Entering Japan's Payment Services Market? Understanding Business Security Deposit Requirements

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

Japan stands as a significant and sophisticated market for payment services, with a regulatory framework designed to foster innovation while ensuring robust user protection. A cornerstone of this framework is the Payment Services Act (資金決済に関する法律 - Shikin Kessai ni Kansuru Hōritsu), which governs a range of activities including prepaid payment instruments, funds transfer services, and, through more recent amendments, crypto-asset exchange services and certain electronic payment instruments like stablecoins. For any entity, domestic or foreign, looking to offer such services in Japan, a critical and often substantial requirement is the mandatory business security deposit (営業保証金 - eigyō hoshōkin). This article provides a guide to understanding these deposit obligations, which are primarily designed to safeguard user funds.

The Payment Services Act: Scope and Objectives

First enacted in 2009 and effective from 2010, the Payment Services Act has undergone several significant amendments to keep pace with the rapidly evolving financial technology landscape. Its core objectives are:

  • User Protection: Ensuring that funds entrusted by users to service providers are secure and recoverable.
  • Maintaining Financial System Stability: Regulating payment services to prevent systemic risks.
  • Promoting Innovation: Providing a clear legal framework that allows for the development of new and efficient payment solutions.

The Act categorizes several types of payment service providers, each with specific regulatory requirements, including the obligation to make security deposits. The main categories include:

  1. Issuers of Prepaid Payment Instruments (PPIs - 前払式支払手段発行者 maebarai-shiki shiharai shudan hakkōsha): Entities issuing instruments like gift cards, e-money, or travel cards that are paid for in advance.
  2. Funds Transfer Service Providers (資金移動業者 - shikin idōgyōsha): Businesses that conduct exchange transactions, essentially moving funds between parties, often across borders or domestically outside traditional banking channels.
  3. Crypto-Asset Exchange Service Providers (暗号資産交換業者 - angōshisan kōkangyōsha): Platforms facilitating the buying, selling, and exchange of crypto-assets (formerly referred to as virtual currencies). This category was formally brought under the Payment Services Act through amendments around 2017.
  4. Electronic Payment Instrument Services (電子決済手段等取引業 - denshi kessai shudan tō torihikigyō): A newer category, established by amendments around 2022-2023, covering intermediaries for certain types of stablecoins and other digital payment methods.

Business Security Deposits: General Principles

Across these categories, the requirement for a business security deposit serves a common fundamental purpose:

  • User Protection Fund: The deposit acts as a segregated pool of assets that can be used to refund users if the service provider becomes insolvent or otherwise fails to meet its obligations (e.g., unable to redeem PPIs, complete a fund transfer, or return user crypto-assets).
  • Depositing Authority: These security deposits must be made with the Legal Affairs Bureau (法務局 - Hōmukyoku) that has jurisdiction over the service provider's principal business office in Japan.
  • Form of Deposit: While deposits are calculated in Japanese Yen, they can typically be made in:
    • Cash (Japanese Yen).
    • Certain eligible securities, primarily Japanese Government Bonds (JGBs), local government bonds, or other securities designated as acceptable by the authorities.
    • In some cases, these direct deposits can be substituted by alternative arrangements like a bank guarantee from an approved financial institution or a security deposit trust agreement with a trust company, subject to specific conditions.

Detailed Requirements for Specific Service Categories

The specifics of the deposit amount, calculation method, and ongoing obligations vary significantly depending on the type of payment service offered.

1. Issuers of Prepaid Payment Instruments (PPIs)

PPIs range from store-specific gift cards to widely accepted electronic money. The regulations distinguish between:

  • Issuers for Own Business (Jika-gata 自家型発行者): Those issuing PPIs usable only for purchasing goods/services from themselves (e.g., a department store's own gift card).
  • Issuers for Third-Party Businesses (Daisansha-gata 第三者型発行者): Those issuing PPIs that can be used at multiple, unaffiliated merchants (e.g., general-purpose e-money). Issuers for Third-Party Businesses generally face more stringent registration and regulatory requirements, including security deposits.

The deposit for PPI issuers is known as an "Issue Security Deposit" (Hakkō Hoshōkin 発行保証金).

