Japan's Amended Payment Services Act Could Prompt More Nonbank Entries Into Traditional Banking Services
The Situation: The amendment to the Payment Services Act ("PSA") of Japan took effect in May 2021, removing the current numerical transfer cap placed on fund transfer services by nonbank institutions.
The Result: This amendment significantly changes the current regulatory thresholds and scope of compliance requirements imposed on money-transfer service providers by setting up multiple license/registration levels that depend on the size and scope of operations. Overall, the amendment expands the scope of fund transfer services in Japan and provides new entrants greater flexibility and choices.
Looking Ahead: The amendment, together with other upcoming regulatory changes, may further extend the periphery of this industry and encourage various areas of financial and nonfinancial service providers to enter this market and offer integrated and sophisticated payment/fund transfer services in Japan.
The amended PSA took effect in Japan on May 1, 2021, prompted by the increasing breadth and sophistication of nonbank payment and fund transfer services.
In 2010, the Japanese government for the first time allowed nonbank institutions to offer fund transfer services ("kawase torihiki"), which had been services offered exclusively by banks for centuries. However, money transmitters registered under the PSA were prohibited from transferring funds in excess of JPY 1 million (approx. US$ 9,000) per transfer. The amendment to the PSA generally removed this cap by setting up different categories of money transmitter license/registrations.
New License/Registration Categories for Money Transmitters
Under the amended PSA, money transmitters will be classified into three categories, with different qualifications and compliance requirements:
- Type 1: Permits an expanded scope of services subject to a new license regime;
- Type 2: Equivalent to the current registration regime with the cap remaining at JPY 1 million; and
- Type 3: Permits fund transfers up to JPY 50,000 with fewer compliance requirements.
Simultaneously, several unique new rules that distinguish money transmitters from traditional banks have been introduced.
Money transmitters are not subject to the Deposit Insurance Corporation, a form of prudential insurance afforded to banking institutions in Japan. While a Type 1 licensee is required to set up collateral measures to secure its customer obligations (generally in the amount calculated on a daily basis), it is not allowed to keep customers' funds beyond the period necessary for fund transfer purpose. For instance, acceptance of customer funds is not allowed, unless it has a specific transfer amount, transfer date and known recipient designated by the transferor. Further, a Type 1 licensee must specify the exact periods required to effect a transfer, based on respective country/regions, in its business plan which must be approved by the Financial Services Agency ("FSA").
The holding period restriction applicable to Type 1 licensees does not apply to a Type 2 or Type 3 licensee. However, in order to avoid creating a loophole under the holding period restrictions, Type 2 licensees are required to confirm that the funds received from customers are related to the specific remittance purpose. If not, the funds must be returned to customers.
While the holding period restriction may seem strict compared to the standards of most OECD countries, money transmitters have an advantage over a regulated banking institution in Japan because they can engage in nonbanking activities that are otherwise prohibited for banks. Accordingly, various IT service providers, such as internet retailers, payment platformers or social media, as well as mobile carriers, may simultaneously engage in fund transfer services. Although a bank may also engage certain nonfinancial services through subsidiaries, etc., the scope has been limited and subject to the approval of the FSA.
Further, the regulatory environments in Japan are rapidly changing to facilitate new entries from nonbanking sectors, making Japanese fund transfer services more competitive in the global market.
Abolishment of Inter-Bank Handling Fee for Payment Clearing Network
In March 2021, the Japanese Banks' Payment Clearing Network announced that it will abolish its inter-banks handling fee and introduce a new management fee system, based on expenses and limited profit add-on. Under this new system, inter-bank fund transmission fees, which have not changed for over 40 years, will be reduced, starting on October 1, 2021. Currently money transmitters are not yet allowed to join the network. However, intra-bank handling fees incurred in connection with their fund transmission services—usually borne by such money transmitters—have been a financial burden for money transmitters. This change was designed to promote competition and new entrants in fund transfer service industries. It is also anticipated that money transmitters may be allowed to join the above bank settlement network as early as 2022.
Possible Introduction of Digital Salary Payment Accounts
In January 2021, the policy-making committee of the Ministry of Health, Labour and Welfare started to discuss whether money transmitters may hold digital employee salary payment accounts. Due to the restriction under the regulations of the Labor Standards Act, employee salary payment accounts have been mostly limited to those opened at a bank. Permitting money transmitters to hold employee salary payment accounts may require further amendments to the PSA and relevant labor regulations; however, if this change happens, it would affect 60 million employee salary payment accounts, which hold as much as JPY 200 trillion per year.
Introduction of New Financial Service Intermediary Service Providers
Simultaneously with the amendment to the PSA, a new concept of "financial service intermediary" was proposed under the new Financial Services Provision Act ("FSPA"). This financial service intermediary will be allowed to operate as an intermediary across securities, insurance and bank products without being required to associate with a particular specified financial institution, as the current intermediary regime requires. Although such intermediary is generally prohibited to accept assets/funds from customers under the FSPA, the draft of associated regulations to the FSPA appears to allow cross entry with fund transfer services under the PSA (i.e., a dually licensed money transmitter and financial service intermediary). A dually licensed intermediary service provider would be permitted to accept funds from customers, and we expect such service provider also may start to handle payment services for investment transactions of customers associated with such intermediary businesses.
Since the first, but limited, deregulation for fund transfer services in 2010, the number of registered money transmitters has remained relatively small. Currently there are only 80 money transmitters registered with the FSA—most of which are entities formed under Japanese law. A foreign entity may also directly register itself as a money transmitter if such entity is already licensed in its own jurisdiction and can satisfy the requirements under the PSA. With multiple regulatory changes forthcoming, we expect that the number of entities licensed/registered as money transmitters, both domestic and foreign, will increase significantly in the near future.
Three Key Takeaways
- Fund transfer services in Japan are evolving. While the local regulations imposed on money transmitters under the new regime are unique in part, we nonetheless expect a significant increase in various nonbanks entering the payment/fund transfer market.
- We believe the Japanese government and regulatory authorities are willing to open up the transfer service market to various new entrants in order to provide a more integrated, one-stop-shop type of service to customers in Japan, encompassing various IT and financial service providers. We expect further regulatory changes favoring this trend in the near future. During that process, the effectiveness of a unique holding period restriction under the PSA may be revisited.
- At the same time, this trend may also expand the business scope of traditional banking institutions. In recent years, the restriction over banks operating nonfinancial business has been gradually loosened, and partnerships between banks and IT service sectors aiming to provide financial platforms have increased. As the market becomes more competitive with the entry of more banking and nonbanking industries, we expect the lines to become blurred when it comes to providing integrated services for customers.
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