Report by the Task Force for the NextGeneration Payment Systems

December 2020

[Table of Contents]
1. Introduction ....................................................................................................................................22.

Current status of payment services ................................................................................................3(1) Details of the Zengin System ......................................................................................................3(i) Overview of the Zengin System ...................................................................................................3(ii) Participation methods in the Zengin System ...............................................................................4(iii) Real-time payments and the network effect ...............................................................................7(iv) Measures to mitigate settlement risk ..........................................................................................7(2) Developments in payment services and regulations ....................................................................8

3. Participation of funds transfer service providers in the Zengin System.......................................13(1) Benefits of funds transfer service providers participating in the Zengin System ......................13(2) Developments in overseas jurisdictions ....................................................................................18(3) Issues related to participation by funds transfer service providers ............................................21(i) Basic viewpoints ........................................................................................................................21(ii) Review of the membership qualification and determination of participation requirements .....21(iii) Requirements for participating as Clearing Participants ..........................................................25(iv) Connection method ..................................................................................................................26(4) Future considerations ................................................................................................................31
4.

Enhancing the convenience of frequent, small-amount payments ...............................................33(1) Current status and future options of frequent, small-amount payment services ........................33(2) Future considerations ................................................................................................................37

5. Upgrading and improving efficiency of payment systems ...........................................................38(1) Proposed approaches .................................................................................................................38(2) Timeline and approaches to considerations ...............................................................................40
6.

Review of inter-bank fees ............................................................................................................42

7. Conclusion ...................................................................................................................................44
Reference ....................................................................................................................................45

As of November 2, 2020
List of members of the Task Force for the Next-Generation Payment Systems
Organization nameBank of Japan

Title
Associate Director - General
Head of Payment and Settlement Systems Division
Payment and Settlement Systems Department

First name

SurnameTomohiro

Usui

Fintech Association of Japan

Chairperson

TakashiOkita

The Japan Research Institute,
LimitedChairperson of the Institute

Yuri

Okina

The Bank of Yokohama, Ltd.

General Manager of Corporate Planning
Department

Nobuo

OnoderaHitachi, Ltd.

Director of Financial Innovation Center
Business Planning Unit

Takeshi

Kitahara

Meiji University

Professor, School of Political Science andEconomics

Shuji

Kobayakawa

The Ehime Bank, Ltd.

General Manager of Operations and IT Systems
Administration Department

Ryohei

Sakai

Mizuho Bank, Ltd.

Executive Officer and General Manager ofOperations Planning Department

Eishi

Shimizu

Sumitomo Mitsui Banking
Corporation

Executive Officer and General Manager
Operations Planning Dept.

HidekiTakamatsu

NTTDATA Corporation

Senior Manager
Zengin Development Group, Zengin Section
Settlement IT Services Division Fifth Financial
SectorTatsuya

Takemura

Japan Payment Service
Association

Executive Director

Takashi

Chouraku

The Nishi-Nippon City Bank,
Ltd.

Executive Officer and Head of Operational
Planning & Management Division

Hiroshi

Nishimura

Fujitsu

Financial Services Business Unit, Head ofBusiness Division IV

Akio

FujitaMUFG Bank, Ltd.

Managing Director, Head of Corporate Planning
Division

Yasuhiro

Yamai

Financial Services Agency

Director of the Banking Business Division Ⅰ,
Supervision Bureau

Masamichi

YamashitaJapanese Banks’ Payment
Clearing Network

General Manager
Planning & Coordination Dept.

Yuichi

Chiba(Names are listed without honorifics and in the Japanesesyllabary order (except for the secretariat office))End

1

1. Introduction
The environment surrounding payment and settlement is changing significantly and constantly acrossthe world including Japan, as evidenced by the development in discussions concerning the possible
introduction of new forms of digital money (e.g. CBDC and Diem) and the promotion of cashless
payment services through public and private collaboration. In response to such changes, the JapaneseBanks’ Payment Clearing Network (the “Zengin-Net”) that serves as an administrator of the Zengin
Data Telecommunication System (the “Zengin System”) is working on various initiatives in pursuit of
an ideal infrastructure for Japan’s payment system. Such initiatives include experimental studies
related to new technologies, surveys on developments in other jurisdictions and dialogues with various
domestic organizations and payment service providers.
As part of these initiatives, the Zengin-Net Expert Panel was established to invite views fromexperts in academics and industries along with those of the member banks. At the Zengin-Net Expert
Panel held in FY2019, experts provided suggestions and recommendations to: (1) realizeinteroperability through allowing non-bank payment service providers (funds transfer service
providers) to participate in the Zengin System; (2) continue discussions for the potential use of newtechnologies; and (3) establish a task force to explore these areas.
During FY2020, the “Council on Investments for the Future” 1 convened by the Japanese
Government and the “Future of Payments Forum” 2 sponsored by the Bank of Japan (the “BOJ”) also
discussed possible participation of funds transfer service providers in the Zengin System and thedevelopment of a low-cost and efficient system for frequent, small-amount payments to adapt to thechanging environment in payment and settlement services. Furthermore, the Japan Fair Trade
Commission published the Report of Survey on Cashless Payments Including Using QR Codes. 3 This
report recommends that the Zengin-Net consider allowing funds transfer service providers to accessthe payment systems and enhance governance over the Zengin-Net and ensure its transparency. 4
Given these developments, the Zengin-Net established the Task Force for the Next-Generation
Payment Systems (the “TF”) in FY 2020 and discussed the future model for the next-generation
payment system (e.g. participation of funds transfer service providers in the Zengin System, anddevelopment of frequent, small-amount payment services). To facilitate discussions among various
stakeholders, the TF members are composed of academics, payment-related organizations, system1 The Council (chaired by the prime minister) was established in 2016. It intends to promote aggressive investments inthe fields contributing to future growth, including the fourth industrial revolution, through public and private
collaboration, and accelerate a growth strategy and structural reform to promote investments for the future.
2 The forum was established by the BOJ to primarily discuss with experts solutions for issues in the existing payment
services in both retail and wholesale areas.
3 https://www.jftc.go.jp/houdou/pressrelease/2020/apr/chouseika/200421_houkokusyo_2.pdf
4 Based on the discussions at the “Council on Investments for the Future,” the same recommendation was made in the“Action Plan of the Growth Strategy” (approved by the Cabinet on July 17, 2020).

2

related business operators, think tanks, the Financial Services Agency (the “FSA”), the BOJ, banks
and the Zengin-Net’s secretariat office (see the list on page 1 for the TF membership).
The following sections outline the results of discussions held by the TF.

2. Current status of payment services
This chapter provides an overview of the Zengin System and domestic trends in payment services toinform the background and basis of the TF’s discussions.

(1) Details of the Zengin System(i) Overview of the Zengin System
The Zengin System operated by the Zengin-Net is a payment system that relays fund transfers between
different financial institutions. Almost all deposit-taking financial institutions in Japan (i.e. over 1,000
institutions) currently participate in the Zengin System. Furthermore, the Zengin System ensures ahigh level of safety and reliability, demonstrated by the fact that system operation has never been
disrupted during its operation since it launched in 1973. The overview of the Zengin System is
described below.
[Figure 1: Overview of the Zengin System]
Current participation
qualification

Deposit-taking financial institutions engaged in domestic funds transfer
services as part of their banking business, etc.
[Transfer of less than JPY100 million]
Designated-Time Net Settlement (the member banks’ net debit amounts

Settlement method

may not exceed the value of collateral posted)[Transfer of JPY100 million or more]
Real-Time Gross Settlement (“RTGS”) (connected to the BOJ-NET foreach transfer)

Functions
Number of transactions

Telegraphic transfers (sending each transfer)
New file transfer facility (sending multiple transfers in bulk)
Telegraphic transfers: Approximately 1.6 billion(FY2019)

New file transfer facility: Approximately 400 million

Total transaction

Telegraphic transfers: Approximately JPY3,000 trillion

amounts

New file transfer facility: Approximately JPY50 trillion(FY2019)
Others・ Each member bank and the Zengin System are connected via
3

dedicated relaying computers (“RCs”).
・ The system is upgraded every 8 years (six upgrades since 1973, andthe 7th Generation Zengin System is in operation from 2019)
In addition to fund transfers, the Zengin System executes settlements arising from transactions
between financial institutions, such as credit cards, debit cards, bank-related QR settlement services
and CD/ATM on-line services. Through these services, it supports the overall payment system in Japan.
[Figure 2: Payment environment surrounding the Zengin System](ii) Participation methods in the Zengin System
There are two access models in the Zengin System: (i) participation as “Clearing Participants” (directly
connected settling participants) settling funds directly using the BOJ’s current account (“BOJ current
account”); and (ii) participation as “Agency Participants” (directly connected non-settlingparticipants) settling funds using the current account of other Clearing Participants.
System-wide, there are two connection methods: (iii) “individual connection” where banks’systems are directly connected to the Zengin System; and (iv) “joint connection” where a joint centeris built with other member banks and their systems are connected to the Zengin System via this center. 5
Combining these access models and connection methods, four participation methods are available
5 Another model similar to “joint connection” is the model to jointly use only a portion of the external connection

system connected to the Zengin System with other member banks. In the case of joint use of the external connection
system, in contrast to “joint connection,” telegraphic messages between the member banks are transmitted via the
Zengin System.

