How nice would it be if one could get a 100,000 won gift certificate for only 80,000 won? This imagination, which may sound absurd, unfolds into reality at Mergeplus. Mergepoint, which offers subscribers a 20 percent discount on the products of every alliance company, was a sensational proposal. Before long, however, ferocious consumers occupied the first floor of the building of Mergeplus and the roads surrounding it, demanding a refund. In turn, it is essential to delve deeper to find out what is happening with Mergepoint.

Mergepoint is an application created by Mergeplus in October 2017, under the goal of merging discount coupons of different companies into a one application for easy management. In March 2020, Mergeplus launched a promotion to provide gift certificates at a 20 percent discount rate on the products of more than 20,000 franchises. Due to this high discount rate, Mergepoint rapidly grew in popularity with a total of one million members and an average daily number of 200,000 users.

Sudden Suspension of Business

On August 11, Mergeplus announced its decision to downsize its operation due to legal issues and unilaterally suspended its service as a payment for convenience stores and major supermarkets. Consumers, who lost their money without knowing the reason, were anxious and repeatedly tried to access the application to check whether or not their Mergepoint was still usable or refundable, which eventually restricted access to the application. After hours of breakdown, most franchises terminated their partnership with Mergeplus, leaving no brands available on the application the next day.

To offer electronic prepayment services, a firm must be registered as an electronic financial business. Otherwise, institutional support will be unavailable in case the company goes bankrupt and the damage will be transferred to consumers. However, Mergeplus had not been registered as an electronic financial business beforehand to avoid strong regulations from financial authorities. Therefore, the Financial Supervisory Service (FSS) demanded Mergeplus to rectify its registration, but Mergeplus refused to submit registration documents, including financial statements. Instead, it announced to suspend the services of affiliates except the food service category. Just three years after Mergeplus made its name known, the inner confidentiality has been revealed.

Suspicion of Ponzi Scheme

The issue of improper registration has drawn attention to the unreliable business model of Mergeplus. Since no promotional fees were received from the affiliate companies, Mergeplus was implementing an aggressive marketing strategy by fully bearing expenses for the 20 percent discount. Given that the current issue of Mergepoint is estimated to be 100 billion won, Mergeplus was required to bear at least 20 billion won of expense. However, Mergeplus’s capital was found to be only 3 billion won, which raises questions on the way it supplemented the deficit. In accordance, questions have been raised on how Mergeplus was planning to make a profit in a structure where the more it sells, the more it loses.

Public opinion is now narrowing to suspicions of a Ponzi scheme. Professor Kim Dae Jong (Business Administration, Sejong University) also views the case of Mergeplus as a kind of Ponzi scheme, a multi-level financial fraud. In other words, interest is paid to existing investors from the money of new investors. Therefore, the consistent inflow of new investors is essential to maintain operations. Professor Kim points out, “Unlike discounts through bulk purchases such as Coupang and E-Mart, Mergeplus does not have a profit model in the first place.” In principle, customer deposits and company operating funds should be strictly separated, whereas Mergeplus has supplemented the company's expenses with customer deposits. Since this uncanny structure has been revealed, Mergeplus had to take responsibility for deceiving its customers.

The so-called “Merge Run” came as consumers flooded with complaints, anxious that they might not receive their money back. In response, Mergeplus announced that it will sequentially refund 90 percent of the unused money via online. However, it did not mention the exact timing of the process, even asking for understanding that immediate refunds might be difficult. Professor Kim expresses his concern about the refund policy, claiming that “Even if an affiliate company asks to settle Mergepoint in cash, Mergeplus, who is already in a state of capital impairment, is probably unable to provide financial compensation.” This uncertain refund policy inevitably leads to certain loss for consumers.

There Is No Such Thing as a Free Lunch

Since Mergeplus is most responsible, they must take agile and accurate refund measures, regularly disclose their operational processes, and show a reflective attitude toward the colossal damage they have caused. In addition, at the State Affairs Committee’s plenary session held on August 20, FSS was criticized in that it could have prevented the current situation if it had identified the risk of Mergeplus when it affiliated with credit card companies in June. To prevent further incidents like this from happening in the future, FSS was urged to prepare a prevention measure by conducting a factual survey on unregistered advance payment services and revising the Electronic Financial Transaction Act so that there is no way out of regulations.

Professor Kim argues, “The affiliates are also jointly responsible for the Mergepoint incident.” That is, if a merchant who affiliated with Mergeplus was aware of its exaggerated discount rate, it could be a crime. Even if one was not aware, one should have had accurate perception about Mergeplus’s business structure to form an alliance.

Individuals also need to cultivate a spending habit without being caught up in false discount rates. “College students should always be wary of companies that guarantee more interest than Kookmin Bank's installment savings rate, which is 2 percent per year,” Professor Kim advises. In addition, an individual can exercise “Installment Rights” and require a credit card company to request a refund from Mergeplus vicariously. Individuals should seek reasonable and legitimate methods to minimize their damage and be careful not to suffer such financial fraud again.

There were different voices and opinions about whether the Mergepoint incident was a Ponzi scheme or a fin-tech innovation. For now, the event is considered as a large-scale financial scam caused by a collaboration of Mergeplus’s unstable structure, irresponsible contracts by affiliate companies, and FSS's slack management supervision. To prevent the recurrence of such financial fraud, an accurate analysis and responsible attitude of each economic entity is needed. While the damage caused by the unfaithful business model was realized for now, this incident will still be meaningful if this opportunity allows fin-tech companies to become more responsible and provide innovative services in the future.