Japanese (along with Korean) companies have long been identified as market leaders in the field of mobile payments ("mPayments"). For example, in 1997 NTT DoCoMo joined with Sony to develop the IC chip that can be found in all forms of contactless pay cards. More recently, on 10 May 2012, Softbank announced it was forming a joint venture with PayPal to offer digital wallet services for online, mobile and offline transactions by launching the "PayPal Here" service.
This is still a much-hyped area and, because of this, there is no single regulatory approach that applies to Japanese mPayment solution providers. This means that a large number of regulatory and other legal considerations need to be taken into account when developing an mPayment service.
The mPayment value chain
mPayment services bring together a number of traditionally separate market participants. For example, financial institutions and mobile network operators may need to work together. The degree of the co-operation between these two types of entities will be determined by the business model that is adopted.
At one end of the spectrum, a Japanese financial institution might acquire an operator licence to become a Mobile Virtual Network Operator and autonomously provide mPayment services. At the other end of the spectrum the mobile network operator could acquire a financial licence to provide mPayment services on its own (such as Sony and NTT DoCoMo's FeliCa Networks).
Most mPayment solutions involve a balance between these two approaches. For example, some mPayment services involve the remittance of funds from one account to another through a third-party service provider such as PayPal.
Range of service models
Before considering the various regulatory and legal challenges facing Japanese mPayment service providers, it is important to understand that the type of mPayment service offered may attract different levels of regulation.
The most common types of mPayment services are:
- Closed Loop Mobile Payments and Direct Carrier Billing
When companies create their own type of mobile payment system for the purchase of their goods or services, this is known as a closed loop mobile payment and when a customer purchases goods or services and the cost is added to the customer's mobile phone bill, this is known as direct carrier billing.
- Mobile Payments Platforms
There are also other types of transactions a user could do with his or her mobile phone that could be considered a "mobile payment." For example, if the user sent money to someone via PayPal by "bumping" their phone with a friend's phone, that is a mobile payment (also known as a "P2P" or "person-to-person" payment).
- Mobile Phone as a Credit Card Terminal/Mobile as the Point of Sale
You can also use a mobile phone to accept payments from others (for example, process credit card payments).
- Mobile Wallet
Finally, the mobile wallet uses "tap and go" (or a smartphone's built-in NFC or another method) to enable a person to pay for goods and services with a mobile phone, much like you would with your credit card.
The provision of mPayment solutions can result in a Japanese mPayment provider being subject to a myriad of sometimes conflicting regulatory obligations (in potentially a significant number of jurisdictions).
The financial services regulatory environment will be of key importance in whichever jurisdictions an mPayment service is to be provided. Financial services obligations will vary from jurisdiction to jurisdiction and according to the type of service being provided.
The telecoms regulatory regime will obviously be applicable to the provision of mPayment services. Mobile network operators will already be familiar with this regime, however new entrants to the mPayments market may find themselves subject to a new set of regulatory obligations if they have not previously provided services in the telecoms sector.
- Data Protection
Data protection is relevant because it can restrict the ability of financial providers and mobile operators from transferring or making use of client data other than for purposes agreed by the client (for example, if a mobile operator expands its initial scope of service provision to offer an mPayment service, it will need to ensure that it is able to use existing customer data for such purposes).
Other Legal challenges
In addition to the regulatory challenges, there are a number of other legal issues that mPayment service providers should consider.
The provision of mPayment services to consumers is likely to result in the application of various consumer protection laws. Depending on the jurisdiction and service in question, these types of laws could be general consumer protection obligations, or more sector specific regulation (e.g. applicable to telecoms and/or financial services).
To date, many mPayment services have involved an alliance, joint venture, or other form of partnership between the various interested stakeholders. Accordingly, this can result in competition concerns.
Structure and tax
Mobile and financial services are often taxed differently. For example, GST in many jurisdictions often does not apply to financial services such as person to person transfers, whereas it often does apply to telecommunications services. This is one reason why it could be a good idea to have structurally separate entities when providing mPayments.
Many mPayment ventures are the result of joint ventures and alliances between the various interested stakeholders in the value chain. Even without a formal alliance, it will be necessary to enter into commercial arrangements with a number of partners in the value chain. Therefore, it is important to consider the extent to which infrastructure sharing is desirable and/or permitted (from a regulatory perspective).
Japanese mPayment service providers should also consider the need to develop and license new and existing technology. mPayments can require large investments in new technology and it is therefore important to protect any IP that you create as well as making sure that you and your partners have the appropriate licences in place to use third party technology or software.
Practical tips on dealing with regulators
It is important to appreciate that mPayment solutions (especially the more sophisticated service models) are likely to attract the attention of a number of regulatory authorities (potentially in a number of jurisdictions).
Regulatory compliance is an on-going obligation and so it is important for Japanese mPayment providers to have appropriate systems in place to make sure they are complying with their on-going obligations.
If you are subject to a regulatory investigation here are a number of handy tips:
- Don't panic – it's important to maintain a level head so that you can marshal an effective response to the regulator's queries and hopefully avoid the matter being taken any further.
- Start gathering information in one place – this will make it easier to present findings to the regulator and avoid the need for further questions and delay.
- Appoint a small response team – it's better to have a smaller, more effective response team which will help to minimise response time.
- Instruct counsel early – the earlier you instruct legal counsel, the easier it is for them to provide the advice needed to guide you through the investigation and deal with the regulator's queries in an effective manner.
- Present a proposed solution – as a general principle, it is important to have a good relationship with your regulators and part of this involves open dialogue. When the time comes to presenting the results of any fact-finding a regulator has asked you to carry out be sure to present a solution that addresses the regulator's concern as well. The