4

under the current Zengin System. They are illustrated in the following figures.
[Figure 3: Case where Financial Institution A is a “Clearing Participant” and adopts “individual
connection”][Figure 4: Case where Financial Institution A is an “Agency Participant” (Financial Institution C is
the agency) and adopts “individual connection”]•••

Messages between Financial Institution A and Financial Institution C can be sent or
received via the Zengin System.
Financial Institution A settles funds using the BOJ current account of the agency(Financial Institution C).
Funds transfer between Financial Institution A and Financial Institution C iscoordinated separately between the two parties.
BOJ

Including Financial
Institution A’s settlement

BOJ current account(Financial
Institution C)(3) Settlement between current
accounts (funds transfer)

BOJ current account(Financial
Institution B)(2) Clearing balance data is sent once a day.
* Transactions of JPY100 mil. or more are settled via RTGS on an
individual transaction basis.

Financial Institution A(Agency participant)Financial Institution Ｃ(Clearing participant)RC

Zengin System(1) Sending/receiving
messages

RC

5

RC

Financial Institution B(Clearing participant)[Figure 5: Case where Financial Institution A is a “Clearing Participant” and adopts “joint
connection”][Figure 6: Case where Financial Institution A is an “Agency Participant” (Financial Institution C is theagency) and adopts “joint connection”]

6Participants in the Zengin System choose from these methods by taking into account theirrespective situations. Currently, financial institutions, which are subject to the Zengin-Net Rules(“member banks”) and have a banking license, participate in the Zengin System as Clearing
Participants in the form of individual connection (see Figure 3). On the other hand, shinkin banks andcredit cooperatives participate in the Zengin System in the form of joint connection via the joint system.
Under this scheme, the central institution of those banks and cooperatives acts as the agency andindividual financial institutions act as Agency Participants (see Figure 6).
(iii) Real-time payments and the network effect
The Zengin System has been delivering real-time payments (i.e. crediting to accounts is immediate
upon the transfer of funds) since 1973. In other jurisdictions, real-time payments were introduced in
the 2000s.6 This suggests that Japan pioneered the development of real-time payment systems aheadof the rest of the world. In the United States, multiple payment systems are operated by the public or
private sector and not all financial institutions participate in a single payment system. By contrast, inJapan, the Zengin-Net is the only clearing agency that operates the payment system (the Zengin
System) under the Payment Services Act. This ensures a high level of network effects, enabling fundtransfers between almost all deposit-taking financial institutions in Japan.
The Zengin-Net has also been undertaking efforts to enhance the Zengin System and to improvethe convenience of users. One example is the 24/7-operation of the Zengin System. Operating hoursof the Zengin System had long been limited to daytime hours on weekdays. Since the operation of theMore Time System in October 2018, the Zengin System has realized operation on a 24/7 basis,
facilitating an environment which supports real-time transfers at nighttime on weekdays or on holidays.
Another example is the launch of the Zengin EDI System in December 2018. This system is designed
to enable attachment of various EDI information (e.g. payment notification number, invoice number)for sending transfer messages between companies.
(iv) Measures to mitigate settlement risk
The Bank for International Settlements (the “BIS”), an organization constituted by the central banksof major jurisdictions, and the International Organization of Securities Commissions (the “IOSCO”)
established international standards (i.e. the Principles for Financial Market Infrastructures (the “FMI
Principles”)) with the aim of designing the infrastructures that support global financial markets thatare more robust and sufficiently resilient to financial crises. The FMI Principles, among other things,
require financial market infrastructures (“FMIs”) to mitigate risks arising from participants in payment
systems. Settlement risk associated with the Zengin System is addressed in a manner that satisfies the
6 Real time payments were introduced in the United Kingdom in 2008, the United States and Australia in 2017, andHong Kong in 2018.

7

FMI Principles.
Specifically, the Zengin System has established a system for providing liquidity, the requirements
for collateral posting to the Zengin-Net 7 and the Sender Net Debit Cap Scheme 8 to prevent thematerialization of settlement-related systemic risk in the event that a member bank becomes short ofsettlement funds (i.e. contagion risk of such an event triggering other participants’ bankruptcy,
insolvency to customers, or other similar events). Furthermore, the Zengin Net has constructed aframework to limit the participation qualification to those deposit-taking financial institutions
managing operational risk, including system risk, under the supervision of competent authorities so as
to avoid risks associated with a member bank affecting other member banks and the stability of the
Zengin System.
In particular, the Zengin Net designed the scheme for the system for providing liquidity in amanner consistent with BIS’s “Lamfalussy+” standard to cover the amount of defaults by the top two
members with the most significant impacts. Furthermore, the defaulter pay principle is applied to coverlosses from a defaulting bank mostly by collateral posted by that bank. With these mechanisms, theZengin System has established highly effective risk management comparable with the payment
systems in other jurisdictions.

(2) Developments in payment services and regulations
With the enforcement of the Payment Services Act in April 2010, entities other than deposit-taking
financial institutions (i.e. funds transfer service providers) are allowed to offer fund transfer services
that had been limited to deposit-taking financial institutions. According to statistics provided by theJapan Payment Service Association (see Figure 7), the number of remittances processed by funds
transfer service providers is increasing year by year, having exceeded 400 million transactions in
FY2019. 9 The use of the code settlement services 10 offered by those service providers has also been
increasing (see Figure 8).

7 Under the system for providing liquidity, if a member bank defaulted due to, for example, a shortage of the current

account balance at the time when the clearing balances are settled via the BOJ current account (i.e. normally at 16:15
on business days), “liquidity providing banks” contracted with the Zengin-Net provide funds to cover the net balance(s)of the defaulted bank during the day and provide final settlement by the end of the day. The liquidity providing bank islater reimbursed using the funds recovered from the disposal proceeds of the collateral posted by the bank in default
on the Zengin-Net.
8 Under this scheme, the member banks’ net debit amount (their gross payment minus their gross receipt) is monitored
and managed by the system to ensure that it does not exceed the value of collateral posted by respective member banks.
Transactions exceeding the collateral value are treated as an error and are not accepted by the Zengin System. With thisscheme, it is possible to repay funds remitted to other member banks with the pledged collateral even if the sender bankdefaults.
9 The number of fund transfer transactions processed by the Zengin System in FY2019 was approximately two billion.
10 A service that uses payment applications on smartphones to make payments by reading QR codes or bar codes.

8[Figure 7: Remittances by funds transfer service providers](Source: Website of the Japan Payment Service Association)[Figure 8: Number of code settlement transactions, etc.](Source: Website of the Payments Japan Association)

9

In June 2020, the Payment Services Act was revised to incorporate the views expressed in thereport published in December 2019 by the Financial System Council’s “Working Group on
Regulations for Payment Services Providers and One-Stop Financial Services Brokers.” This revised
act intends to address the needs for highly convenient, secure and safe payment services that arecompatible with the cashless era, and to enhance and protect the convenience of financial service users.
As shown in Figure 9, the revised act classifies funds transfer service providers into three types (Type1, Type 2 and Type 3) according to their remittance limits, and then applies requirements according to
the risks associated with respective remittance limits. 11[Figure 9: Regulatory framework for settlements by funds transfer service providers and banks]* Some of the requirements described above includes the revisions that incorporate discussions at the “Working
Group on Regulations for Payment Services Providers and One-Stop Financial Services Brokers.”

The following overview discusses the regulatory differences between funds transfer service
providers and deposit-taking financial institutions. 12- In contrast to deposit-taking financial institutions, funds transfer service providers are prohibitedfrom accepting users’ funds unrelated to fund transfer transactions (prohibition of receipt of deposits)
under the Act Regulating the Receipt of Contributions, the Receipt of Deposits, and Interest Rates.
11 The revised Payment Services Act will take effect within one year from the publication date. Going forward, relevantcabinet orders, cabinet office ordinances and guidelines that stipulate detailed rules will be established.
12 Note that, with respect to the issues related to the revision of the Payment Services Act, the discussions at the
Financial System Council’s “Working Group on Regulations for Payment Services Providers and One-Stop Financial
Services Brokers” were not necessarily undertaken assuming funds transfer service providers’ participation in the
Zengin System.

