Single Purpose Commercial Prepaid Cards and Their Implementing Practices in Shanghai

In September 2012, the Ministry of Commerce (“MOFCOM”) issued the Administrative Measures on Single Purpose Commercial Prepaid Cards (Tentative) (“Single Purpose Cards Measures” -- click here for the measures in Chinese and click here for an English translation), which took effect on Nov. 1, 2012, and provide the basic principles on the issuance and regulation of Single Purpose Commercial Prepaid Cards (“Single Purpose Cards”). While MOFCOM is responsible for the general administration of Single Purpose Cards nationwide, more detailed implementation work would be carried out by MOFCOM’s local counterparts, especially those at the provincial level. Consequently, different places may have different policies to implement the Single Purpose Cards Measures. This article will discuss the key provisions of the Single Purpose Cards Measures and the corresponding implementation practices in Shanghai.

MOFCOM’s definition for Single Purpose and Multiple Purposes Cards

According to the Single Purpose Cards Measures, Single Purpose Cards refer to the prepaid cards that can only be redeemed (i) with the card issuer, (ii) within a corporate group where the card issuer is the ultimate parent company that absolutely controls each group member (the “Group Issuer”), or (iii) within a franchise under one single brand where the card issuer owns or has the exclusive right of the registered trademark or the franchise logo under the brand (the “Brand Issuer”). From MOFCOM’s perspective, if a prepaid commercial card can be accepted and redeemed with any enterprise outside of the aforesaid scope, such a prepaid card would be deemed a “Multiple Purpose Commercial Prepaid Card” (“Multiple Purpose Card”) and subject to the payment processing license regulation by the People’s Bank of China (“PBOC”).

Eligible industries

According to the Single Purpose Cards Measures, enterprises engaging in the businesses of (i) retail, (ii) hotel and catering and (iii) residential services are subject to the Single Purpose Card Measures. The above three categories of businesses are further illustrated and divided into the subordinate subcategories of businesses, as set forth in the following chart:

In implementation, Shanghai MOFCOM requires that any company which wants to issue a Single Purpose Card must have in its business scope at least one of the above subcategory businesses, and the cards issued can only be accepted and redeemed for the exact subcategory businesses within those subcategory businesses. In addition, particularly for a Brand Issuer, the registered trademark for the franchise within which Single Purpose Cards are accepted and redeemed also needs to be registered on the relevant services or the underlying products relating to at least one of the above subcategory businesses.

Card Issuers

The Single Purpose Cards Measures provide four categories of card issuers: (i) Group Issuer, (ii) Brand Issuer, (iii) Large Scale Issuer and (iv) Other Issuer.

A Group Issuer refers to a parent company of a corporate group which issues a Single Purpose Card that can be accepted and redeemed by this parent company and other group members within the corporate group. The group members should be subject to the “absolute controlled” by the parent company, i.e. the parent company should, directly or indirectly, own more than 50 percent of the equity share of each group member. The Group Issuer must be a company registered in China.

A Brand Issuer refers to a card issuer that (i) owns a registered trademark or a corporate logo, (ii) is exclusively licensed to use a corporate logo or a registered trademark (since usually a corporate logo is a trademark, we only cover trademarks in this article, and do not separately discuss corporate logos). The cards issued by a Brand Issuer can be used in its franchise members, i.e. the licensee or sub-licensee of the trademark. If a Brand Issuer is exclusively licensed to use a trademark in China, it can issue cards nationwide. However, if a Brand Issuer is only exclusively licensed to use a trademark in Shanghai, the Brand Issuer is only allowed to issue cards within Shanghai. According to Shanghai MOFCOM, if a card issuer wants to issue cards as a Brand Issuer, the card issuer must firstly get approval from the local MOFCOM for its franchise operation under the Chinese franchise regulation and have the trademark license properly recorded with the China Trademark Office before it can claim to become a Brand Issuer. However, given the considerable time and efforts that will be required to get the franchise approval and trademark license registration by the time of filing for card issuance, the existing card issuers do not need to have the franchise approval and the trademark license registration certificate. Rather, the relevant official receipt by the relevant authorities of the application for the franchise operation or the trademark license will be sufficient.

A Large Scale Issuer refers to a card issuer whose Single Purpose Cards can only be used with its own business and whose Single Purpose Cards issuance satisfies one of the following two conditions:

• Business revenue in last year exceeds RMB 5 million; or
• Registered capital of the card issuer is more than RMB 1 million, and the card issuer is incorporated within one year.

