Do Your Company's Points or Coins Fall Under the Payment Services Act? What to Decide Before Designing Them

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

When introducing a "points" or "coins" system into your company's web service or app, it is rarely possible to determine from the outset whether it constitutes a prepaid payment instrument under the Payment Services Act. This is because the conclusion depends on whether the points are sold for consideration or granted free of charge, whether they can also be used at other companies' stores, and how the expiration date is set.

If they fall under prepaid payment instruments, you need to check, depending on whether an exemption applies and on where they can be used and the unused balance, how to deal with notification or registration, deposit of security, restrictions on refunds and so on. If they do not fall under the definition, on the other hand, these obligations do not apply. To avoid having to redo work later because of a design mistake, let us go through the line of reasoning in accordance with the criteria in the Act and the Cabinet Order.

The Requirements for a Prepaid Payment Instrument and Separating Out Free Points

Article 3, Paragraph 1 of the Payment Services Act (Japanese) defines prepaid payment instruments by dividing them into Item 1 (amount-based) and Item 2 (quantity-based). The former refers to instruments issued in exchange for consideration corresponding to an amount and used to pay a price; the latter refers to instruments issued in exchange for consideration corresponding to a quantity of goods or services and that can be used to claim delivery or provision.

Broken down, the requirements come to the following three points.

• An amount or quantity is recorded on a certificate or electronic record (storage of value)
• The instrument is issued in exchange for consideration corresponding to that record (receipt of consideration)
• It can be used to pay a price or to claim delivery of goods or provision of services (exercise of rights)

Only when all of these are present does the instrument become subject to regulation. The requirement that tends to become an issue in practice is consideration. Points distributed free of charge through sign-up campaigns or according to usage are issued without receiving consideration from users, so, viewed on their own, they do not fall under prepaid payment instruments. However, if points purchased for consideration and points granted free of charge are mixed and managed as the same balance, it becomes difficult to accurately grasp the unused balance of the points issued for consideration. Even when free points are used alongside paid ones, it is likely necessary to separate the balances of paid and free points and to set the order in which they are consumed.

The Six-Month Rule for Exemption and How It Works in Practice

Article 4, Item 2 of the Payment Services Act exempts from regulation prepaid payment instruments that can be used only within a period specified by Cabinet Order from the date of issue. As for this period, Article 4, Paragraph 2 of the Order for Enforcement of the Payment Services Act (Japanese) provides that "it shall be six months." In other words, if the instrument is designed to be usable only within six months from the date of issue, it falls outside the scope of the Act's provisions on prepaid payment instruments even if it meets the three requirements above.

What needs care here is that the actual operation of the system, not just the wording of the terms of use, is evaluated. Even if the terms state a six-month validity period, if the points remain usable after expiration or the system does not automatically process their expiry, there is a risk that the period limit will be regarded as a dead letter and the exemption will not be recognized. Designs that extend the expiration date each time through campaigns and the like are also subject to review.

Coupon-type points that are used up in a short period are easy to keep within this six-month rule, whereas if you aim for a membership program in which points are accumulated over the long term, or a design under which they can effectively be used indefinitely, you will proceed with regulatory compliance as a prepaid payment instrument built in from the start.

The Distinction Between Own-Business and Third-Party Instruments, and Notification and Deposit Obligations

Prepaid payment instruments are divided into own-business instruments under Article 3, Paragraph 4 of the Act and third-party instruments under Paragraph 5. Own-business instruments are those that can be used only with the issuer itself or with closely related parties specified by Cabinet Order (such as a parent company or subsidiary holding a majority of the voting rights), while third-party instruments are those that can also be used with other parties, such as member stores of other companies with no capital relationship. A design that allows use for payments at other companies' stores falls under third-party instruments, and unlike own-business instruments, which are subject to a notification system, prior registration procedures (Article 7 and the following Articles of the Act) and establishing an appropriate internal system are required. A function for exchanging points with other companies' points must be checked separately, taking into account the issuer and the places of use of the points after exchange.

Even own-business instruments that are used only within the company's own service cannot be issued freely without conditions. If the unused balance as of the record dates of March 31 and September 30 each year (unused balance as of the record date) exceeds JPY 10 million (Article 6, Paragraph 1 of the Order for Enforcement of the Act), an obligation arises to file a notification with the Prime Minister (Article 5, Paragraph 1 of the Act). If the company issues multiple own-business points, the determination is made based on the total amount, not on the individual balances.

Furthermore, when the unused balance as of the record date exceeds JPY 10 million, a deposit for issuance security must be made in an amount equal to at least one half of that unused balance (Article 14, Paragraph 1 of the Act). Bonds such as government bond certificates can be used for the deposit, and there are also methods using a prescribed preservation contract or a trust (Article 14, Paragraph 3, Article 15 and Article 16 of the Act). The deadline for making the deposit is, as a rule, within two months from the day after the record date. As the outstanding balance grows, the burden of preservation also increases, so it is important to anticipate the trend in the balance and the funding arrangements at the business planning stage.

The General Prohibition of Refunds and the Boundary With Fund Transfer Services

An own-business issuer that has filed a notification or a third-party issuer that has been registered is, as a rule, prohibited from refunding the prepaid payment instruments it has issued to their holders (Paragraph 5 of the same Article), except in cases such as discontinuation of the business (each Item of Article 20, Paragraph 1 of the Act). Freely granting refunds at users' request during normal operation of the service is not permitted. This is because allowing unlimited refunds would come close to the acceptance of deposits regulated by the Act Regulating the Receipt of Contributions, Receipt of Deposits and Interest Rates (Investment Act). There are exceptions specified by Cabinet Office Order, such as small refunds, but you need to avoid creating a function to "refund leftover points in cash" without checking the conditions for applying those exceptions.

In addition, if you allow points to be transferred between users or withdrawn to bank accounts, you need to check how they will be used after transfer, the refund mechanism and the flow of funds. Depending on the design, this may constitute exchange transactions and may require registration as a fund transfer service provider. Because there are also separate regulations on transferable prepaid payment instruments, the type of business cannot be determined solely on the single point that the points can be moved between users.