10

If, however, a funds transfer service provider is given a remittance instruction from a sendercustomer and funds received that are credited to the sender’s account are linked to a specificremittance request, such funds are not deemed as deposits. 13- Funds transfer service providers are not subject to any quantitative prudential requirements
equivalent to the minimum capital requirements and the capital adequacy requirements applicable todeposit-taking financial institutions 14 for the following reasons: “Uniform capital rules requiring tomaintain the prescribed amount of capital are not established for funds transfer service providers”
because “they are permitted to concurrently engage in businesses other than the funds transfer service
and therefore it cannot be presumed that the amount of their capital can be used as assets available
only for the funds transfer service” and “the size and type of their services vary, and the amount of
capital required also differs depending on the nature and business model of such services.” 15 With
regards to funds transfer service providers handling large-amount payments, the aforementioned
report published by the Financial System Council states that “the proposed approach would be to
first establish necessary rules and then consider whether to develop additional rules as necessary inconsideration of current practice and status of the payment services used for payments between
companies.” 16 This is based on the view that, if excessively stringent rules are established to address
the concern over significant social and economic impacts arising from the bankruptcy of a funds
transfer service provider handling large-amount payments, such rules may impede the creation of
new highly-convenient services in Japan and therefore such a potential scenario should also be paid
attention to.
- Under the deposit insurance system, settlement obligations and specific settlement obligations ofdeposit-taking financial institutions are guaranteed in full to ensure the stability of the payment
systems. 17 The deposit insurance system, on the other hand, is not available for funds transfer service
providers. However, with a view to minimizing the impact of their bankruptcy on users, the Payment
Services Act requires funds transfer service providers to secure assets at the level sufficient to cover
the sum of the “amount of outstanding obligations” and the “amount of costs related to theprocedures for the fulfillment of the right” (the required amount as security for providing the funds
transfer services) on each business day. Nevertheless, this obligation to secure assets under the
Payment Services Act does not ensure the same level of stability for the payment systems as the
13 The finalized amendments to the cabinet orders and cabinet office orders pertaining to the enforcement of the
Payment Services Act published by the FSA (February 23, 2010) (https://www.fsa.go.jp/news/21/kinyu/201002231.html)
14 However, the condition for rejecting the registration of funds transfer service providers include “a corporation whichlacks the sufficient financial soundness deemed to be necessary for the proper and secure conduct of funds transfer
services” (Article 40(1)(iii) of the Payment Services Act).
15 See p.160 of Chikujyo Kaisetsu Shikin Kessai Hou [Zouho-ban], a book written and edited by Yasufumi Takahashi,
explaining the Payment Services Act for each article.
16 https://www.fsa.go.jp/singi/singi_kinyu/tosin/20191220/houkoku.pdf
17 However, as described later, necessary risk management measures are taken under the Zengin-Net Rules.

11

deposit insurance system because (i) the amount of security deposits for providing the funds transfer
services may fall short of the required amount as security for providing the funds transfer services
due to a certain time lag 18 in the timing of calculating the required amount as security for providing
the funds transfer services which is used as an input for the amount of security deposits for providing
the funds transfer services; and (ii) while the deposit insurance system employs the weekend
approach, 19 it takes about six months to reimburse the security deposits for providing the funds
transfer services. 20

18 The revised Payment Services Act sets out the frequency of calculation according to the risks of each type of funds

transfer service providers, and therefore such a time lag would be shortened.
19 An approach taken when a defaulted financial institution undergoes resolution proceedings. Under this approach,the defaulted financial institution takes necessary measures (e.g. aggregation of multiple accounts owned by a same
individual or company/group) over the weekend after the end of business on Friday, and the successor financial
institution to which the business is transferred resumes the service from Monday.
20 In addition, there are other regulatory differences between deposit-taking financial institutions and funds transfer
service providers, which will be discussed later in detail.

12

3. Participation of funds transfer service providers in the Zengin System
This chapter highlights the results of the considerations on participation of funds transfer service
providers in the Zengin System. 21(1) Benefits of funds transfer service providers participating in the Zengin System
Funds transfer service providers are currently offering a variety of services, including remittances
between accounts, payments at merchants (i.e. stores, restaurants etc.) and cross-border payments. As
the current Zengin System does not allow their participation, these services are provided through bankaccounts primarily in the following manners:[Figure 10: Services of funds transfer service providers (remittance between accounts)][Figure 11: Services of funds transfer service providers (credit transfer from an account to a bankaccount)]

21 The following terms in this chapter, Chapter 4 and Chapter 5 mean:“Essential” means that, in light of the FMI Principles, etc., it is essential for the Zengin-Net or funds transfer service
providers to take actions to address the issue.
“Necessary” means that the Zengin-Net or funds transfer service providers are required to take actions to address
the issue.
“Preferable” means that it is preferable that the Zengin-Net or funds transfer service providers take actions to address
the issue as much as practicable.
“Expected” means that the issue needs to be addressed and the TF expects the relevant institution to take actions toaddress the issue.

13

[Figure 12: Services of funds transfer service providers (cross-border payment)][Figure 13: Services of funds transfer service providers (payment at merchants and crediting merchants’accounts)]

The TF conducted a hearing to gain insights into the needs of participating in the Zengin System
by funds transfer service providers. As a result, while (i) some had a positive opinion that it could leadto reductions in time and costs associated with receipt of funds in the customers’ accounts and crediting
14

the merchants’ accounts, others (ii) argued that it is important to reduce participation costs toencourage participation by funds transfer service providers in the Zengin System; (iii) requested toenhance the flexibility of the Zengin System connection methods and to consider developing apayment system suitable for frequent, small-amount transactions; and (iv) indicated that posting
collateral to the Zengin-Net when participating as Clearing Participants would be a burden.
[Figure 14: Main comments raised in the hearing with funds transfer service providers]Companies

Comments
・ We will consider participation if benefits outweigh participation andother costs.
・ Applying system requirements unique to Japan (e.g. it is essential toCompany A

locate servers in Japan and necessary to install dedicated lines) would
raise the hurdles in the participation consideration stage. Therefore,system design and specifications already employed in other developed
jurisdictions are preferable.
・ Participation of funds transfer service providers in the Zengin System
would shorten the time taken for service users and merchants to receive
cash and improve the convenience, and reduce costs incurred to connect
to banks or bank transfers for crediting (addition of funds). These will
lower merchants’ fees and shorten the cycle of crediting proceeds tomerchants’ accounts and, in turn, may improve merchants’ cash flows

Company B

and promote cashless payments.
・ In addition to providing the connection requirements for connecting to
the Zengin System via RCs, we request that API-based connection to the
Zengin System by channels such as the use of transit gateway be also
explored.
・ As proposed in the government’s Action Plan of the Growth Strategy,
etc., it is requested that the establishment of a new low-cost payment
system, assuming frequent small-amount payments, be explored.
・ We will make a final decision on whether to participate in the Zengin
System in consideration of whether costs are appropriate to the size ofoutgoing and incoming remittances. The specific determination criteria

Company C

include how to participate in a payment system with low marginal cost,
and whether a new service offered using such a payment system cangenerate income from transactions with customers.
・ Given that funds transfer service providers need to comply with the15Companies

Comments
Zengin-Net

Rules

and meettheZenginSystem’s

technical

specifications, we think it is necessary to construct another fund transfer
network suitable for frequent, small-amount transactions.
・ It is important that participation in the Zengin System is open to funds
transfer service providers. However, the consideration on participation
is dependent on whether benefits outweigh participation costs.
・ Participation in the Zengin System will enable direct remittances
between a bank account and a funds transfer service provider accountand between funds transfer service provider accounts. It will also reduce
workload at both funds transfer service providers and corporate andindividual users, thereby enhancing the user convenience. The same
benefits can be generated from participating in a system for processing
frequent, small-amount remittances, if constructed.
・ The Zengin-Net should clarify system developments (including theconnection method), the required risk management level and otherrequirements that need to be addressed by funds transfer service
providers that intend to participate in the Zengin System.
Company D・ Although we understand that their purposes differ, it is burdensome tocomply with both the protection obligation (deposits) under the Payment
Services Act and the obligation to pledge collateral under the ZenginNet Rules.
・ The consideration of a system for frequent, small-amount remittances
should place the highest priority on the safety and efficiency. In addition,
the system should be designed in a manner that market trends and theneeds of end users (e.g. companies, consumers, stores) can be identified
in a timely manner and promptly reflected in the services.
・ In connection with the next-generation Zengin System upgrade, werequest that the Zengin Net consider drastic cost reduction and APIbased connection. The Zengin-Net can first address the issues ofparticipation as Agency Participants and the frequent, small-amountremittance system, and then consider those fundamental issues arisingfrom the upgrading phase and the issue of participation as Clearing
Participants.

Allowing funds transfer service providers to access to the Zengin System would enable them to
execute remittances directly to existing financial institutions and other service providers in a manner
16

illustrated in the figure below. As commented in the hearing, this would lead to reductions in timeand costs arising from receipt of funds or crediting merchants’ accounts, thereby ensuring
interoperability across multiple new payment services and improving the user convenience.

[Figure 15: Image of connection and remittance by funds transfer service providers]

The Report of Survey on Cashless Payments Including Using QR Codes published by the Japan
Fair Trade Commission in April 2020 expressed views related to participation of funds transfer service
providers in the Zengin System, stating that, from the perspective of the competition-enhancing policy,
it is advisable for the Zengin-Net to define the eligibility requirements of business operators (legal
eligibility), security level, financial soundness and other conditions for the membership of the ZenginNet and consider allowing funds transfer service providers to participate in the Zengin System if suchconditions are satisfied.
Furthermore, the government’s Follow-up on the Growth Strategy (approved by the Cabinet on
July 17, 2020) indicated that, given that non-bank payment service providers (non-banks) need to usebanks as intermediaries for debiting and crediting accounts of users and merchants due to a lack ofqualification to participate in the Zengin System, the government will consider the membership
qualification and other issues to allow well-performing non-banks to participate in the Zengin System
so that they can reduce their remittance costs through their own efforts.

17

(2) Developments in overseas jurisdictions
Some jurisdictions are also considering participation of non-banks in their respective payment systems,with the United Kingdom and Hong Kong already allowing non-banks to participate. The following
table summarizes the participation by non-banks in those jurisdictions.
[Figure 16: Participation by non-banks in the United Kingdom and Hong Kong]

Systems allowing
participation by
non-banksYear of first participation by
non-banks

United Kingdom

Hong Kong

FPS (small-amount payments)

FPS (small-amount payments)

BACS (bulk transfer)
CHAPS (large-amountpayments)
FPS: 2018

2018

BACS: 2019
CHAPS: 2019
It is required to obtain a license

It is required to obtain a license

Participation requirements

for the electronic money

for the electronic money

for non-banks

institutions or payment

institutions.

institutions.