Other Issuers refer to a card issuer whose Single Purpose Cards can only be used within its own business and cannot satisfy either of the above conditions.

Card Sellers

Within a company group or franchise system, there usually can only be one card issuer, but there may be more than one company actually selling the cards to consumers. According to the Single Purpose Cards Measures, a Card Seller refers to an enterprise designated by a Group Issuer or a Brand Issuer to be responsible for sale and management of the cards, such as card selling, charging, lost-report managing, replacing and returning for refund, etc. The Single Purpose Cards Measures further provide that a Card Seller must be a member of the corporate group or the franchise group. The Single Purpose Cards Measures do not specify whether a non-group member can sell cards on behalf of the Group Issuer or the Brand Issuer. In addition, the Single Purpose Cards Measures are silent on whether a Large Scale Issuer or Other Issuers are allowed to designate a third party to be its Card Seller.

According to Shanghai MOFCOM, a Group Issuer or Brand Issuer is allowed to designate a non-group member as its Card Seller, and a Single Issuer is also permitted to designate a third party to sell cards on its behalf, provided that the card issuers must be ultimately responsible for the cards sold.

Fund management

The Single Purpose Cards Measures provide strict rules on the management of advances collected through card selling.

Advances Balance

To control the risk, a card issuer is only allowed to sell Single Purpose Cards up to a certain amount. The fund received as a result of selling Single Purpose Cards is referred to as “Advances”, and the balance of received Advances minus the price of goods/service already purchased using cards is referred to as “Advances Balance”.

For a Group Issuer, the Advances Balance cannot exceed 30 percent of the total business revenues of the entire group in last year. For a Brand Issuer, a Large Scale Issuer or an Other Issuer in the business of retail or hotel and catering, the Advances Balance cannot exceed 40 percent of its revenue of the main businesses in last year. For a Brand Issuer, a Large Scale Issuer or an Other Issuer in the business of residential services, the Advances Balance cannot exceed its revenue of the main businesses in last year. For a Brand Issuer, a Large Scale Issuer or an Other Issuer that has been established for less than one year, the Advances Balance cannot exceed 200 percent of its registered capital.

Advances Deposit

A card issuer is required by the Single Purpose Card Measures to deposit certain Advances in a depositary account with a commercial bank at the choice of the card issuer. So far, according to Shanghai MOFCOM, they accept only four commercial banks to be eligible depositary banks, which are Bank of China, Industrial and Commercial Bank of China (“ICBC”), Shanghai Pudong Development Bank, and China Minsheng Bank. It implies that, for the time being, a card issuer can only open a depositary account in one of the four banks.

For a Group Issuer, the funds deposited in its depositary account should not be less than 30 percent of the Advances Balance as of the last previous quarter. For a Brand Issuer, the funds deposited in its depositary account should not be less than 40 percent of the Advances Balance as of the previous quarter. For a Large Scale Issuer, the funds deposited in the depositary account should not be less than 20 percent of the Advances Balance as of the previous quarter.

Alternatives to Advance Deposit

Alternatively, according to the Single Purpose Cards Measures, a card issuer can choose to purchase guarantee insurance, bank guarantee or other commercial guarantee in lieu of the advance deposit mentioned above.

According to Shanghai MOFCOM, the effective term of such insurance or guarantee should be one year, and the insured or guaranteed amount should be at least 40 percent of the estimated total Advances Balance in the coming year. For a company that issues Single Purpose Cards for the first time, it should estimate its Advances Balance with reference to other card issuers in the same industry. So far, Shanghai MOFCOM only accepts (i) guarantee insurance provided by Bank of China Insurance and Ping’An Insurance, (ii) bank guarantee provided by ICBC, and (iii) commercial guarantee provided by China National Investment and Guaranty. In addition, the templates of agreements with insurance companies, banks, or commercial guarantors are provided by MOFCOM online. Card issuers must follow the standard form of such templates, and are not allowed to substantially modify the terms of such templates.

Use of the Advances

A card issuer can only use the Advances in its main businesses and should not use the Advances to invest in real estate, equity share or securities, or loan the Advances to a third party. However, according to Shanghai MOFCOM, a Group Issuer is allowed to lend the advances to other group members.

Card issuance

Some general principles

A card issuer must include its company name, contact information, card number, service regulations, notes, and etc. in the card. If the card issuer is a Group Issuer, it also needs to add the name of the corporate group; and if the card issuer is a Brand Issuer, the corporate logo or trademark must be included in the card.