  • Trigger for Deposit: An Issue Security Deposit is required when the total "unused balance" (mijiyō zandaka 未使用残高) of all issued PPIs (i.e., the total value loaded by users but not yet redeemed) exceeds a statutory threshold. As of early 2025, this threshold is typically ¥10 million.
  • Base Dates (Kijunbi 基準日): The unused balance is calculated as of specific "base dates," which are March 31st and September 30th of each year.
  • Calculation of Deposit Amount: If the unused balance on a base date exceeds ¥10 million, the issuer must deposit an amount equivalent to at least 50% of that unused balance. For example, if the unused balance is ¥50 million, the required deposit is at least ¥25 million.
  • Deposit Procedures:
    • An initial deposit is required if the projected unused balance at commencement will exceed the threshold.
    • Subsequently, within two months of each base date, the issuer must calculate the unused balance. If the required deposit amount based on this balance is higher than what is currently deposited, an additional deposit (tsuika kyotaku 追加供託) must be made. Conversely, if the required amount is significantly lower, a partial withdrawal may be possible with regulatory approval.
  • Deposit Application Form Example (Key Fields): The application (kyotakusho) would typically state the cause for deposit as "Payment Services Act Article [relevant article number], for Issue Security Deposit for Prepaid Payment Instruments," along with details of the issuer, the unused balance as of the base date, and the calculation of the deposit amount.

2. Funds Transfer Service Providers (Shikin Idōgyōsha)

These entities, which require registration with the Prime Minister (delegated to the Financial Services Agency - FSA and local Finance Bureaus), are obligated to make a "Performance Security Deposit" (Rikō Hoshōkin 履行保証金).

  • Purpose: To protect user funds that are in the process of being remitted but have not yet reached the beneficiary.
  • Calculation of Deposit Amount: The required deposit amount must be at least equivalent to the total sum of "funds in transit" as of a specific base date. "Funds in transit" generally means the aggregate amount of remittance orders received from users for which the transfer process to the beneficiary has not yet been completed. Additionally, an amount for other user protection purposes, as stipulated by Cabinet Order, must be included.
  • Base Dates and Reporting: Providers must calculate this amount at least weekly (or even daily for high-volume providers, as specified by Cabinet Order) and ensure their deposit (or alternative security like a bank guarantee or trust agreement) covers this amount. They must also report these figures regularly to the authorities.
  • Initial Deposit: A minimum deposit amount (e.g., ¥10 million, or a higher amount based on projected transaction volumes) may be needed upon registration and before commencing operations.
  • Deposit Application Form Example: The cause for deposit would be "Payment Services Act Article [relevant article number], for Performance Security Deposit for Funds Transfer Services," with details of the provider, the amount of funds in transit as of the base date, and the calculation leading to the deposit amount.

3. Crypto-Asset Exchange Service Providers (Angōshisan Kōkangyōsha)

Following amendments to the Payment Services Act around 2017, entities providing crypto-asset exchange services also fall under a registration regime and have obligations to protect user assets, which include making security deposits.

  • Purpose: To safeguard users' fiat currency and crypto-assets held by the exchange in case of the exchange's insolvency or other failures (such as hacking incidents where user assets cannot be fully recovered).
  • "Performance Security Deposit" or Segregated Trust: These providers must segregate users' money from their own corporate funds, typically by placing it in a trust account with a trust company. For users' crypto-assets, a significant portion (e.g., most of it) must be kept in "cold wallets" (offline storage).
  • Deposit Requirement: In addition to segregation, crypto-asset exchanges must deposit with an official deposit office an amount in cash or eligible securities. The calculation is complex but generally tied to the value of user crypto-assets managed in "hot wallets" (online, more vulnerable wallets) and potentially a portion of user fiat currency not fully covered by trust arrangements. The aim is to have readily available funds for user restitution. The exact amount is determined by formulas set out in Cabinet Orders, taking into account factors like the type and amount of crypto-assets handled and the exchange's operational risks.

4. Electronic Payment Instrument (e.g., Stablecoin) Service Providers (Denshi Kessai Shudan tō Torihikigyōsha)

Amendments to the Payment Services Act, effective from June 2023, introduced a comprehensive regulatory framework for "Electronic Payment Instruments," which largely targets stablecoins. Entities involved in issuing or intermediating such instruments are subject to licensing/registration and various obligations, including securing user assets.

  • Purpose: To ensure that issuers of certain types of stablecoins can meet all redemption requests from users and that intermediaries handle user assets appropriately.
  • Security Deposit/Collateral Requirements: Issuers of stablecoins that fall under the definition of Electronic Payment Instruments are typically required to hold underlying assets (e.g., fiat currency deposits, highly liquid securities) equivalent to the total value of stablecoins issued. In addition to this asset preservation, they may also be required to make a performance security deposit with a deposit office or enter into trust agreements to further secure users' redemption rights, particularly to cover operational risks or shortfalls. The specifics depend on the exact structure of the stablecoin and the nature of the provider's activities (issuer, intermediary). The rules aim to ensure that users can always redeem their stablecoins at face value.