Central bank current
account/
Settlement

Non-banks may open a central

Non-banks are prohibited frombank current account andopening a central bank current

directly execute settlements (oraccount (and therefore need to

may outsource settlements tooutsource settlements tobanks without opening a central

banks).

bank current account).

Number of participating nonbanks(as of the end of
September 2020)

FPS: 9Hong Kong dollar settlement:(e.g. Wise, CreDec)12

BACS: 2(e,g, Alipay, WeChatPay)(e.g. Modulr)

RMB settlement: 8

CHAPS: None(e.g. TNG)

(There was a case of non-bankparticipation in the past.)(Prepared by the Secretariat based on the websites of each institution)

The United Kingdom initiated discussions on participation of non-banks in the payment systems
ahead of the rest of the world with the aim of fostering innovation and competition in the payment
services industry. The United Kingdom has taken a phased approach, initially allowing indirect
participation and then shifting to direct participation by opening a current account in the central bank.
18

Such a phased approach that considers shifting to direct participation can be referenced as a solution
to ensure the stable operation of the institutional framework.
In Singapore, a working group consisting of banks and non-banks have discussed participationof non-banks in a small-amount payment system (i.e. FAST). In November 2020, the Monetary
Authority of Singapore (the “MAS”) announced that: (i) direct connection to FAST by non-banks will
be initiated from February 2021; (ii) participation will be limited to those non-banks that are licensed
as “Major Payment Institutions” 22 ; (iii) non-banks are able to connect through an API gateway
developed by the working group; and (iv) in parallel with FAST, non-banks may also participate in
PayNow (i.e. an overlay service that enables remittances using a mobile number, etc.). 23
In Australia, the central bank requested the New Payments Platform Australia (“NPPA”, thepayment system administrator) to consider non-banks’ participation in the payment systems. NPPA
has responded that: (i) it is not appropriate to allow those entities without a banking license to connect
to the New Payments Platform (“NPP”) from the perspectives of governance, capital adequacy,liquidity, risk management, BCP and information security, and other existing licenses would not meetsuch eligibility; but (ii) if a new regulatory framework (licensing) is established and provided byauthorities, NPPA would consider direct connection by such entities to the NPP. 24
In the United States, a public notice was issued in August 2019 regarding FedNow that is planned
to be launched by the Federal Reserve System in 2023/24. In response to the public notice, many
provided feedback that direct participation by non-banks would increase risks in the services and thepayment systems as a whole. 25 Given such feedback, discussions related to FedNow is moving towardprohibiting non-banks from direct connection.
In sum, some jurisdictions have allowed participation of non-banks in their respective payment
systems while other jurisdictions such as Australia and the United States have taken cautious
approaches on the basis that the regulatory framework for non-banks differs from that of banks.
Some TF members pointed out that participation of non-banks in the payment systems was being
discussed only in the area of small-amount payments and was not discussed from the viewpoint ofparticipating in the large-amount payment systems (e.g. CHIPS in the United States and EURO1 in
22 Unlike the “Standard Payment Institution License,” while no restrictions are imposed on monthly transaction volume
or customers’ account balances, this license is subject to stringent capital and other requirements.
23 MAS website (https://www.mas.gov.sg/news/media-releases/2020/non-bank-financial-institutions-to-have-accessto-fast-and-paynow)
24 NPP Australia Limited’s Updated Response to the Reserve Bank of Australia's NPP Functionality and Access
Consultation: Conclusions Paper (https://nppa.com.au/wp-content/uploads/2019/10/RBA-Functionality-and-Accessconsultation-recommendations_NPPA-Response_October-2019-updated-response.pdf)
25 Service Details on Federal Reserve Actions To Support Interbank Settlement of Instant Payments(https://www.federalregister.gov/documents/2020/08/11/2020-17539/service-details-on-federal-reserve-actions-tosupport-interbank-settlement-of-instant-payments). Additionally, some commented that non-banks should be allowed
to participate directly in FedNow as their dependency on banks would lead to additional costs and unfairness.

19

Europe) operated by the private sector (see Figure 17). Therefore, these discussions on participationof funds transfer service providers in the Zengin System can be an initiative taken ahead of the largeamount payment systems in the United States and Europe.
[Figure 17: Large-amount payment systems operated by the private-sector in the U.S., Europe andJapan]CHIPS (United States)
Administrator

TCH

EURO1 (Europe)

Zengin System (Japan)

EBA CLEARING

Zengin-Net(The Clearing House)

Participation

Deposit-taking

Deposit-taking

Deposit-taking

qualification

institutions

institutions

institutions

Number of

470,831 transactions

207,007transactions

6,876,000 transactions

USD1.6 trillion

EUR208 billion

JPY12 trillion

・ Funding participant

・ Participant

・ Clearing Participant- Contributes funds in- Holds a special ECB- Holds the BOJ current

advance to a CHIPS

account and directly

account and directly

pre-funded account at

executes settlements.

executes settlements.

Bank of New York and・ Sub-participant

・ Agency Participant

directly executes- Directly sends/receives- Directly sends/receives

settlements.

instruction messages

instruction messages

to/from EURO1.

to/from the Zengin・ Non-funding- Requests a participant

System.

participant

to act as an agency for- Requests other clearing- Directly sends/receives

settlements (overseas

participant to act as the

instruction messages

branches of participants

agency for settlements.

to/from CHIPS.

select which- Requests a funding

participation model toparticipant to act as an

adopt because they canagency for settlements.

aggregate the balancestransactions
Transaction
amountthe Federal Reserve

Participation
modelwith participants).
* The number of transactions and the transaction amount are the average of one business day and based on the 2019
results.

20

(3) Issues related to participation by funds transfer service providers(i) Basic viewpoints
It is preferable to expand the Zengin System’s membership qualification currently limited to deposittaking financial institutions to include funds transfer service providers given that there are needs ofsuch service providers to participate in the Zengin System and their participation would help enhance
the funds transfer services and user convenience. However, it is necessary to consider a mechanismthat provides better services for users and at the same time ensures the stability of the payment systems.
Shortages of settlement funds by a funds transfer services provider will not only affect the funds
transfer services provider itself but have spill-over effects on other member banks, their clients andthe Zengin-Net, and eventually undermine the stability of the financial system as a whole unlessappropriate protection measures are in place.
In view of the above, the TF reached a common understanding that the overarching goal is not toundermine the safety of settlements and the stability of the system and, based on this, discussed
measures and issues with respect to enhancing the user convenience if funds transfer service providers
are allowed to participate in the Zengin System.
(ii) Review of the membership qualification and determination of participation requirements
One of the issues arising from allowing participation by funds transfer service providers whenreviewing membership qualification is what requirements should be applied to those service providers
which intend to participate in the Zengin System. Risks to be considered in determining their
participation requirements mainly include a. liquidity risk, b. credit risk and c. operational risk.

21

[Figure 18: Risks to be considered]
Risks

Definitions

Effects if the risk materializes
・ There is a possibility that necessary

Risk that a participant

a. Liquidity risk

may not be able to settle

funds will not be transferred to otherits funds within aparticipants, thereby disrupting many

predetermined time frame

other settlement activities and causing

and may incur losses

systemic risk.
・ Actions taken to mitigate liquidity risk(e.g. triggering of the system forproviding liquidity) may impose
burdens on other participants.
・ There is a possibility that the risk will

Risk that a participantb. Credit risk

may not be able to fulfill

cause a settlement failure and impose

its obligations owed toburdens on other participants as a

the Zengin-Net due toresult of actions taken to mitigate

deterioration in its

liquidity risk (e.g. triggering of thefinancial condition orsystem for providing liquidity).

other reasonsc. Operational risk

Risk of incurring losses

・ There is a possibility that smooth

due to inappropriate or

execution of services by othermalfunctioning ofparticipants may be affected by theinternal processes, staff

failure to send or receive messages due

and systems, or otherto system breakdown/malfunction or aexternal events

poorly established organizational* The Zengin-Net further

structure.

classifies operational risk

・ If the risk leads to settlement failures

into administrative risk,

attributable to a system, actions taken

system risk, information

to mitigate liquidity risk (e.g.

security risk, cyber security

triggering of the system for providing

risk or other risks.

liquidity) may impose burdens on otherparticipants.