A card issuer or seller must inform a purchaser of its articles or rules on use of the card, which should contain the following contents:

• Name, category and function of the card;
• How to purchase, fund, use and return the card, and if it is a Registered Card (defined below), how to report loss and transfer;
• Charge items and standards;
• Rights and obligations of the parties concerned;
• Principles of dispute resolution and liabilities for breach; and
• Other matters required by applicable laws.

Upon a purchaser’s request, a card issuer or seller must sign a card purchase agreement with the purchaser. The agreement should also cover the above content. However, if the purchaser does not require, such an agreement may be exempted.

Under the Single Purpose Measures, a card issuer or seller is mandatorily required to provide card return service according to the card articles or card purchase agreement. It implies that a card issuer or seller cannot simply reject cards returned by purchasers, but it can set forth conditions in advance in the card articles or card purchase agreement. If so, purchasers should meet such conditions in order to return the cards. Although allowing the card issuer or seller to have card return conditions, the Single Purpose Cards Measures impose some mandatory requirements for card return handling. For example, the purchaser needs to provide his/her identification card, and the card issuer or seller must refund the remaining balance in the card to the purchaser’s own bank account and record the bank account information.

Registered Card vs. Unregistered Card

The Single Purpose Cards Measures divides cards into two categories: Registered Card and Unregistered Card, but do not provide the definition for either category. Literally speaking, a Registered Card bears a purchaser’s name, and thus if the purchaser loses this card, he/she can report the loss and get a new card. An Unregistered Card does not carry the purchaser’s information and everyone who gets the card can use and fund the card. If an Unregistered Card is lost, the purchaser cannot report the loss and get a new card.

Under the following circumstances, a purchaser needs to provide his/her identification card and contact information to the card issuer or seller:

• If the purchaser wants to purchase a Registered Card; or
• If the purchaser wants to purchase Unregistered Cards at the value of RMB 10,000 or more in one time.

For an individual, the identification card refers to the resident ID card, passport, or residence certificate (known as Hukou in China), etc. For an enterprise or other organization, the identification card refers to the business license, tax registration certificate, or organization code certificate, etc. A card issuer or seller must keep the purchaser’s information for more than five years, and ensure the confidentiality of such information.

The maximum value of a Registered Card is RMB 5,000, and the maximum value of an Unregistered Card is RMB 1,000. A Registered Card should be permanently valid, and the valid term of an Unregistered Card should not be less than three years. However, if an Unregistered Card expires but still has balance in the account, the card issuer or seller should activate or replace the card for the cardholder.

In the following situations, bank transfer rather than cash payment should be used to purchase Single Purpose Cards:

• An enterprise or other organization purchases cards with the value of RMB 5,000 or more in one time;
• An individual purchases cards with the value of RMB 50,000 or more in one time; or
• A purchaser purchases cards through other means off-site.

According to Shanghai MOFCOM, “bank transfer” refers to the payment through bank accounts. Payment via a Multiple Purpose Card is not acceptable, while credit card payment is allowed.

Post-filing Vs. Pre-filing

According to the Single Purpose Cards Measures, a Group Issuer or Brand Issuer should file card issuance with MOFCOM’s local counterparts at provincial level, a Large Scale Issuer should file card issuance with MOFCOM’s local counterparts at city level (such cities consist of administrative districts), and an Other Issuer should file card issuance with MOFCOM’s local counterpart at county level.

The Single Purpose Cards Measures further provide that the filing should be completed within 30 days after the issuance of the cards. However, Shanghai MOFCOM requires beyond the above provision that the filing should be done 15 working days before the issuance of the cards. In addition, Shanghai MOFCOM also requires that companies that had already issued Single Purpose Cards before the release of the Single Purpose Cards Measure complete the filing before Jan. 29, 2013.

Based upon the above, it is clear that Shanghai MOFCOM in its implementation of the Single Purpose Cards Measures adds some more requirements for its local regulation purpose. We assume that the local counterpart of the MOFCOM at other provinces will have their own implantation policies to reflect their own local regulatory demand. Therefore, we highly suggest that Single Purpose Cards issuers should not rely only on the black letters of the Single Purpose Prepaid Cards Measures but should consult with the MOFCOM local counterparts which have jurisdiction on them before they plan for their own Single Purpose Cards businesses.