When Do Self-issued Points Fall Under the Category of Prepaid Payment Instruments as Defined by the Japanese Payment Services Act?

According to a survey conducted by a major think tank, the total number of points and miles issued by key companies across 11 industries in Japan in fiscal 2014 exceeded at least JPY 800 billion (approximately $7.2 billion). It is estimated that this figure surpassed JPY 1 trillion (approximately $9 billion) in 2022, according to a public announcement by Nomura Research Institute, Ltd. on October 5, 2016.

Points, which were once bestowed in relatively small amounts as a promotional tool and seen mainly as “extras”, have grown into a significant presence. They provide enough of a discount on the purchase of goods and services to be noticed, and they have become so liquid that they can sometimes be purchased with cash or exchanged between point issuers. It has also become commonplace for IT and venture companies to create and operate “point” systems on their own apps or web services.

Points, which are increasingly seen as indispensable in social life, can now be considered to hold an economic value equivalent to cash. This has led to the implementation of certain consumer protection measures to guard against unexpected situations such as the insolvency of point issuers and to ensure transparency for users. This article will discuss the legal regulations applicable when self-issued points fall under the so-called “prepaid payment instruments” stipulated by the Japanese Payment Services Act.

The Japanese Payment Services Act and Self-Issued Points

The system related to “prepaid payment instruments” in the “Payment Services Act” of Japan used to be the “Prepaid Certificate Act (commonly known as the Prepaid Card Act)”, which mainly assumed gift certificates, gift cards, and prepaid cards. However, the definition of “prepaid payment methods” was broadened in 2010 to cover not only the increasing spread of point services mentioned earlier, but also daily advancements like e-money charging, diversification of online games, and more.

In addition to prepaid payment instruments, Japanese Payment Services Act regulates fund transfers and the handling of virtual currency, among other things. It evolves year by year as a mechanism to ensure the appropriateness of new financial services. The issue that can potentially arise in relation to self-issued points is a problem concerning fund transfers. Simply issuing self-points and allowing users to use them can become a case of “fund transfer” if those points are moved between users or cashed in. In such cases, the Act imposes particularly strict regulations. Details regarding this issue are explained in the following section of this article.

Self-Issued Points and Consumer Protection

Regulations are imposed on the “principal guaranteed” to ensure consumer protection.

As companies create new value that rapidly becomes widespread, it becomes an entity that society cannot ignore. This calls for social norms, particularly in terms of user protection, which in turn leads to the establishment of legal systems enforced by state authority. The same process applies to points, and within the Japanese Payment Services Act, they have been classified as “prepaid payment instruments”. Consequently, certain legal regulations are now imposed on the act of issuing such self-generated points.

This legislation can be considered closely related to regulations on the custody of money. Occasionally, there are reports of questionable businesses skillfully amassing money from a large number of people, only to eventually go bankrupt or disappear, causing significant damage to investors. Before considering the application of criminal law, such as fraud charges, for the actions of these businesses, there are cases where a violation of the Japanese Investment Law occurs as soon as they collect investments from an unspecified number of individuals. This is because the law, in its Article 1, prohibits the acceptance of money with a principal guarantee. The act of accepting money with a principal guarantee can easily give consumers the illusion that it is safe because the principal is guaranteed. The law is wary of cases where a company that has collected money in this way goes bankrupt and consumers suffer damage.

What are the Regulations on Prepaid Payment Instruments?

Economic Value Equivalent to Money

The risk that the Japanese Investment Law’s regulation of deposits aims to prevent can also apply to businesses issuing economic value equivalent to money, such as gift certificates, prepaid cards, electronic money, and points. In other words, it can create the illusion that “there is no risk in converting cash into proprietary points, just like depositing money in a company that guarantees the principal”.

Rather, to properly operate economic value that does not presuppose physical circulation like cash and mainly relies on the existence of electromagnetic records, considering its vulnerability, a user protection policy is even more important. The Japanese Payment Services Act imposes regulations on such economic value equivalent to money as follows.

What are Prepaid Payment Instruments and their Discipline?

The Japanese Payment Services Act defines a method called “prepaid payment instruments” in Chapter 2 and obligates businesses that fall under this method as follows.

• Ensure that supervisory administration applies by reporting and registering with the Director of the Financial Bureau.
• Require legal display and information provision for easy understanding by customers.
• Deposit half of the unused balance as a deposit on a legally determined standard date.

Compared to the permit system of the Japanese Banking Law, etc., the hurdle may be somewhat lower, but it can be said to be a strict regulation that imposes a considerable burden, as certain acts are required under the supervision of the authorities and half of the “deposit” balance is securely maintained.