Currently, only deposit-taking financial institutions are allowed to participate in the Zengin
System. As mentioned earlier, there are regulatory differences between deposit-taking financial
institutions and funds transfer service providers. It is therefore necessary to consider whether
additional requirements should be applied to funds transfer service providers in light of such regulatory
differences as measures to mitigate the risks above. The following summarizes the approaches
22discussed at the TF:
a. Approach to liquidity risk
The Zengin-Net has established the system for providing liquidity and the Sender Net Debit Cap
Scheme as measures to avoid liquidity risk. As a precondition of these measures, each participant isrequired to implement appropriate risk management and compliance with this requirement is ensured
by the Zengin-Net’s monitoring. 26 Since these measures are fundamental to the prevention of systemic
risk, it is essential that they will also be applied to funds transfer service providers if their participationin the Zengin System as Clearing Participants is allowed.
The FMI Principles also require that the FMI prioritizes its claims against collateral provided to
it by a participant. 27 If, therefore, a funds transfer service provider participates as a Clearing
Participant, consistent with the treatment for the existing member banks, it is essential that the service
provider be required to post collateral to cover the net debit amount in full to the Zengin-Net.
Some funds transfer service providers commented in the hearing that the posting of collateral forthe net debit amount will impose higher burdens given that this will be an add-on to the security
deposits for providing the funds transfer services required under the Payment Services Act. However,the Payment Services Act requires such security deposits to protect users by securing funds available
for remittances held by funds transfer service providers. 28 By contrast, the posting of collateral tocover the net debit amount is intended to secure funds necessary for the Zengin-Net to clear net
balances. Accordingly, the claims being secured are essentially different between the two. In light of
the FMI Principles above, the TF considers it inappropriate to reduce the amount of collateral posted
to cover the net debit amount on the basis that security deposits are posted.
Burdens arising from collateral may be reduced to a certain extent by effectively using funds
under the agency scheme. For example, a funds transfer service provider serves as the agency andadjusts funds of individual service providers. 29

26 See the FMI Principle 18, key consideration 3.
27 FMI Principle 3.1.5 sets out that “[a]lso, the FMI should structure its operations so that its claims against collateralprovided to it by a participant should have priority over all other claims, and the claims of the participant to that same
collateral should have priority over the claims of third-party creditors (…).”
28 Guidelines for the Administrative Processes I-2-2-2-1, (Note 3) set out that “[a] Funds Transfer Service Provider
needs to note that it is indebted to the sender until the recipient actually receives funds by any of the methods listed in(a) to (d) below. (…) (b) Funds credited to the deposit account held by the recipient at a bank, etc. (including persons
equivalent thereto in foreign jurisdictions (…)”
29 Another option would be that an individual deposit-taking financial institution acts as an agency and a funds transfer
service provider uses collateral of the agency, without requiring posting collateral to the Zengin-Net. However, as thisscheme is offering credit to the service provider from the agency’s perspective, the agency may require the service
provider to post a certain amount of cash collateral or other security measures.

23

b. Approach to credit risk
Even when credit risk of a member bank materializes, the possibility of triggering a significant
systemic risk is minimized if the aforementioned measures to mitigate liquidity risk are taken.
Nonetheless, if the system for providing liquidity is triggered as a result of actions taken to mitigate
liquidity risk, it may impose significant burdens on other participants. It is therefore important to detectand prevent credit risk from materializing in order to ensure the stability of settlement.
To mitigate credit risk, deposit-taking financial institutions are subject to supervisory monitoring
including the capital adequacy ratio, and market monitoring through disclosures of their financial
statements, thereby ensuring their financial soundness. By contrast, funds transfer service providers
are supervised by the FSA, but are not subject to quantitative requirements such as the capital adequacy
ratio, and do not necessarily disclose their financial statements. It is therefore necessary for the ZenginNet to require the service providers to disclose their financial statements.
c. Approach to operational risk
The Zengin System has never experienced a disruption to its online trading since it was launched andhas never failed to execute settlements intraday. This achievement owes not only to the Zengin
Center 30 which is the center of the system but also to member banks that have robustly managed
incidents including failures, when they occurred, through prompt communications and actions, andcooperated to ensure the stable operation of the Zengin-Net Rules.
If operational risk of a member bank materializes, its failure in sending or receiving messages orsettlement may affect other member banks. Accordingly, funds transfer service providers are required
to manage operational risk at the same level as the member banks.

The above represents our conclusion on the approaches to respective risks. The TF considers it
necessary for all participants to establish frameworks that appropriately address each risk. In themedium to long term, the TF is expected to continue exploring the implementation of rules that willcontribute to all participants in reference to practices in other jurisdictions.
To appropriately address these risks, competent authorities also play a critical role in addition to
funds transfer service providers participating in the Zengin System and the Zengin Net serving as thefund clearing agency.
The FSA and Local Finance Bureaus monitor funds transfer service providers based on the

30 Centers that carry out day-to-day management of the Zengin System.

24

Payment Services Act from the perspectives of protecting users, enhancing the safety, and increasing
the efficiency and convenience of the payment systems. Specifically, they review their financial
soundness and the status of establishing an organizational structure necessary for ensuring anappropriate execution of business activities, and exercise legal authority to take a disciplinary action,
where necessary.
At the TF, the FSA expressed its views regarding actions to be taken if funds transfer service
providers are allowed to participate in the Zengin System as follows: “The FSA has been monitoring
funds transfer service providers according to their size and profiles. If they are allowed to participate
in the Zengin System, the FSA will further take necessary monitoring measures to address changes in
the risk environment surrounding them. Specifically, in collaboration with the Zengin-Net and the BOJ,
the FSA will consider specific risk management and other requirements for those service providers
that will participate in the Zengin System and then explore possible measures to avoid undermining
the stability of the payment systems.”(iii) Requirements for participating as Clearing Participants
Another issue in considering participation of funds transfer service providers is whether to allow
participation as Clearing Participants.
a. Option to not allow participation as Clearing Participants
The first option is to not allow participation of funds transfer service providers as Clearing Participants.
In such a case, in order for those service providers to participate in the Zengin System, it will enter
into an agency agreement with a financial institution currently participating in the Zengin System torequest settlements to that financial institution (i.e. agency). By doing so, the funds transfer service
provider will be able to access the Zengin System through the agency but will be required to pay
certain fees to the agency and may be subject to access restrictions. It should also be noted that theservice provider will be subject to the agency’s settlement limit or will need to implement risk
management activities separately.
b. Option to allow participation as Clearing Participants
The second option is to allow participation of funds transfer service providers as Clearing Participants.
Providing such a participation opportunity is preferable from the perspective of ensuring fairness inaccessibility to the payment system. In fact, funds transfer service providers expressed the needs forparticipating as Clearing Participants in the TF’s discussions. 31

31 A funds transfer service provider interviewed by the TF has currently reached Phase 3 (opening a current account in

the central bank and directly connect to the system) after it went through Phase 1 (connection as a bank customer (atthe stage of offering the services)) and Phase 2 (connection through other Clearing Participants) in an overseas

25

If funds transfer service providers would participate as Clearing Participants, the risks discussed
in the previous chapter, if they were to materialize, are likely to have a more significant impact on theactivities on the payment systems since those service providers will execute settlements by themselves.
Therefore, in considering the issue associated with those service providers participating as Clearing
Participants, it is necessary to engage in thorough discussions on the fairness, the required financial
soundness and risk management and other relevant matters.
Furthermore, funds transfer service providers will need to open a BOJ current account if they areallowed to participate as Clearing Participants. The TF received the comment from funds transfer
service providers to consider the issue of opening a BOJ current account. In this regard, the BOJ
expressed its view at the TF as follows: “The BOJ selects counterparties to current account transactions
in a manner to comply with the mandate stipulated in Article 1 of the Bank of Japan Act (i.e. “theBank of Japan’s purpose is to ensure smooth settlement of funds among banks and other financial
institutions, thereby contributing to the maintenance of stability of the financial system”). In relation
to the Zengin System, the BOJ has been working to mitigate settlement risk of large-amounttransactions (i.e. JPY100 million or more per transaction). We will appropriately consider ourapproach for funds transfer service providers’ access to the BOJ current account in consideration of
the TF’s discussions, our mandate and the institutional framework.”(iv) Connection method
Funds transfer service providers commented that it would be difficult for them to participate in the
Zengin System if connection costs were high even if they were allowed to participate in the system.
Given such a comment, it is preferable to review the current connection method in a manner that will
enable easier participation by funds transfer service providers and at the same time benefit existing
participants as much as practicable. Drawing on proposals by multiple vendors at the TF, the TF
discussed this issue focusing on the following four proposed schemes.
a.

Current scheme
・ Funds transfer service providers connect to the Zengin System via RCs (in the case of joint
connection, via the joint system; the same shall apply hereinafter).
・ Advantages include: (a) the participation can be realized at an early stage because this scheme
maintains the existing connection method; and (b) no additional costs are incurred by the
Zengin System and existing participants. On the other hand, disadvantages include the burden
on funds transfer service providers to purchase RCs, similarly to existing participants.
・ Since the majority of funds transfer service providers have their system servers built on thejurisdiction that has already realized connection of funds transfer service providers to the payment systems.

26

cloud, even if they are able to purchase RCs, they will incur development costs for connection.

[Figure 19: Current scheme]

RC

ZenginSystemRC

Funds Transfer
Service Provider

Bank

b. Scheme to develop a common platform (API gateway (APIGW))・ Funds transfer service providers connect to the Zengin System via a new common platformthat converts the connection methods (i.e. APIGW). Additional functions can be added to
APIGW and existing participants can also connect.
・ As advantages, those service providers may be able to connect to the Zengin System with lesscosts than the current scheme that uses RCs and existing participants do not need any systemdevelopments. Disadvantages, on the other hand, include costs for developing the common
platform.
[Figure 20: Scheme to develop a common platform (APIGW)]API
GW

ZenginSystemFunds Transfer
Service Provider

c.

