Learning from SHOWROOM: How to Create a Social Tipping Service that Does Not Conflict with the Payment Services Act
Services capable of live streaming by Smartphones and other devices, such as SHOWROOM (https://www.showroom-live.com)and 17Live (https://17media.jp), are becoming increasingly popular.
At SHOWROOM, the audience can give digital contents, known as “gifts”, such as flower bouquets or Tokyo Tower (“gifting”), to live streamers. This is a system where live streamers can receive compensation based on the gifts given by the audience; in short, it is a service where the audience can “tip” the live streamers.
According to App Annie, a US app analytics company, SHOWROOM was Japan’s top-ranked video distribution application in the first half of 2017 in terms of revenue (moreover, YouTube ranked number 1 in terms of the number of users).
In an era when subscriptions are at a zenith, SHOWROOM allows the audience to view everything for no charge and without restrictions. SHOWROOM’s social tipping business model is the opposite of a subscription system where users are charged each time an item is purchased.
However, under Japanese law, if a social tipping service is operated without registering as a “Funds Transfer Service”, a violation of the Payment Services Act may occur. With what kind of system has SHOWROOM implemented a social tipping service that does not conflict with the Payment Services Act?
To operate a plain social tipping service, registration as a “Funds Transfer Service” is necessary.
The so-called social tipping service refers to a service where money can be remitted to people who publicly post content on the web; this may be deemed an “exchange transaction”.
Exchange transactions (a type of remittance and transfer service involving the transfer of funds in response to a customer request) could typically only be done by banks, etc.; however, after the Payment Services Act came into effect in 2010, funds transfers in amounts of 1 million yen or less per transfer can be done only if they are done by a “funds transfer service provider”. This is mentioned in an earlier article, Learning from the Mercari Example: The Snares of the Payment Services in C2C Services.
When general business enterprises other than banks provide social tipping services, it is necessary for them to register as a funds transfer service provider. However, for the registration as a funds transfer service provider to be accepted, there are high hurdles such as the obligation to make a deposit in an amount equal to or exceeding 100% of the monetary amount received from the remittance service (Payment Services Act, Article 42, Paragraph 2 and Paragraph 3) and the obligation to verify [the user’s] identity (Act on Prevention of Transfer of Criminal Proceeds, Article 4). Actually, at this point, there are only 63 corporate entities registered as funds transfer service providers, including LINE Pay Corporation and Yahoo Japan Corporation (as of October 31, 2018.See the external link)
As just described, in addition to the high hurdles for registration of a funds transfer service, it cannot be
denied that there may also be a low level of acceptance of a social tipping service, where the feeling of
“being there” and “the vibrancy of the spot” is important, with respect to
adopting the current scheme of funds transfer services with its required circuitous procedures, such as
Therefore, with each company developing a service that resembles a social tipping service based on various ideas, a funds transfer service is not the same as a plain vanilla remittance service; more particularly, (1) a service that transmits points (prepaid payment instrument) instead of cash and (2) a service that uses a receiving agent scheme. We will introduce a concrete example of each service.
A service resembling a social tipping service that sends points (prepaid payment instrument) instead of cash
This is a service that transmits points instead of cash since a service that remits just cash itself would be classified as a funds transfer service. This is a system where the user buys points from the service provider and can then transmit the points he/she purchased to a counterparty. We will introduce various services of this type.
Kyash is a prepaid payment method. If you charge an amount to the Kyash app either using cash or a credit card, you can use the charged amount for web-based or other payments. However, once an amount is charged (or purchased to charge it to the Kyash app), that amount cannot later be converted into cash and withdrawn from the user’s Kyash account. (Kyash)
Hatena Points are points that can be used for services provided in the Hatena website. Although there was a function where Hatena points could be sent to other users, the provision of this point transmission function was terminated as of November 28, 2018. (Hatena Points)
Osushi is a service where virtual-content sushi a user purchased can be sent to someone [via the Web], who can then exchange the virtual sushi received for real tuna sushi, real urchin, or other products.
Although Osushi announced at the time of its launch at the beginning of 2018 that the virtual sushi that were received could be converted into cash, this cash conversion service has currently been modified.
