Making a payment in the most populated city in the world can be surprisingly difficult. For the 37 million people living in Tokyo, and the 15.2 million inbound travellers who visited the city in 2019 before the pandemic, the primary payment method was cash. Indeed, the Tokyo tourism board advises international travellers to carry cash at all times. In a world rapidly embracing frictionless payments and real-time transactions, the hi-tech city looks strangely old fashioned.
In recognition of the challenges faced across the banking and finance spaces, the Tokyo Metropolitan Government launched the Tokyo Financial Award (TFA) to encourage innovation in financial products and services.
The award has a specific payments category, aiming to tackle issues raised by residents and businesses in Tokyo in their use of digital payments in both business-to-business and business-to-consumer transactions. The results of the survey identified issues around the lack of interoperability between electronic money (e-money) apps, the lack of cashless payment methods beside e-money, and the fact that credit cards are still not accepted in all stores. Further, concerns were raised about the level of security to prevent theft and stop unauthorised use of credit cards and smartphones. The level of fees paid to use various payment methods was also seen as problematic.
The motivation to use digital payments is driven at least as much by rewards and loyalty points as the inconvenience of cash
Across the country, cash is still the preferred transaction method. Jeff Galvin, senior partner at McKinsey’s Tokyo office, says: “Credit card payments have grown from about 15% of total transaction value in 2014 to 25-30% in 2020. So they’re growing, but it’s still the case that the biggest share of transactions is from cash and bank transfers, which remains around 70% today.”
This is not due to lack of innovation. Sony developed the non-contact chip FeliCa in 2000, and the country’s first mobile wallet (m-wallet) was introduced by network provider NTT Docomo back in 2004. But despite being an option for nearly 20 years, digital payments are yet to take off. And the issue is not a low penetration of mobile devices — in a country of 126 million people, there were an estimated 95 million smartphones in use in 2019.
In addition to mobile apps, such as Google Pay and Apple Pay, and m-wallets, pre-paid integrated circuit (IC) cards are a popular form of cashless payment. Locally released transport cards, such as Suica, used on Japan Rail networks in the Greater Tokyo, Niigata and Sendai areas, can also be used as payment methods in some shops. However, first the cards have to be loaded with cash payments, either made at a ticket machine or a convenience store.
The Japanese government attempted to push the use of cashless transactions in 2019, setting the target of having 40% of transactions being made via credit cards, debit cards or e-money in time for Expo 2025 Osaka, and with the future aim of reaching 80% of all transactions.
Cash still king
For Japan to move away from cash payments would require a significant culture shift that cuts across the country’s ageing population, low crime levels and economy.
On a basic level, the inconvenience of using cash that has spurred other markets towards using digital payments simply is not there in Japan.
It is difficult not to compare the country’s payments landscape to that of its Asian neighbours; however, Mr Galvin says it is not as simple as comparing like for like. “Looking at markets like China, there was no way to do e-commerce transactions as very few people had a credit card. The wallets needed to be created to allow these purchases to be made. Alibaba is able to enable these transactions as a closed-loop digital wallet, supporting its own business growth. Then Tencent leveraged its WeChat messaging platform to do the same.”
Jeff Galvin, McKinsey
The availability of ATM machines in China is also declining. Research by Zero One Research Institute found the number of ATMs across China decreased by 83,900 during 2020, and the number of ATMs per 10,000 fell to 7.24, down from 7.87 in 2019.
ATMs are widely available across Japan, not only within banks but also in more than 20,000 post offices, as well as convenience stores. However, despite their ubiquity, ATMs have their limitations. Banks often charge fees to make withdrawals on weekends or outside of peak hours on weekdays. They are not a 24/7 service, with many closing on Sundays or public holidays. There is also limited interoperability between ATMs from different banks, making them difficult to use in different parts of the country. But consumers seem to be prepared to accept these operational restrictions.
Yuuki Fukumoto, a researcher in the financial research department at the NLI Research Institute, says: “Banks have tried to reduce the number of ATMs and bank branches to protect [themselves] from low profitability seen from the low interest rate policy. With fewer ATMs, it could make cashless payments more convenient.”
The number of ATMs has declined in recent years, as banks seek to reduce the associated maintenance costs. World Bank data shows there were 124.12 ATMs per 100,000 people in Japan in 2019, a decline from a high of 132.81 per 100,000 in 2009. Despite these changes, cash is still preferred.
“There are several cultural reasons why people stick with cash,” Mr Galvin says. “Japan is a safe country with low levels of fraud and theft, so it is safe to carry cash, and there are ATMs in convenience stores everywhere.”
The Ministry of Justice’s 2020 white paper on crime, the most recently available figures for robberies, reports that the country saw just 1.8 robberies per 100,000 people in 2016. By comparison, there were 154.3 robberies per 100,000 people in France and 98.6 robberies per 100,000 people in the US in 2017.