Criteria for Being Considered a “Prepaid Payment Instruments”

Firstly, let’s take a look at the fundamental conditions that qualify something as a “prepaid payment methods” according to the Japanese Funds Settlement Act. These conditions can be found in Article 3 of the Act, which may not be immediately understandable to the general public due to its intricate legal language.
Therefore, for the sake of clarity, we will list these conditions in bullet points below:

• The amount of money, or the quantity of goods to be purchased or services to be provided, is recorded or specified.
• The above record or specification is issued in the form of a ticket or symbol.
• The above-mentioned issuance is made in exchange for a fee or other forms of compensation.
• The issued item can be used for the payment of goods or services.

If all these four conditions are met, the item in question is considered a “prepaid payment methods” and is subject to the regulations of the Act.

However, self-issued points, as long as they are issued in exchange for money or other compensation and can be used for the purchase of goods or services, will generally meet these four conditions.

Certain Conditions Can Lead to Non-Applicability

However, applying regulation solely based on these four points would result in a considerable range of businesses being regulated, making the business environment rather stifling. Thus, certain items, even if they satisfy the four conditions above, are designated as not being prepaid payment instruments. These are what we call the “exclusion conditions.”

• If the usage period is limited to within six months: Due to the relatively low risk of insolvency, such items are excluded from regulation (Article 4, Paragraph 1 of the Act, and Paragraph 2 of the Cabinet Order).
• Items such as transportation tickets, movie or theater tickets, betting tickets, items used only for commercial transactions for the user: Due to their specific usage or their short validity period, these items are excluded from regulation (Article 4, Paragraph 1 of the Act, and Paragraph 1 of the Cabinet Order).
• Items like revenue stamps, postage stamps, golf membership cards, etc.: These items are explicitly exempted by law, as guidelines issued by the authorities indicate that they are not considered prepaid payment instruments.

The particularly important exclusion is the first one, items with a usage period of six months or less. The point here is that if the validity period is within six months, the item does not qualify as a prepaid payment instruments, and as previously mentioned, it will not be subject to the Act’s regulations.

Distinguishing Between Third-Party and In-House Types

The extent of user protection varies depending on the circulation range of the tickets, etc., issued by the prepaid payment instruments. This aspect is also incorporated into the laws and regulations.

• When the circulation range extends to third parties other than the issuer (Third-Party Type): For example, Suica points, which can be used not only for train rides but also at convenience stores and elsewhere, are considered third-party type.
• When the circulation range is limited to the issuer’s own business (In-House Type): For example, points issued by game operators that can only be used for purchasing items in their games are considered in-house type.

The regulation differs based on these classifications. This is known as “relaxation conditions,” meaning the legal restrictions are “relaxed” if the type is in-house.

• Third-Party Type: Issuance of tickets etc., by prepaid payment methods cannot be made unless registered with the Financial Services Agency. This registration comes with various conditions, such as the issuer having a net asset value of at least 100 million yen as a general rule. It’s fair to say that this represents a requirement for the issuer to have a certain degree of financial strength, similar to when holding customer deposits, to prevent the risk of failure.
• In-House Type: Registration with the Financial Services Agency is not required. If the unused balance is 10 million yen or less as of the legally defined date, you are not subject to regulation. If the balance exceeds this amount, you will be subject to regulation, but you only need to make a “notification” to the Financial Services Agency, not a registration.
  If you fall under the third-party type, you need to meet conditions such as a net asset value of 100 million yen and obtain registration with the Financial Services Agency. This regulation can be considered quite heavy, particularly for early-stage ventures.

To avoid these regulations, you may consider conditions like:

• Setting the validity period to 6 months (exclusion condition).
• Designing points to be in-house type and keeping the unused balance below 10 million yen (relaxation condition).

Does Granting Points Constitute a “Prepaid Payment Instrument” Subject to Regulation?

What are the requirements and conditions for being considered a “prepaid payment instrument”?
With the above understanding, we will now delve into specifics regarding self-issued points. First, let’s number the basic requirements of the “prepaid payment methods” under the Japanese Payment Services Act, the exclusion conditions, and the relaxation conditions that we’ve discussed so far. We will provide concrete examples to make these easier to visualize. Then, we would like to apply these to several typical cases of point granting.

So, does each case qualify as a “prepaid payment instrument” and is subject to regulation?

1) The amount, or quantity of goods to be purchased or services to be provided, is stated or recorded.
Example: The presence of a statement on a website, usage statement, receipt, etc., such as “Held Points: XX points” or “XX yen worth of our products/services”.
2) The above statement/record is issued in the form of tickets, symbols, etc.
Example: The held points can be exercised at any time through an IC card, smartphone app, etc.
3) The above issuance is made in exchange for consideration.
Example: It is obtained by buying with cash, credit card, prepaid card, gift certificate, points, etc., rather than as a free bonus.
4) The issued item can be used for the payment of goods to be purchased or services to be provided.
Example: It can be used for purchases of goods or services.

5) The condition falls within the exclusion conditions, such as being valid for a period of 6 months.
Example: The duration is limited, such as “within 6 months”, “until XX date”, etc.