Social tipping service “Osushi” to restart; converting the virtual sushi to cash is not possible anymore.
These [services] have the following points in common:
- Points (virtual content) are purchased for a fee before using services
- Only points (virtual content) are sent, not cash
- Points (virtual content) cannot be converted into cash (by either the purchaser or the recipient)
Points (virtual content) such as those mentioned above which are issued in exchange for consideration received so that users can purchase goods or receive services using the points are called “prepaid payment instruments” (the Payment Services Act, Article 3, Paragraph 1) and are subject to certain restrictions under the Payment Services Act (such as the obligation to make a security deposit for issuance, the obligation to submit a notification, and the obligation to indicate the valid period. However, the Payment Services Act does not apply if the valid period is less than six months after the issuance date [of the points].
Services similar to social tipping that involve a receiving agent service scheme
A receiving agent service scheme is a scheme where the receiving agent receives the payment on behalf of the seller when the consideration is paid from the buyer to the seller for some goods or services; this is akin to paying public utility charges at a convenience store. When this article was written (November 2018), receiving agent service schemes are not deemed a “funds transfer service” regulated by the Payment Services Act. Please refer to past articles. “Paymo” is an example of a remittance service that uses a receiving agent service scheme.
Paymo, a bill-splitting app
A person who pays the entire bill for meals and the like on behalf of others in the group can later collect
the split portion of the bill from the unpaid participants of the group. Paymo is a service that invoices and
receives the split amount on behalf of the person [who has paid the entire bill]. (Paymo)
Article 23 (Overview of the Equal-Splitting Settling Function)
“Separate settlement function” is a function, in regard to a receivable (“Subject Receivable”) acquired against counterparty (“Participant”) to whom goods or services have been provided by an eligible shop, etc. in regard to the payment of price for the eligible shop, etc. provided for in Paragraph 1 of Article 24, in the case that the Participant owes a receivable jointly and severally, if one member of the Participant (“Representative Member”) makes a payment of the entire amount of the Subject Receivable to the eligible shop, etc. and if there is a statutory subrogation of the Subject Receivable for the Participant by the Representative Member as a result, for taking the payment procedure for the Subject Receivable against the Representative Member by a member who is a Participant (“Participating Member”).
Article 29. (Settlement of Price (Separate Settlement Function))
2. The Representative Member shall delegate to the Company the receipt from the Participating Member on behalf of the Representative Member for the price related to the invoice amount to be paid by the Participating Member and the Company shall accept such delegation.
4. The Representative Member shall, under the delegation of Paragraph 2, grant to the Company and the subcontractor of the Company authority for the proxy receipt related to the Subject Receivable and authority for issuing the receipt after payment of the Participating Member. Provided, however, that in accordance with the merchant agreement executed with the prescribed payment service provider or receiving agent service provider of the Company, if the assignment of the Subject Receivable (limited to the invoice amount; hereinafter the same in this paragraph) is required, the Representative Member shall assign the Subject Receivable to the Company and the Company shall pay the Representative Member the amount equivalent to the Subject Receivable in accordance with Article 31 as consideration for the receivable assignment.
The reason that Paymo can be said to be a receiving agent service and not a funds transfer service is
that there is an underlying transaction, which is the payment of the equally-split purchase price.
Actually, if [Paymo] were used for making an equal-splitting settlement by pretending it is even though people
had not actually gone out drinking, then [Paymo] would be just a remittance service and would be deemed a
“funds transfer service.” For this reason, at Paymo there is an obligation to attach a
receipt as documentation evidencing the underlying transaction, which is the precondition of the
equal-splitting. Thus, the attached receipt is an indispensable factor for Paymo to ensure the
legality of its services.
Moreover, since Paymo is not a service that uses prepaid payment instruments, the recipient of the payment of the equally-split bill can, of course, withdraw [the received amount] in cash.
As indicated above, since the Payment Services Act is a barrier in Japan, it is necessary to skillfully employ various devices to come up with a social tipping service (or a service similar to a social tipping service) that maintains its legal compliance.