（Fmr Katsuhiro Iwayama Law Office)
Katsuhiro Iwayama, Attorney at Law
【Applicability of Prepaid Payment Instruments】
＜Prepaid Payment Instruments＞
A “prepaid payment instrument” is, in more familiar terms, a prepaid card. Common examples that people use in everyday life include transportation IC cards such as Suica and PASMO, department store gift certificates, and in-game coins purchased within online games. More specifically, the requirements can be described as follows (Source: “Overview of Prepaid Payment Instrument Issuing Business,” published by the Japan Payment Service Association (So far, Japanese only, English version will be prepared).
＜Prepaid payment instruments for their own business and for third-party business＞
Prepaid payment instruments are divided into two categories: “Prepaid payment instruments for their own business” and “Prepaid payment instruments for third-party-type prepaid payment instruments.”
Simply put, a “for their own business” can only be used for the services provided by the issuer itself. By contrast, a “third-party-type” is defined under the law as any prepaid payment instrument other than a proprietary-type prepaid payment instrument. More specifically, it refers to instruments that can be used to purchase goods or services from third parties, such as affiliated merchants, in addition to the issuer.
Transportation IC cards are a typical example of third-party-type prepaid payment instruments because they can be used not only for railway transportation services but also for payments at convenience stores and other merchants.
With respect to third-party-type prepaid payment instruments, the issuer must:
be a corporation, have net assets of at least JPY 100 million (although lower thresholds, such as JPY 10 million, may apply in certain cases, for example where use is limited to a single municipality), and complete prior registration.
From the perspective of new businesses, companies will often consider issuing "Prepaid payment instruments for their own business”. Accordingly, please refer to the following materials for further details (Source: “Overview of Prepaid Payment Instrument Issuing Business,” published by the Japan Payment Service Association). (So far, Japanese only).
With respect to "repaid payment instruments for their own business", prior registration is not required. However, as indicated in “Question 4” of the flowchart above, if the outstanding unused balance exceeds JPY 10 million as of the reference date, the issuer is required to file a notification and deposit a security bond equal to at least one-half of the unused balance.
Of course, if the business plan remains relatively small in scale, the unused balance may never exceed JPY 10 million. However, as the business expands, it is entirely possible that the balance will increase. Accordingly, businesses should be aware that attempting to avoid classification as a prepaid payment instrument (or more precisely, avoid becoming subject to the applicable regulations) by keeping the balance below JPY 10 million may ultimately become difficult to control from the operator’s perspective.
At present, if a business wishes to structure its service so that it does not fall within the definition of a prepaid payment instrument, one practical approach, as indicated in “Question 2,” is to limit the validity period to within six months from the date of issuance. In fact, many in-game currencies are structured in this manner.
In addition, where a payment has been made and a subsequent cancellation occurs, if the refund is provided not in cash but in the form of a voucher, the consideration originally paid for the reservation effectively becomes the source of funds used to purchase that voucher. As such, depending on its structure, the voucher itself may also constitute a prepaid payment instrument. Therefore, if a business wishes to remain outside the scope of the Payment Services Act, one possible approach is to limit the validity period of such vouchers to six months or less.
Furthermore, as a business expands, it may enter into partnerships with other companies’ point or rewards programs. Particular caution is required in this regard. Specifically, even if a company’s own point program does not independently constitute a prepaid payment instrument because the points are granted free of charge, the company’s point program may nevertheless become classified as a prepaid payment instrument where the partner company’s point program itself falls within that category (see the “Reference” section of Q12 in the “Frequently Asked Questions on Prepaid Payment Instruments” compiled by the Japan Payment Service Association(Japanese only)).
The another point requiring attention concerns overseas issuers of prepaid payment instruments. Although foreign businesses themselves are generally not subject to Japanese regulations, such businesses are prohibited from soliciting prepaid payment instruments within Japan pursuant to Article 36 of the Payment Services Act.
