The JFTC published two reports ("Reports") including the "Report on Cashless Payment Services using QR Codes, etc." ("Cashless Payment Report" or "Report")1 and "Report on the Household Account Book Services, etc." ("Household Account Book Report")2 on April 21, 2020 based on the market research ("Research") conducted on Fintech and Financial Services from October 2019 to March 2020.3
Financial technology or Fintech refers to technology-enabled innovation in the financial services that spurs new business models, applications and processes, such as payment applications for mobile devices.
The JFTC conducted the Research because recently Fintech companies have actively been providing financial services that were traditionally provided by banks. Fintech companies, as new entrants into the financial services market, are expected to activate competition that leads to increase options for users, improvement in the convenience and lowering the costs.
This Alert overviews one of the Reports that focused on the cashless payment services using QR codes, etc. provided by Fintech companies.
Cashless Payment Report
In Japan, the government has been promoting cashless payment services and launched the Cashless & Consumer Return Project when the consumption tax increased from eight percent to ten percent in October 2019. Under the Project, consumers will get up to five percent of the payment return when they purchase by cashless method (e.g., credit card, debit card or QR code) at small- and- medium-sized retailers.
The financial services area is one of the areas various competition authorities are watching. For example, competition authorities of the UK, Canada and Australia recently conducted market researches in the settlement services area and published recommendations from the viewpoint of competition policy.
In light of these domestic and international situations, the JFTC decided to conduct the research to identify issues related to competition policy and published the Report.
According to the Cashless Payment Report, the JFTC conducted the research from October 2019 to March 2020. The research includes a questionnaire survey and a hearing survey. For the questionnaire survey, the JFTC sent inquiries to companies including 137 banks (129 of them responded), 67 fund transfer service providers (48 of them responded) and two retail payment infrastructure providers (both of them responded). The JFTC also conducted a questionnaire survey on website subject to 4,000 consumers who used the code settlement services including QR code. The JFTC conducted the hearing survey for 55 companies and experts including 21 banks and 15 Fintech companies.
The Report identified potential issues from three perspectives with respect to competition policies and Anti-Monopoly Act ("AMA"), including (1) horizontal and vertical relationships between banks and non-banks (i.e., code settlement dealers), (2) financial infrastructure and (3) institutional issue with respect to restrictions on payment of wages to non-banks.
(1) Relationship between banks and non-banks (i.e., code settlement dealers)
The Report points out that banks and non-banks who provide code settlement services are both in horizontal and vertical relationships; they are competitors when it comes to provision of code settlement services (i.e., horizontal relationship), and at the same time, non-banks are required to be connected to the user's bank account (i.e., vertical relationship). Further, it suggests about a possibility where a bank has bargaining power over a non-bank that provides code settlement services as it would substantially harm the non-bank's business, if it would not be able to continue transactions with the bank. In other words, banks could be in superior positions that are subject to abuse of superior bargaining position ("ASBP") regulation.
In principle, the Report recognizes that a company shall have freedom to choose a counterparty whom it deals with, including whether or not to deal with the counterparty. However, when a bank is in dominant or superior position, certain conduct would be regulated under the Anti-Monopoly Act. For example, if a bank in dominant position refuses to deal with a non-bank code settlement dealer for the purpose of excluding such a dealer from the market, and the dealer is excluded as a result, such bank's conduct would be refusal to deal and/or interference with competitor's transaction that are prohibited as an unfair trade practice (i.e., single firm conduct) under the Anti-Monopoly Act.
(2) Financial infrastructure
The Report reviews two infrastructures including Zengin System and CAFIS from the competition policy perspective.
Zengin System provides a nationwide online network system for banks handling domestic funds transfers. It is the sole system in Japan and is an indispensable system when transferring funds between banks. The Report indicates that the interbank charges (i.e., part of costs incurred in interbank settlements using the Zengin System) have been fixed since February 1979, although the rules on domestic exchange transactions stipulate that interbank charges shall be determined through negotiations between the remitting banks and the receiving banks, and the amount is set at a level far exceeding the actual administrative costs. The Report mentions risks that such fixed interbank charges would impede lowering costs of settlements between non-banks and member stores (i.e., stores using QR codes, etc.) as the interbank charges apparently are passed on to consumers. Further, it may be leading to a loss of member stores' convenience because such fixed interbank charge at a high rate may be keeping the frequency of transferring funds from the accounts of non-banks to the accounts of member stores. The Report recommends reconsidering the amount of the interbank charges that have not been changed for more than 40 years.
CAFIS is one of the largest settlement platforms in Japan, and the Report recognizes that CAFIS is virtually essential for non-banks to provide code settlement services. According to the Report, the charges for CAFIS have not been changed for more than 10 years, although volume of transactions in the industry has increased and therefore, costs per transaction should have decreased. The Report provides recommendations including to reflect such reduction of costs to CAFIS charges.
(3) Institutional issue with respect to restrictions on payment of wages to non-banks
In Japan, current laws do not allow wages and salaries be wire transferred to any account other than bank accounts. Therefore, consumers usually have funds in their bank accounts. This situation requires non-banks be connected to consumers' bank accounts in order to provide code settlement services.
Currently, the government is considering lifting the ban on payment of wages and salaries to non-banks. From competition policy perspective, lifting the ban on payment of wages and salaries to accounts at non-banks would have a favorable impact on ensuring equal footing of competition conditions between banks and non-bank code settlement services providers.
1 The Report (in Japanese) is available at https://www.jftc.go.jp/houdou/pressrelease/2020/apr/chouseika/200421_houkokusyo_2.pdf
2 The Report (in Japanese) is available at https://www.jftc.go.jp/houdou/pressrelease/2020/apr/chouseika/200421_houkokusyo_1.pdf
3 The JFTC Press Release of April 21, 2020 (in Japanese) is available at https://www.jftc.go.jp/houdou/pressrelease/2020/apr/200421.html. Summary of the Reports (in Japanese) is available at https://www.jftc.go.jp/houdou/pressrelease/2020/apr/chouseika/200421_gaiyou.pdf
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