RC

Bank

Scheme to develop a dedicated application connection platform and use the Zengin System
・ Funds transfer service providers connect to the Zengin System via a dedicated application
platform and through existing participants. Processing of remittances after passing throughthe application platform is carried out by existing participants which use the Zengin System
to transfer funds (it is also an option to aggregate remittances from the application platform
to the Zengin System to reduce participating costs).
・ As advantages, this scheme may be less costly for funds transfer service providers relative tothe current scheme that uses RCs. On the other hand, disadvantages include: (a) existing27

participants which intend to connect to the application platform need to modify their systems,
incurring additional costs; and (b) as this scheme is designed to process settlements throughexisting participants, there is a vertical relationship between funds transfer service providers
and existing participants.
[Figure 21: Scheme to develop a dedicated application connection platform and use the Zengin
System]RC
Apps
Platform

ZenginSystemBank ARC

Bank B

Bank Bd. Scheme to develop a dedicated system for small-amount payments, co-existing with the Zengin
System・ Depending on their business model, funds transfer service providers connect to either adedicated system for small-amount payments specializing in telegraphic transfers (“newsystem”) or the Zengin System, or both. Connection to the Zengin System will be made using
the “current scheme” or the “scheme to develop a common platform (APIGW).”
・ Similar to the “scheme to develop a dedicated application connection platform and use the
Zengin System,” the advantage is that this scheme is less costly for funds transfer service
providers relative to the current scheme that uses RCs. On the other hand, disadvantages
include incurring development costs for the new system and costs incurred by existing
participants to connect to the new system. However, depending on what actions are taken todevelop a new system, such costs could be made relatively low.

28

[Figure 22: Scheme to develop a dedicated system for small-amount payments, co-existing with
the Zengin System]

Dedicatedsystem forsmall-amountpayments

Funds Transfer
Service Provider

Bank
API
GW

ZenginSystemFunds Transfer
Service Provider

RC

Bank

Of the above four schemes, the TF considered “b. scheme to develop a common platform(APIGW)” as some service providers requested for the use of an API. Additionally, “d. scheme todevelop a dedicated system for small-amount payments, co-existing with the Zengin System” wasconsidered in light of the United Kingdom’s practice where a dedicated system for small-amountpayments is operated separately from a bulk transfer system and a large-amount payment system.
Under the United Kingdom’s practice, non-banks can select the system that they wish to connect to.
Comparison of the proposed schemes above based on the aspects including costs and realization
speed is summarized in the table below:

29[Figure 23: Comparative summary of proposed schemes]c. Scheme to develop a dedicateda. Current schemed. Scheme to develop a dedicatedb. Scheme to develop a common

application connection platformsystem for small-amount

platform (APIGW)

and use the Zengin Systempayments, co-existing with the△Medium△Medium△Low to High

Zengin System

〇Low
・
Cost
(Central)

No additional costs (however,・

Costs to be incurred for the・

Additional costs to be incurred

development of the applicationaccording to the size of the newsomeplatform.

However,cost

platform.

system.

allocation

needs

be

contribute to cost reduction ofcontribute to cost reduction of

the current system in the future.

the current system in the future.

modification

will

be

to

considered separately.

〇Low
Cost

・

development of the common

needed).

・

Costs to be incurred for the

depending on the requirements,〇Low

No additional costs (however,depending(Existingsomeparticipants)

needed).

on・requirements,

modification

will

No

a

some

on

may

it

may

△Low to High・ Costs to be incurred for

RC-based

modifying banks’ own systems

to the specification of the new(however,to align with the application

system) for modifying banks’platform.

own systems to align with therequirements,

modification

However,

if

costs

connection
dependingit△Medium

additional

maintainingbeHowever,will

・

Costs to be incurred (according

new system.

beneeded).
Cost(Funds transfer

△High
・

△Medium

The same level of connection
practice will be incurred.

〇Fast
・

Realization speed〇Low

It may be possible to realize

・

〇Low

may be lower
to

the

than

・

current

Time for consideration and・Time for consideration and

Cost

mays

connecting

system.

Realizable during 7Z

be lower
to

the

than

current

system.

Realizable during 7Z・Time for consideration andcurrent connection via RC, it

development for building thedevelopment for building thedevelopment for building thewill be fast to realize.

commonapplication platform will be

new system will be necessary.

platformwillbenecessary.

・

Costs

connecting

the current practice.

Realizable during 7Z

As this scheme maintains the・connection with less costs thancosts as under the current

service providers)This scheme will not eliminate
burdens

Other issues

・

on

funds

service providers.

transfer

・necessary.

It is necessary to assess whether

・If the application platform is・

Existing participants need to

the level of functions/costs thatbulked, it is necessary to takemanage settlement risk andwould reduce burdens on funds

actions for outstanding balances

operation for the two systems.

transfer service providers can be(credit).

realized.

* “7Z” represents the 7th Generation Zengin System. The next-generation system is scheduled to be launched in 2027.

As the landscape of settlement is changing rapidly, it is expected that the participation of funds
transfer service providers shall be realized as early as possible. For this reason, and given thetimeframe needed to assess each scheme and other relevant factors, it is preferable to consult primarily
with existing vendors about actions to be taken by them under “a. current scheme” so that they canparticipate in the Zengin System as soon as they satisfy the participation requirements. In addition, it
is preferable to engage in specific discussions on “b. scheme to develop a common platform (APIGW)”
because the time required for its consideration and development is relatively short and this scheme isexpected to benefit existing participants as well.
For the remaining two schemes, namely “c. scheme to develop a dedicated application connection
platform and use the Zengin System” and “d. scheme to develop a dedicated system for small-amountpayments, co-existing with the Zengin System,” it is preferable to continue their discussions from a
medium to long-term perspective because these schemes would contribute to optimizing andsignificantly enhancing the efficiency of the Zengin System as a whole. “d. scheme to develop a
dedicated system for small-amount payments, co-existing with the Zengin System” will be further
discussed in Chapter 4, as it is an effective measure for enhancing the convenience of frequent, smallamount payments.
30

(4) Future considerations
The TF identified the following issues and challenges to be considered in order to take specificmeasures for funds transfer service providers to participate in the Zengin System.
[Figure 24: Summary of main issues and challenges]

・ Consideration of participation requirements that help ensure theParticipation
requirements

stability of the payment systems by taking into account elements
including differences in both the legal systems and actual
practices between funds transfer service providers and deposittaking financial institutions

・ Consideration of details of connections with RCs, and necessity
and timing of implementing a new common platform, such as the
API GW (the timing to start developing the new common
Connection method

platform).

・ Measures to support funds transfer service providers to smoothly
take actions for participating as Agency Participants (e.g.
standardizing terms and conditions to be included in theagreement)

Costs
Additional requirements
to participate as
Clearing Participants

・ Cost allocation when the common platform is developed
・ If funds transfer service providers are allowed to participate as
Clearing Participants, consideration of additional requirements
including their respective financial soundness and risk
management

・ Assigning a code based on the uniform financial institution coding
Other issues andchallenges related to the
Zengin Systemsystem to funds transfer service providers

・ Differences in user identification information between bankaccounts and funds transfer service provider accounts and asolution to eliminate such differences

・ Implementation of the recipient’s account confirmation process* The above is limited to main issues and challenges that need to be discussed when considering participation offunds transfer service providers.

The TF expects the Zengin-Net, the FSA and the BOJ to cooperate appropriately and consider
the issues related to participation as Clearing Participants, as well as those related to participation as
Agency Participants. The latter issues may include a point in which even if funds transfer service
providers are allowed to participate as Clearing Participants, some of them may prefer to participate
as Agency Participants. The TF considers that the effective solution to this is for Zengin-Net to31

collaborate with relevant authorities and implement initiatives to support funds transfer service
providers to smoothly perform procedures for using an intermediary acting as an agency, including
standardizing terms and conditions to be included in the agency agreement and clarifying their details.
This is based on the fact that, except for cooperative financial institutions (e.g. shinkin banks and credit
cooperatives) that use their central institution as the agency for settlements, there are only limited
cases where member banks participate in the Zengin System as Agency Participants.
Furthermore, while fund transfers between deposit-taking financial institutions are currently
executed under a common account numbering system based on uniform financial institution coding
and branch coding, if a funds transfer service provider which does not have an account number, whichis consistent with such an existing uniform coding system used by deposit-taking financial institutions
intends to connect to the Zengin System, it is necessary for the service provider to separately takeactions to conform to that existing coding system. In addition, to prevent additional operationalburdens arising from a failure to credit funds to the recipient’s account, it is necessary to discuss
whether to require funds transfer service providers to use the “Confirmation of Payee” during thenighttime and on holidays, which is mandatory under the current practice. Accordingly, the TF
considers it necessary to have in-depth discussions on these specific operational issues. 32

32 For example, since the deposit insurance system is not available for funds transfer service providers, it is necessary
to consider the treatment of fund transfers (treatment of forward-dated transfers) in the event of bankruptcy.

32

4. Enhancing the convenience of frequent, small-amount payments
This chapter describes the results of considerations on the enhancement of convenience of frequent,small-amount payments.