Common Procedural Aspects for Business Security Deposits

While the calculation methods differ, several procedural elements are common across the various types of business security deposits under the Payment Services Act:

  • Additional Deposits (Tsuika Kyotaku 追加供託): If, as of a base date, the calculation reveals that the required security deposit amount has increased (e.g., a PPI issuer's unused balance has grown significantly, or a funds transfer provider has more funds in transit), the service provider must make an additional deposit to cover this shortfall. This is typically required within a specific timeframe (e.g., two months from the base date for PPI issuers).
  • Deposit Orders (Kyotaku Meirei 供託命令): Should a service provider fail to make a required initial or additional deposit, the competent regulatory authority (the FSA or a local Finance Bureau) can issue a formal deposit order, compelling compliance. Failure to comply can lead to administrative sanctions, including business suspension or revocation of registration/license.
  • Withdrawal/Retrieval of Deposits (Torimodoshi 取戻し): A service provider may be able to withdraw all or part of their deposited security funds under certain circumstances, such as:
    • Cessation of the regulated payment service business in Japan.
    • A significant and sustained decrease in the basis for calculation (e.g., a PPI issuer's unused balance falls well below the level that necessitated the current deposit amount).
    • Substitution of the cash/securities deposit with an alternative permitted form of security, like a bank guarantee or trust agreement of equivalent value.
      Any withdrawal typically requires prior approval from the regulatory authority.
  • Substitution of Deposited Assets (Sashikae 差替え): Service providers can apply to substitute one form of deposited asset for another (e.g., replace deposited JGBs that are maturing with new JGBs, or replace cash with eligible securities, or vice-versa), provided the total value of the security deposit remains at or above the required level. This involves a two-step process: making a new deposit of the replacement assets, and then, upon confirmation, applying for the withdrawal of the original assets.
  • Restitution to Users (Kanpu 還付): This is the ultimate purpose of the security deposit. If a service provider becomes insolvent, bankrupt, or otherwise fails to meet its obligations to users (e.g., cannot honor PPI redemptions, fails to complete fund transfers, or loses user crypto-assets), users have a right to claim restitution from the deposited security funds. This process is typically initiated by users filing claims with the relevant regulatory authority, which then oversees the verification of claims and the pro-rata distribution of the available deposited funds.
  • Conversion/Liquidation of Securities (Kanka 換価): If the security deposit consists of securities (like JGBs) and cash is needed for user restitution, the regulatory authorities or the deposit office, under court direction, can liquidate (sell) these securities to generate the necessary cash for distribution.

Considerations for Foreign Entities Entering the Japanese Market

Foreign companies aiming to offer regulated payment services in Japan must be fully prepared to meet these business security deposit requirements, in addition to other licensing and operational obligations:

  • Licensing/Registration: Offering these services typically requires obtaining the appropriate license or registration from the Japanese financial authorities.
  • Business Presence: A physical business presence in Japan (such as a branch office or a subsidiary company) is usually a prerequisite for registration and operation.
  • Deposit Location: The security deposit must be made with the Japanese Legal Affairs Bureau having jurisdiction over the entity's principal place of business in Japan.
  • Ongoing Compliance: The obligation is not a one-time event. It involves ongoing monitoring of the relevant metrics (unused balances, funds in transit, etc.), regular recalculations, and potential adjustments to the deposited amount.
  • Local Expertise: Navigating the Payment Services Act and its associated deposit rules, which are detailed and can be amended, generally requires local legal and compliance expertise.

Conclusion: A Key Pillar of User Protection in Japanese Payments

The business security deposit requirements under Japan's Payment Services Act represent a significant regulatory commitment to user protection in the rapidly innovating financial services sector. Whether for issuers of prepaid instruments, funds transfer providers, crypto-asset exchanges, or stablecoin operators, these deposits provide a crucial safety net for consumers.

Entities, including foreign firms, contemplating entry into the Japanese payment services market must factor these deposit obligations into their business planning, operational setup, and ongoing compliance costs. The rules are specific, calculation methodologies vary by service type, and strict adherence to procedural requirements for making, maintaining, and adjusting these deposits is essential. Given the dynamic nature of financial regulation, particularly in areas like crypto-assets and digital payments, continuous monitoring of the Payment Services Act and its related cabinet orders and regulatory guidelines is indispensable for compliant operation in Japan.