6) If it is not a third-party type but an in-house type, registration with the Financial Services Agency is not required.
Example: In-House Type: Can be used exclusively in the department store that issued it. Third-Party Type: Can be used widely, not only in their own stores but also in fast-food restaurants, convenience stores, etc.

Case 1: Granting a certain number of points according to usage amount or conditions

This refers to instances where credit card companies, etc., grant a certain number of points to card members based on their usage amount or conditions (Example: JCB Card’s OkiDoki Point Program).

Points are granted with a specific number recorded on the card usage statement, etc. (fulfilling conditions 1 and 2), but as they are given as a bonus based on usage amount or conditions, and not purchased for a price (not fulfilling condition 3), they are not considered a “prepaid payment methods”.

Case 2: Those usable throughout shopping malls, etc.

These points are granted by an Internet shopping mall-centric company to members of the same corporate group according to certain usage amounts or conditions (Example: Rakuten Super Points).

The specific number of points is recorded and granted on a corporate group-wide point management site (Example: Rakuten Point Club) (fulfilling conditions 1 and 2), but as they are given as a bonus based on usage amount or conditions, and not purchased for a price (not fulfilling condition 3), they are not considered a “prepaid payment instrument”.

Case 3: Gift Points Purchased at Convenience Stores

These are gift points that can be purchased at convenience stores, with the amount purchased converted into equivalent points of the same corporate group (Example: Rakuten Point Gift Card).

The gift card with a specific number of points recorded (fulfilling condition 1) is issued at convenience stores etc. (fulfilling condition 2), and the points are granted in exchange for an amount equivalent to the points (fulfilling condition 3). These points can be used for purchasing goods or services within the corporate group (fulfilling condition 4), so they are considered a “prepaid payment instrument”.

There is a way to make it not applicable as a prepaid payment instrument by setting a validity period

However, depending on the validity period of the points allocated by the gift card, it may fall under the exclusion conditions.

Looking at the “Rakuten Point Gift Card” as an example, the following is stated on the service introduction site:

The validity period of the Rakuten Super Points earned with this card is 6 months from the date of purchase at the store. Rakuten Point Gift Card

Therefore, at least in the case of the “Rakuten Point Gift Card”, it falls under the exclusion conditions (not fulfilling condition 5), so it is not considered a “prepaid payment instrument”.

The Rakuten gift card has a validity period set for 6 months.

By the way, if there were no time restriction, the points would be applicable as third-party prepaid payment methods (not fulfilling condition 6) as they can be used in each participating Rakuten store, and registration with the Financial Services Agency would be necessary.

Case 4: Points from So-called Japanese PTC Sites

These are points awarded on corporate point sites, where registered members earn a certain number of points by clicking on advertisements or playing games.

These points are granted after being recorded on the point management site (fulfilling conditions 1 and 2). However, since these points are given as bonuses for clicking on advertisements or using games, and no payment is made for the awarding of points (condition 3 not met), they are not considered a “prepaid payment instrument”.

Case 5: When Exchanging Company A’s Points for Company B’s Points

To explain, in some scenarios, Company A grants its own points according to the amount spent shopping within the Company A group. These accumulated points can be used for shopping within the Company A group. As explained in Case 4-2, since points are not granted in exchange for a payment (condition 3 not met), they are not considered a “prepaid payment instrument “. Let’s assume here that Company A, finding the scope of its own points too limited, partners with Company B, allowing A’s points to be exchanged for B’s miles at a certain rate. This case concerns the issue at Company B.

Normally, Company B would award miles according to the user’s usage record, and these accumulated miles can be exchanged for services such as free tickets. As no payment is made for the awarding of these miles (condition 3 not met), they are also not considered a “prepaid payment instrument”.

However, is the same true when the miles are granted through an exchange with Company A’s points? Here, caution is necessary. Because the exchange requires the allocation of Company A’s points, there is room to consider that this allocation is accompanied by a payment of the “price” in the form of Company A’s points. While the interpretation of the term “price” may vary, if such point exchanges are considered as paying a “price”, there might be a possibility that it is classified as a “prepaid payment instrument”. Thus, to operate outside the application of the Japanese Payment Services Act, Company B might need to consider measures such as limiting the effectiveness of the said exchange part to within 6 months.

Conclusion: Understanding the Japanese Payment Services Act is Necessary for Self-issued Point Systems

As such, depending on the operation of point allocation, it may be subject to stringent regulations regarding prepaid methods under the Japanese Payment Services Act, so careful attention is necessary in designing point systems.

We introduced several typical scenarios of point allocation this time. It should be clear from each case that the deciding factors are whether the allocation “involves a payment” and in cases where it does, “shortening the validity period”. With proper design considering these two points, you can avoid being subject to stringent regulations.

While not covered in this article, it is also necessary to pay attention to regulations related to prizes and rewards, even if the Japanese Payment Services Act does not apply when granting points.