion by 2028.
Merchants are chomping at the bit to harness some of this massive eCommerce popularity in South Korea. They face obstacles in doing so, however, owing in large part to strict fraud protection rules and cross-border challenges.
Why International Merchants Struggle to Enter the Market
Merchants entering the South Korean eCommerce space are discovering that recognizing an emerging market’s potential and capitalizing on its growth are two very different things. One of the key challenges international merchants face is credit card processing. While 80% of all transactions in South Korea use credit cards, half the cards issued in the country come from local brands rather than worldwide providers, unlike other global markets. This means that card transaction processing may apply to only 40% of consumers, leaving a huge payments gap.
Merchants also face significant hurdles when attempting to process South Korean transactions from abroad, due to stringent authentication and compliance rules. The South Korean government prohibits the won from being transferred outside the country, and foreign banks have significantly lower approval rates for cross-border transactions than those located in South Korea. In addition, cross-border payment networks impose surcharges on cardholders purchasing internationally, disincentivizing South Korean consumers from transacting with foreign businesses.
APIs are proving effective in aiding foreign businesses looking to enter the South Korean market. These systems seamlessly integrate into existing payments infrastructure, offering merchants local card acceptance and reduced foreign exchange risks without requiring an overhaul of payments processing systems. Studies have found that the use of these APIs can reduce abandoned transactions by up to 40%, significantly improving conversion rates and making entry into the opaque South Korean business market far easier.
South Korea represents a huge potential market for eCommerce merchants, but many may find the institutional barriers insurmountable. API-driven, full-service payment solutions are key to removing these roadblocks.
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