What Are Prepaid Payment Instruments?
1. Qualification as a Prepaid Payment Instrument
Under the Payment Services Act, a prepaid payment instrument refers to any instrument that meets all of the following criteria:
(1) The amount or the quantity of goods or services is recorded on a certificate, electronic device, or other physical medium, or is recorded by electromagnetic means,
(2) The user pays consideration corresponding to that amount,
(3) A certificate, number, symbol, or other code linked to that monetary value is issued, and
(4) It can be used to pay for the purchase of goods or the provision of services.
Foreign startups considering expansion into Japan should pay particular attention to this. In many other countries, gift cards, electronic money, and remittances are often regulated under separate frameworks. In Japan, however, a “system that allows value received in advance to be used at a later date” is often classified broadly as a prepaid payment instrument under the Payment Services Act. Therefore, even if a company simply categorizes it as “points,” “wallet balance,” or “in-app currency,” it may still qualify as a prepaid payment instrument under Japanese law.
Typical examples include gift certificates, catalog gift vouchers, magnetic or IC prepaid cards, and prepaid cards usable on the internet. Among these, prepaid balances usable only on a company’s own e-commerce site, digital gift certificates usable only at the company’s own stores, and paid currencies usable only within the company’s own games are often considered to fall under the “In-House type” described below.
On the other hand, wallet balances usable at multiple participating merchants, prepaid code payments that can be used for settlement at stores other than the issuer’s, and paid balances usable for payments to multiple sellers within a marketplace may fall under the “Third-Party type” described below.
2. Exemptions
However, even if the four requirements for prepaid payment instruments are met, this does not automatically mean they fall under the scope of the Payment Services Act. Typical exemptions include instruments usable only within six months from the date of issuance, transportation tickets, admission tickets to museums and similar venues, and meal tickets for employee cafeterias.
The determination is based on substance, not the name given to the product. For example, even if a product is called a “ticket,” “access pass,” or “coupon,” if it is designed to allow the user to use the monetary value acquired through prepayment for future payments, it may be deemed a prepaid payment instrument. In Japan, simply changing the service name or marketing terminology will not avoid regulation. The legal structure itself must be carefully examined.
In practice, a three-step approach is helpful for determining whether your service qualifies as a prepaid payment instrument: first, confirm whether you have received monetary or other consideration from the purchaser or user; second, confirm whether the validity period exceeds six months from the date of issuance; and third, determine whether use is limited to the issuer (or its closely related parties) or extends to third parties.
Types of Prepaid Payment Instruments
1. In-House Type
An In-House prepaid payment instrument refers to one that can be used only when purchasing goods or services from the issuer. The term “issuer” here includes certain closely related parties.
2. Third-Party Type
Third-Party prepaid payment instruments are those that can be used primarily to purchase goods or services from third parties other than the issuer. Instruments designed to be usable at multiple participating merchants are highly likely to fall under this category.
Regulations Concerning Prepaid Payment Instruments
1. Prohibition on Refunds
Refunds for prepaid payment instruments are generally prohibited. Unlike systems in some other countries where wallets may allow users to withdraw their remaining balance after charging, Japanese law generally does not permit this. This is a distinctive feature of the Japanese regulatory framework.
If a system is designed to allow general refunds, depending on the structure of the service, it is likely to be classified as a funds transfer service rather than a prepaid payment instrument, meaning the prepaid payment instrument framework would not apply.
2. Obligation to make deposit
Prepaid payment instruments issuers must deposit an issuance guarantee, a requirement that is often overlooked. When the unused balance exceeds 10 million yen, an amount equal to at least half of that balance must be deposited with the nearest official depository (in practice, the Legal Affairs Bureau). However, a cash deposit is not always required. The deposit obligation may be satisfied alternatively if the issuer enters into a guarantee contract for security deposits with a financial institution, or a trust agreement for security deposits with a trust company, and notifies the authorities accordingly.
3. Regulations on In-House Type
For In-House prepaid payment instruments, a notification must be filed if the unused balance exceeds 10 million yen for the first time on a reference date (March 31 or September 30). The filing deadline is within two months of the day following that reference date.
This determination is not made on a per-service basis. Instead, the unused balances of all In-House prepaid payment instruments issued by the same entity are aggregated as of the reference date. Even if the instruments are spread across multiple apps or brands, they are combined for this assessment if they are issued by the same entity.
4. Regulations on Third-Party Type
Unlike the In-House type, the Third-Party type requires a license from the relevant local finance bureau (the Director-General of the Regional Bureau of Finance or equivalent authority) before issuance. In other words, compliance must be part of the plan before launch, not addressed retroactively after operations begin.
The Third-Party type carries stricter entry requirements than the In-House type. If a foreign startup launches a balance service usable at multiple merchants without obtaining a license first, as might be common overseas, it risks operating an unlicensed business in Japan. Therefore, when considering a Third-Party type in Japan, the legal framework must be built into the product design from the start.
Practical Structuring Options
1. Set the validity period to six months or less
The most typical approach is to design the service so that it can only be used within six months of the issuance date.
However, simply stating this in the terms and conditions is not enough. The system must actually expire the balance after six months, and the expiration date must be clearly displayed to users. If renewals or reissuances effectively allow use beyond six months, the arrangement may conflict with the intent of the regulations even if the stated term is short.
2. Adjust the unused balance as of the reference date to 10 million yen or less
Notification and the deposit of an issuance guarantee are required when the unused balance first exceeds 10 million yen on the reference date (March 31 or September 30). Therefore, continuously managing the unused balance to ensure it remains at or below 10 million yen as of the reference date is one practical method to avoid the application of the law.
However, since the unused balance is calculated by aggregating all instruments issued by the same issuer rather than on a per-service basis, it is difficult to avoid the requirement simply by creating separate services.
Launching with a “six-month expiration” or “low-balance maintenance” model may be a viable option during the initial phase in Japan. However, if you anticipate expanding in the Japanese market, you should plan early for a structure that allows a transition to In-House notification or Third-Party license.
Summary
Prepaid payment instruments are a key regulatory consideration for startups designing prepaid balances, in-app currencies, digital gift certificates, and similar products in Japan. Japanese law broadly classifies these as prepaid payment instruments and divides them into In-House and Third-Party types, each subject to different regulations. As regulations common to both types, refunds are generally prohibited. In addition, if the unused balance as of a reference date exceeds 10 million yen, at least half of that amount must be deposited as an issuance guarantee. For the In-House type, a notification must be filed within two months of the date on which the unused balance exceeds 10 million yen for the first time. For the Third-Party type, license is required prior to issuance, and the standards for establishing the necessary systems are stricter.
Foreign startups considering the Japanese market should therefore determine early on whether their service qualifies as a prepaid payment instrument, and based on that, decide before launching whether to design the service to use an exemption, operate as an In-House type, or register (obtain a license) as a Third-Party type. In Japan, legal assessments directly influence product design. Incorporating legal considerations from the initial design stage, rather than relying on reactive measures, is the recommended approach.
GVA Global LPC can provide optimal advice tailored to your company’s specific circumstances. If you are considering entering the Japanese market, please feel free to contact us.
