South Korea - Country Commercial Guide
Trade Financing

Discusses the most common methods of payment, such as open account, letter of credit, cash in advance, documentary collections, factoring, etc. Includes credit-rating and collection agencies in this country. Includes primary credit or charge cards used in this country. Also includes information on Foreign Exchange controls and Banking Systems, and U.S. Banks & Local Correspondent Banks. 

Last published date: 2020-09-21

Methods of Payment

The Korean financial system is frequently hard-pressed to meet the demands for financing and capital for international commercial transactions. This is mainly attributed to banks holding BIS (Bank for International Settlement Reserves) capital adequacy ratios above the 10 percent required and to being stricter on loan requirements for SMEs and small businesses, given significant personal household debt. Foreign companies in start-up operations with a Korean partner often need to invest financial resources for the joint venture, while their Korean partner makes in-kind investments, i.e., land or facilities, for their share of equity. Joint-venture companies and foreign firms often work with branches of foreign banks for local-currency financing, although the branches of foreign banks control a small portion of available Korean Won.

Sources of Korean Won financing have included domestic commercial banks, regional banks, and specialized banks, including the Korea Development Bank, the National Agricultural Cooperative Federation, the Industrial Bank of Korea (IBK), and the Korea Housing Bank.

Korea’s major international banks offer services for all types of international trade payment methods. When you engage in business activities with a customer overseas, knowing how to collect payment on an overseas sales transaction is the single most critical factor for SME business owners who aspire to expand their international business operations.  

Common overseas payment methods include:  
•    Sight and deferred payment Letters of Credit (L/C),
•    Documents against Acceptance (D/A) and Documents against Payment (D/P), and 
•    Open Account Transactions.  
D/A and L/Cs are forms of extended credit in which the importer makes no payment for the goods until the date called for in the L/C.
D/P is similar to D/A except that the importer cannot clear the goods from customs prior to making payment.  In some cases, an importer can clear goods prior to payment under a sight L/C. L/C transactions generally follow standard international Uniform Customs and Practice (UCP) codes.  

CS Korea recommends that U.S. companies consider dealing on a confirmed L/C credit basis with new and even familiar customers. A confirmed L/C through a U.S. bank is recommended because it prevents unwanted changes to the original L/C, and it places responsibility for collection on the banks rather than on the seller. Once a business relationship has strengthened over time, use of payment mechanisms other than L/Cs can be employed.  

For more extensive details on international payment methods, please see:  please read the Trade Finance Guide available at https://www.trade.gov/trade-finance-guide-quick-reference-us-exporters.

To reduce risk of nonpayment, U.S. companies may also contact credit rating agencies, which can provide fee-based corporate information to evaluate the financial credibility of Korean companies. Dun and Bradstreet Korea (https://www.dnb.com/product/contract.htm), the Korea Investors Service (http://www.kisrating.com/en/), and the Korean Information Service are known to provide fee-based credit rating services in Korea.  

CS Korea can provide valuable information, including a company’s credit standing, through our fee-based International Company Profile Service https://www.trade.gov/international-company-profile-0 . The Korean Commercial Arbitration Board http://www.kcab.or.kr/servlet/main/1000 and private collection agencies can provide arbitration and collection services. KCAB’s mediation staff can counsel on the arbitration procedure to suit both Korean and foreign companies’ specific needs and assist in communication and negotiation.

ever payment terms are agreed upon, make sure they are understood by all parties and that your client, representative or contact signs a mutually agreed document. Payment terms must be agreed to in advance. It is rarely wise to sell on open account to a brand new customer.

Banking Systems

Korea’s financial system consists of banking and non-bank financial institutions. The Financial Services Commission (FSC: http://www.fsc.go.kr/eng/) and the Financial Supervisory Service (FSS: http://english.fss.or.kr/fss/en/main.jsp), its regulatory arm, are responsible for supervising and examining all banks, including specialized and government-owned banks, as well as securities and insurance companies. The FSC and the FSS have played a key role in financial restructuring and has strengthened the regulatory and supervisory framework governing the entire financial sector.  

Financial Services and KORUS FTA

The KORUS FTA has provided the U.S. financial service industry unprecedented access to the Korean market.  The Agreement locks in standards, regulations, and commitments that increase the transparency, predictability, and cost-efficiency for operating in the Korean financial services market.  However, restrictions on the use of overseas cloud computing services in the financial services industry still presents regulatory obstacles which limit market access for U.S. global financial service providers.  Korean regulations mandate cloud system service providers to maintain a control system in Korea, which restricts the flexibility of foreign financial service suppliers offering services on a cross-border basis.  

The United States continues to engage the Korean government on FTA commitments in financial services.  

Foreign Exchange Controls

Korea has liberalized foreign exchange controls, in line with OECD benchmarks. A foreign firm that invests under the terms of the Foreign Capital Promotion Act (FCPA:  http://legal.un.org/avl/pdf/ls/Shin_RelDocs.pdf) is permitted to remit a substantial portion of its profits, providing it submits an audited financial statement to its foreign exchange bank.

To withdraw capital, a stock valuation report issued by a recognized securities company or the Korean Appraisal Board must be presented. Foreign companies not investing under the FCPA must repatriate funds through authorized foreign exchange banks after obtaining government approval. Although Korea does not routinely limit the repatriation of funds, it reserves the right to do so in exceptional circumstances, such as in situations which may harm its international balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of its domestic financial markets. To date, the Korean government has had no instance of limiting repatriation for these reasons, even during and after the 1997-98 financial crisis.

The Bank of Korea has detailed information about foreign-exchange control policies in Korea.  Consult: http://eng.bok.or.kr/.

U.S. Banks and Local Correspondent Banks

For a list of major U.S. and Korean banks in Korea, consult:  http://export.gov/southkorea/usefullinks/majoruskoreanbanks/index.asp