(1) Current status and future options of frequent, small-amount payment services
With the growing popularity of cashless payments, the volume of high-frequent, small-amountpayments and remittances is increasing. Some entities adopt a business model which provides suchservices free of charge to customers and at a low rate to merchants. Against this background, as
indicated in the Action Plan of the Growth Strategy, there are needs for a payment infrastructure which
supports low-cost, efficient, frequent and small-amount payments. At the same time, taking into
consideration that peer-to-peer remittances and payments related to medical and nursing care are still
heavily dependent on cash, and given the current domestic situation where multiple payment services
are being offered, it is preferable to build a frequent, small-amount payment system that can also be
used as solutions to address social challenges associated with users’ needs. The functions of such asystem may include cash alternatives, interoperability between payment service providers and credit
transfers using mobile phone numbers and other codes that are already implemented in otherjurisdictions.
In addition to small-amount payments, the Zengin System also supports large-amount payments
and bulk transfers (e.g. payroll transfer, collective transfer). Due to this feature, while it ensures a very
high level of reliability and stability, it is difficult to respond with agility to changes in system costs
and needs required for frequent, small-amount payment services. One possible solution to address thisissue is to develop a low-cost infrastructure dedicated to frequent, small-amount payments separatelyfrom the Zengin System and deliver the required functions in a timely manner. As stated in theconsiderations on participation of funds transfer service providers, some service providers commented
in the hearing by the TF that they expect a separate system dedicated to frequent, small-amountpayments to be established.
The proposed approaches for building such a dedicated system are (a) a method to develop thesystem in a vertical manner similar to “Cotra” 33 explained at the fourth TF; and (b) a method todevelop the system in a horizontal manner similar to “d. scheme to develop a dedicated system forsmall-amount payments, co-existing with the Zengin System” described in the previous chapter.

33 Small-amount payment infrastructure that is currently considered by the five city banks. This option intends to use
the existing infrastructure (J-Debit infrastructure) that are already connected by more than 1,000 financial institutions
and be an alternative tool for exchanging cash between individuals. For further information, see the minutes of the
fourth TF (https://www.zengin-net.jp/company/pdf/200929_summary.pdf).

33

[Figure 25: Vertical and horizonal methods]

VerticalmethodHorizontal
methodNew system

Notify net balanceof transfers

Zengin System

New system

Zengin System
Notify net balanceof transfers

BOJ-NET

Notify net balanceof transfer

BOJ-NET(Source: Professor Kobayakawa’s presentation materials)[Figure 26: Overview of “Cotra”](Source: Cotra’s Project Presentation Materials)

34

The vertical and horizonal methods have the following advantages and disadvantages. While bothmethods have considerable advantages, the challenge will be how to maintain the relationship andbalance with the existing Zengin System.
[Figure 27: Vertical method versus horizontal method]
Vertical method

Horizontal method

・ Similar to other retail payment

・ This method allows a certain

systems,

the net balance ofdegree of discretion to develop atransfers is linked with the Zengin

new system for frequent, small-

System,amountandthereforehigh・ Interfacing with the BOJ-NET isrealized via the Zengin System.
・ If, in addition to cash and ATM
transactions,

the

is

existing Zengin System.
・ This method allows funds transfer
service providers to flexibly selectsystemfrom the methods to participate inprovides a clearing service for

the Zengin System. For example,

some small-amount transactions

they can participate in the Zengin

via the Zengin System, burdens on

System and not in the new system,banks participating in the Zenginor participate in the new system

Systembut not in the Zengin System.

arising

newthatcompletely separated from thecompatibility is ensured.

Advantages

payments

frompostingcollateral are likely to be reduced.
・ Needs to consider the balance

・ Needs to consider the balance

between the Zengin System andbetween the Zengin System and

the

the

new

system(therearesystem(thereareoverlapping roles and functions

overlapping roles and functions

withwith the Zengin System).

theZenginSystem,transaction limits need to be set

Disadvantages

new・ Needs

toassesswhetherequivalenttoaand a risk management framework

frameworktheneeds to be explored).

Zengin System can be establishedin a short timeframe.
・ Needs

solutionstoaddressincreased burdens on the ZenginNet (e.g. managing positions ofbank participants in both systems,
multi-layering of final settlementson the BOJ-NET).

35

“Cotra,” that will be operated under the vertical method, aims to build a frequent, small-amountpayment system expeditiously and with low costs by using the existing payment infrastructure.
Therefore it could be an effective option meeting the needs of a new payment infrastructure to support
frequent, small-amount payments (see Figure 28 and 29 for the details of combining Cotra with “c.
scheme to develop a dedicated application connection platform and use the Zengin System” and “d.
scheme to develop a dedicated system for small-amount payments, co-existing with the Zengin System”
described in the previous chapter and the comparison of costs and realization speed).
At the same time, it is expected that issues such as to what extent the system will contribute tocost reduction, how many financial institutions will participate in the new system and whether it will
have the network effect will be further explored. Payment-related organizations expressed their viewsat the TF that “key points of future discussions will be (i) the timeframe until realization; (ii) costs(incurred by end-users and financial institutions (including costs for existing participants and newparticipants, respectively)); and (iii) the number of participants among existing financial institutions.”[Figure 28: Details of methods for realizing a frequent, small-amount payment system]36

[Figure 29: Comparison of schemes of a frequent, small-amount payment system]c. Scheme to develop a dedicatedd. Scheme to develop a dedicated system(Idea based on d.)application connection platform and use

for small-amount payments, co-existing

Cotra

the Zengin Systemwith the Zengin System△Medium・
Cost(Central)

・

Costs

will

be

incurred△Low to High
for

the

・

Additional

costs

will

be

・

development of the application platform.

according to the size of the new system

It may contribute to cost reduction of the(and depending on requirements).
・current system in the future.

It may be developed at low cost by using
the existing J-Debit infrastructure.

incurred・Interfacing with the BOJ-NET can be
executed via the Zengin System.

It may contribute to cost reduction of thecurrent system in the future.

Cost(Existing△Medium・

participants)
Cost(Funds transfer△Low to High・

service providers)already participating, and modification

banks’ own systems to align with the newcosts incurred by existing participants areapplication platform.

system.

Realization speed

・Other challenges

expected to be minimal.

〇Low
・

・

This uses the API connection and may beThis assumes an API connection and may

less costly than connecting to the existing

be less costly than connecting to thebe less costly than connecting to thesystem.

existing system.

existing system.

This assumes an API connection and may

Realizable during 7Z・More than 1,000 financial institutions arebanks’ own systems to align with the

〇Low
・

・

Costs will be incurred for modifying

Costs will be incurred for modifying

This

needs

consideration

Realizable during 7Z
and

・

This

needs

consideration

・anddevelopment phases for building an

development phases for building a new

application platform.

system.

If bulking is implemented on the・

Existing participants and Zengin Net needapplication platform, need to address

to manage settlement risk and implement

outstanding balances (offering credit).

operation for the two systems.
・

This

needs

development

consideration
phasesforandadditional

development (can be realized in 7Z).
・

Details (e.g. settlement risk management
approach) need to be explored for Cotra.

Need to take actions to solicit participantsin a new payment network.

(2) Future considerations
As the solutions to enhance the convenience of frequent, small-amount payments, it is necessary to
encourage further discussions on the specifics of “Cotra” since it is an effective infrastructure platform,
and for the Zengin-Net to provide appropriate support and facilitate cooperation for the launch of the“Cotra” service.

37

5. Upgrading and improving efficiency of payment systems(1) Proposed approaches
The previous chapters discussed the results of considerations regarding funds transfer service
providers’ participation in the Zengin System and enhancement of the convenience of frequent, smallamount payments. The following table highlights the results of considerations and the proposed
approaches for each issue.
[Participation of Funds Transfer Service Providers in the Zengin System]
・ The TF recommends that the requirements for participating in the Zengin System, whose
membership qualification is currently limited to deposit-taking financial institutions (i.e.,banks), be revised. The target of revision is to enable funds transfer service providers (i.e.,
non-banks) to apply for its membership by FY2022. Accordingly, further details on
membership requirements and necessary institutional framework for expanding membership
qualification will be worked out.
1. Requirements for participation•

Non-banks which intend to participate in the Zengin System should be subject to the sameterms and conditions as the existing member banks from the perspective of ensuring thestability of the payment systems. These include the application of the “collateral system”
and “system for providing liquidity” required under the Zengin-Net Rules. The ZenginNet, the Financial Services Agency and the Bank of Japan will closely cooperate anddiscuss the way forward for setting up a monitoring framework and standards of those nonbanks from the perspective of stability of the payment systems.

•

In the medium to long term, further rules and institutional frameworks, if any, that
contribute to all participating entities will be explored.34

2. Participation method•

Two access models to join the Zengin System are expected to be implemented from theperspective of ensuring the fairness in accessibility to the payment system. Those models
are namely “Agency Participants” (directly connected non-settling participants) and“Clearing Participants” (directly connected settling participants).

•

Non-banks executing settlement as Clearing Participants are likely to have a moresignificant impact on the payment systems including the activities of the Zengin System.
The requirements on their financial soundness and risk management for Clearing
Participants should be more stringent compared to those intended for Agency Participants.

•

Non-banks joining the Zengin System as Agency Participants will have to make anagreement with Clearing Participants who will provide settlement services on their behalf.

34 Based on these measures, consider participation requirements in detail without distinguishing the types of funds
transfer service providers defined under the revised Payment Services Act.

38

Accordingly, terms and conditions included in the agreement are expected to be
standardized.
3. Connection method•

In the short term, participants connecting to the Zengin System’s infrastructure will use thecurrent method (i.e. connecting through relay computers). In parallel, however, a new
method using an application programming interface (API) should be explored for use in
the medium term. This method is expected to benefit both the existing member banks andnon-banks.

