Japan’s amended payment services law could encourage more non-bank entry into traditional banking services – finance and banking
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The situation: The amendment to Japan’s Payment Services Act (PSA) came into effect in May 2021 and removed the current number transfer limit that applies to non-bank money transfer services.
The result: This change significantly changes the current regulatory thresholds and the level of compliance requirements imposed on money transfer service providers by establishing multiple license / registration levels depending on the size and scope of the business. Overall, the change expands the scope of money transfer services in Japan and gives new entrants more flexibility and choice.
looking ahead: The change, along with other upcoming regulatory changes, may further expand the periphery of this industry and encourage various sectors of financial and non-financial service providers to enter this market and offer integrated and mature payment / money transfer services in Japan.
The amended PSA came into effect in Japan on May 1, 2021, triggered by the increasing breadth and sophistication of non-banking payment and remittance services.
In 2010, for the first time, the Japanese government allowed non-banks to offer money transfer services (“kawase torihiki”) that had been offered exclusively by banks for centuries. However, money transmitters registered under the PSA were prohibited from sending funds in excess of JPY 1 million (approximately $ 9,000) per transfer. With the amendment to the PSA, this limit has generally been lifted by introducing different categories of licenses / registrations for money transmitters.
New license / registration categories for money sender
According to the amended PSA, money transmitters are divided into three categories with different qualifications and compliance requirements:
- Type 1: Allows an extended scope of services under a new license regime;
- Type 2: Corresponds to the current registration regime, whereby the upper limit remains at 1 million JPY; and
- Type 3: Allows money transfers up to JPY 50,000 with fewer compliance requirements.
At the same time, several unique new rules have been introduced that distinguish money transmitters from traditional banks.
Money transmitters are not subject to Deposit Insurance Corporation, a form of prudential insurance granted to banking institutions in Japan. While a Type 1 licensee must take security measures to secure his customer obligations (usually in the daily calculated amount), he is not permitted to keep customer funds beyond the time required for the money transfer. For example, accepting customer funds is not permitted unless it has a specific transfer amount, a transfer date, and a known recipient named by the remitter. In addition, a Type 1 licensee must specify in their business plan, which must be approved by the Financial Services Agency (“FSA”), the exact time periods required for a transfer based on the specific country / region.
The holding period limitation applicable to type 1 licensees does not apply to type 2 or type 3 licensees. However, to avoid creating a loophole in the holding period restrictions, Type 2 licensees must confirm that the funds received from customers are related to the specific purpose of the transfer. If not, the money has to be paid back to the customers.
While the holding period limit may seem strict compared to the standards of most OECD countries, money transmitters have an advantage over a regulated banking institution in Japan in that they can engage in non-banking activities that banks would otherwise be prohibited from doing. Accordingly, various IT service providers, such as internet retailers, payment platforms or social media, as well as mobile phone providers can operate money transfer services at the same time. Although a bank may also obtain certain non-financial services through subsidiaries, etc., the scope has been limited and is subject to the approval of the FSA.
In addition, the regulatory environment in Japan is changing rapidly to facilitate new market entries from non-banking sectors, making Japanese money transfer services more competitive in the world market.
Elimination of the interbank handling fee for the payment clearing network
In March 2021, the Japanese Banks Payment Clearing Network announced that it would abolish its interbank processing fee and introduce a new management fee system based on expenses and limited profit margin. Under this new system, the fees for transferring interbank funds, which have not changed in over 40 years, will be reduced from October 1, 2021. Money senders are currently not allowed to join the network. However, in-bank processing fees associated with their money transfer services – which are typically borne by such money transmitters – have been a financial burden on money transmitters. This change should encourage competition and new entrants in the money transfer service industries. It is also expected that money senders may be allowed to join the aforementioned bank processing network as early as 2022.
Possible introduction of digital payroll accounts
In January 2021, the Department of Health, Labor and Social Affairs decision-making committee began to discuss whether money transmitters could keep digital payroll accounts for employees. Due to the restrictions imposed by the provisions of the Labor Standards Act, employees’ pay-out accounts were mostly limited to those that were opened at a bank. Permitting Money Transmitters to maintain employee salary accounts may require further changes to the PSA and relevant labor regulations; However, if this change were to occur, it would affect employees’ 60 million payroll accounts, up to JPY 200 trillion annually.
Introduction of new financial service intermediaries
At the same time as the PSA was changed, a new concept of the “financial services broker” was proposed in the new Financial Services Act (“FSG”). This financial services intermediary is allowed to act as an intermediary for securities, insurance and banking products without having to be tied to a specific financial institution, as the current intermediary regime requires. While such an intermediary is generally prohibited from accepting assets / funds from clients under the FSPA, the draft related regulations of the FSPA appear to allow cross-entry with money transfer services under the PSA (i.e. a dual licensed money sender and financial services intermediary) . . A dual licensed intermediary service provider would be eligible to accept funds from customers and we expect that service provider to also provide payment services for investment transactions from customers associated with such intermediary business.
Since the first but limited deregulation of money transfer services in 2010, the number of registered money transmitters has remained relatively small. There are currently only 80 money transmitters registered with the FSA, most of which are incorporated under Japanese law. A foreign legal entity can also register directly as a money transmitter if this is already approved in its own area of law and can meet the requirements of the PSA. Given several upcoming regulatory changes, we expect the number of companies licensed / registered as money transmitters domestically and internationally to increase significantly in the near future.
Three important lessons
- Money transfer services in Japan are evolving. Even if the local regulations for money transmitters are in part unique under the new regime, we still expect a significant increase in the number of non-banks entering the payment / money transfer market.
- We believe that the Japanese government and regulators are ready to open the transfer service market to various new entrants in order to provide a more integrated one-stop service for customers in Japan that includes various IT and financial service providers. We expect further regulatory changes that will favor this trend in the near future. During this process, the effectiveness of a unique holding time restriction under the PSA can be verified.
- At the same time, this trend can also expand the scope of business of traditional banking institutions. In recent years, restrictions on banks engaging in non-financial business have been gradually relaxed, and partnerships between banks and IT service sectors to provide financial platforms have increased. As the market becomes more competitive with the entry of more banking and non-banking industries, we expect the lines to become blurred in providing integrated services to customers.
The content of this article is intended to provide general guidance on the subject. You should seek expert advice regarding your specific circumstances.