•

At the same time, other new information technologies and possible measures will be
explored from medium- to long-term perspectives, with a view to further enhancing theefficiency gains from modernizing the whole Zengin System.

[Enhancement of convenience of frequent, small-amount payment s]
・ The TF has concluded that the Cotra Project is a feasible solution for the short-term revisionperspective. The project is led by five city banks aiming to build a new infrastructure for smallamount payments. The Zengin-Net and Cotra Project Team will closely cooperate and discuss
the way forward in order to launch the Cotra operation in early FY2022.
・ In parallel with the Cotra Project, it is desirable to continue discussions on the frequent, smallamount payments in medium to long term, keeping in mind the timeframe of the nextgeneration Zengin System upgrade.

To introduce interoperability appropriate for the advent of the digital age, in the short term, it isrequired that realistic solutions for these issues be built to realize participation of funds transfer service
providers based on the current Zengin System and infrastructures (including consideration of API
GW) and frequent, small-amount payments.
In the medium to long term, the TF believes that one of the ideal forms is to realize efficient andlow-cost operation of integrated systems that satisfy diversity, flexibility and convenience while
maintaining security, safety and stability, which are the underlying attributes of the payment systems.
At the same time, “c. scheme to develop a dedicated application connection platform and use the
Zengin System” and “d. scheme to develop a dedicated system for small-amount payments, co-existingwith the Zengin System” that were discussed as options for the connection methods and for realizing
a frequent, small-amount payment system for participation by funds transfer service providers arelikely to facilitate the optimization of the whole Zengin System and fundamentally improve efficiency.
Accordingly, the TF recommends that these options continue to be discussed from medium-to-longperspectives with a view to upgrading to a next-generation Zengin System, including an ideal form of
the frequent, small-amount payment system. A suggested approach would be to discuss a new system39

in parallel with “Cotra” and then integrate them efficiently in the future. The presentation on the futureof the payment systems from medium- to long-term perspectives was made by three member vendors
at the TF. The details of their presentation are provided for reference at the end of this report.
To respond to the ever-changing environment surrounding payment and settlement services, theTF believes it necessary to carefully monitor developments both in Japan and overseas and makeceaseless efforts to pursue an ideal form of the payment infrastructure in Japan.

(2) Timeline and approaches to considerations
The TF considers it necessary to take an approach to explore the issues keeping in mind the timeframe
and flexibly review and revise the ideal form of the payment systems to reflect changes in theenvironment in payment and settlement services, including users’ needs.
The proposed approach for the areas that are identified as future considerations is to establish
working groups for rule-related and system-related issues, and continue discussions among members
well-versed in respective issues. Examples of key considerations to be addressed by such new working
groups include the following.
[Figure 30: Considerations in FY 2021]
Examples of rule-related issues
・ Partial amendments to relevant rules (e.g.

Examples of system-related issues
・ Funds

Operational Procedures)transfer

serviceproviders’connection methods, including API GW・ Consideration of participation of funds

・ Consideration of detailed operationaltransfer service providers as Clearing

issues, such as how to identify funds

Participantstransfer service provider’s accounts and・ Standardization of terms and conditions

use of the “Confirmation of Payee”, andincluded in the agreement if non-banks

system-related actions

join the Zengin System as Agency

・ Enhancing efficiency of the Zengin

Participants and will have to make an

System in the medium to long term (e.g.

agreement with Clearing Participants who

introduction of new technologies)

will provide settlement services on their・ Consideration of system-related policies
on the next-generation Zengin Systembehalf・ Monitoring of developments related to a

upgrade, including an ideal form of afrequent, small-amount payment systemfrequent, small-amount payment system,(e.g. Cotra). Clarification of relation withbased on discussions at the rule working

the Zengin System, and actions togroup

establish rules

40Examples of rule-related issues

Examples of system-related issues

・ Consideration of institutional frameworkrelated issues (e.g. the Zengin-Net Rules,
risk management) associated with thenext-generation Zengin System upgrade,including an ideal form of a frequent,small-amount payment system[Figure 31: Consideration timeline]

To ensure transparency of discussions and strengthening information dissemination, it ispreferable to take the following actions going forward: (i) create other opportunities to collaborate
with relevant bodies in addition to the Panel of Experts and the new working groups; and (ii) publicly
disclose costs associated with the Zengin-Net Rules and the Zengin System and the progress of
payment system enhancement initiatives.

41

6. Review of inter-bank fees
The TF’s discussions did not directly cover inter-bank fees 35 addressed in the Report of Survey on
Cashless Payments Including Using QR Codes published by the Japan Fair Trade Commission in April
2020 and the Action Plan of the Growth Strategy. However, the TF has been updated on the directionof review of inter-bank fees. The overview of the review is summarized below:[Figure 32: Overview of the inter-bank fee review]“(…) inter-bank fees, (…) having not changed for more than 40 years, should
Excerpts frombe reviewed. For the review, from the perspective of securing stable andthe Action Plan

efficient operation of nationwide payment network infrastructure, inter-bankof the Growth

fees should be integrated to the system mandated by the Japanese Banks’

Strategy

Payment Clearing Network (Zengin-Net), and should be lowered to areasonable level that properly reflect costs, while visualizing cost structures.”・ Consider shifting to a new scheme under the Zengin-Net Rules managed
and operated by the Zengin-Net based on the Operational Procedures bytaking into account the proposals in the Action Plan of the Growth
Strategy and other initiatives.
・ As a direction of consideration, it is assumed that the new scheme will

Concepts of thereview

regard related costs as “costs required for the receiver bank to process fundtransfers in order to operate the Zengin-Net in a stable manner” (“fundtransfer operational costs”) and set out rules on such costs in the
Operational Procedures.
・ In calculating the fund transfer operational costs, it is also assumed toconsider (i) costs to be borne by receiver banks and (ii) costs leading toenhancement of convenience (network externality) and efficiency of the
Zengin-Net and the Zengin System.
・ Conduct a preliminary survey of costs to be borne by receiver banks (upTimeline ofto August 2020) (based on the results of the preliminary survey, consider

actions

the direction on the calculation method of the Fund transfer operational(planned)

costs) [Completed]・ Conduct a survey on costs to be borne by receiver banks to implement the
new scheme targeting all banks (up to November 2020) [Completed]

35 “Inter-bank fees” are paid by the sender bank to the receiver bank in funds transfer transactions and are determinedby consultation between individual banks. Considering the nature of funds transfer transactions, the inter-bank fees
are construed as costs required for agency operations between banks (e.g. crediting of funds to the recipient’s
account). The receiver bank bears various costs associated with crediting operations (e.g. actions to resolve a failure
to credit funds to the account, AML measures) but does not collect any fees from the recipient. Therefore, the receiverbank receives inter-bank fees from the sender bank and appropriates them for such costs.

42

・ Explore each issue based on the results of the survey above, consider the
calculation method for each cost and determine its direction, and consider
draft amendments to the Operational Procedures, etc. (November 2020 toFebruary 2021)
・ Apply for resolution and approval by the board of directors for theamendments to the Operational Procedures, etc., including the amount offund transfer operational costs (=> FSA’s approval of the amendments to
the Operational Procedures) (February to March 2021)
・ Explain the new scheme to member banks to gain their understanding, andmember banks prepare for the implementation (e.g., system development
and revising the agreement to reflect new inter-bank fees) (from March
2021 onward)
・ Start to apply fund transfer operational costs (release) (from March 2021
onward)43

7. Conclusion
The TF members are composed of not only banks but also academics, payment-related organizations,system-related business operators, think tanks, the FSA and the BOJ. All the recommendations in thisreport were proposed as a result of discussions among those stakeholders with various background.
Looking at developments abroad, not many jurisdictions have set up a group which consists ofvarious stakeholders to discuss whether to increase access to payment systems whose membership has
been limited to deposit-taking financial institutions and to allow non-banks (funds transfer service
providers) to participate. This demonstrates that Japan has been undertaking highly progressive
initiatives. Such initiatives could significantly contribute to the digitization of the society.
The TF expects that the issues identified as future considerations in this report will be further
discussed in the next fiscal year onwards and that the preferable “next-generation payment systems”
will be determined.

44

ReferenceThis section introduces presentations made by each member vendor at the TF regarding the future
image of the payment systems from medium- to long-term perspectives as they can be referenced in
the consideration phase for the next fiscal year and beyond.
① NTT DATANTT DATA gave a presentation on the creation of a two-tier structure as a future form of the nextgeneration payment infrastructure aimed at realizing a “more convenient cashless society” that address
market and social issues. This structure consists of (1) front infrastructure focusing on “diversity” and“flexibility to changes” and (2) back infrastructure focusing on “security and safety” and “simplicity(easily interfacing with the front infrastructure).”② Hitachi, Ltd.
Hitachi, Ltd. introduced in its presentation a solution that can achieve both objectives of maintaining
the safety and reliability of the Zengin System and reducing costs. Specifically, this can be achievedby reviewing the system configuration (eliminating overlapped functions) and the connection method
according to the architecture of the payment systems, while leveraging the current business logic.

45

③ Fujitsu
In its presentation, Fujitsu remarked that incorporating Cotra’s clearing function to a newly built
small-amount payment infrastructure and thereby increasing frequency of payments could mitigate
settlement risk and serve as the foundation of the next Zengin System.

46