Barriers to overcome
Security breaches of high-profile cashless services have made consumers wary of going digital. In January 2021, Japan Post Bank announced it was withdrawing its Visa-backed prepaid Mijica card after at least 230 hacks saw the bank having to pay out Y53m ($480,000) in compensation. Similarly, the convenience store 7-Eleven was forced to shut down its 7-Pay app-based payment service within just three months of its launch. The app was hacked just two days after its launch on July 1, 2019, and by the end of the month, 808 cases of unauthorised use had been recorded, amounting to Y38.61m in fraudulent transactions.
Another stumbling block is Japan’s demographics. The country has the oldest median age in the world, at 48 years. Indeed, 28.7% of the population are over the age of 65, representing 36.17 million people, according to figures from the Japanese government in September 2020. There are 80,000 people in the country aged over 100 years.
Mr Fukumoto says: “The size of the older population is increasing, and it is difficult to get them to change their habits and use new payment methods, both in terms of consumers and store owners. There is also the historical bias against taking out debt, and [towards] the feeling of control when handling cash — knowing exactly what funds are going in and out.”
Furthermore, the culture still values the human interaction and customer service that comes from dealing with physical payments. “Larger cities are adapting digital payments more quickly, but cash remains common in local areas,” Mr Fukumoto adds. “The interaction between the customer and the vendor remains an important aspect of local communities.”
The economic climate within the country may also be behind the preference for cash. David J Gibson, chief investment advisor and co-founder at Astris Advisory Japan, says: “People like using cash, from a safety point of view, and in a deflationary economy.”
Digital payments providers
Yet the arrival of the Covid-19 pandemic has made using cash seem less attractive, owing to concerns about viral transmission through handling cash. This is where the mobile payment (m-payment) platforms have stepped in.
The bulk of the m-payments business is held between PayPay, established by mobile phone network provider and conglomerate SoftBank; Line Pay, part of the Line social media messaging app; and Rakuten Pay, under the Rakuten Group, which was founded as an e-commerce platform.
These businesses are seeing user numbers rise. SoftBank revealed that PayPay was valued at $3.4bn in its annual report, released in March 2021. The platform saw sales of Y30bn with a 0.94% fee charged per transaction.
QR code apps are being rapidly adopted but are still only small, at 5% of cashless transactions and only 1.5% of total consumption
A Line Pay spokesperson agrees that the pandemic has had an impact. “In general, Japan is still a very cash-based society, relative to other markets, which is why people can still get by with cash with nearly all transactions. However, the shift to digital payments continues to accelerate, now even more so with Covid-19, and the government’s push for digital transformation across all industries,” says the spokesperson.
These payment apps have a wide reach. Rakuten Pay is available in more than five million online and offline stores. The number of monthly users of Rakuten Pay reached 50 million during 2020. Z Holdings, a SoftBank subsidiary which owns PayPay, merged with Line in March 2021. The group announced plans to allow interoperability between the two apps for QR code purchases from August 2021. Line Pay users can now make purchases at PayPay vendors, and vice versa. With around 40 million users on each platform, and PayPay boasting around 40% of users active each month, the move will double the potential customer base for many businesses.
The partnership may potentially grow the PayPay service overseas as Line Pay has an international reach, being used in Thailand and Taiwan. There are 56.7 million Line Pay users, with 40 million of them being in Japan. During 2020, the total global transaction value through Line Pay was Y1.6tn.
Rakuten has also looked to expand its reach by partnering with other payments services. A spokesperson for Rakuten Payment says: “Rakuten Pay partnered with [Suica], opening up the service to even greater levels of convenience. Rakuten Pay users can now issue, charge and pay with Suica through the Rakuten Pay app, unlocking access to an additional one million locations where Rakuten Pay can be used nationwide.”
Availability
Despite the numbers of users and cross-platform partnerships, the proliferation of digital payments remains limited in Japan.
Mr Gibson says: “PayPay is the largest QR code provider, with more than 80% market share. QR code apps are being rapidly adopted but are still only small, at 5% of cashless transactions and only 1.5% of total consumption.”
For many, cash is still the default method of paying for goods bought online. Mr Galvin says: “Roughly 10% of e-commerce transactions are still convenience store cash payments, and some payments are made as cash on delivery. Companies like Uber Eats have had to adapt to having their delivery drivers accept cash in addition to credit card payments on the apps.”
A person involved with the TFA project says: “There are still many small and medium-sized merchants that only accept cash due to the relatively high credit card commission fee. The fee tends to be high because the upper limit placed on commission fees is less strict in Japan than other countries.”
Processing charges in Japan can be between 2% and 5%, which are paid by the retailer, with further charges for the payment service providers. This can make it prohibitively expensive for smaller companies to accept credit cards.
“Around 30% of Japanese people are hesitating to use cashless payments because it forces stores to pay the costs related to cashless payments,” Mr Fukumoto says. “There is a big divide between the rural and the urban areas, where the demands vary between customer service and the need for fast transactions.”
The interaction between the customer and the vendor remains an important aspect of local communities
The Japanese government tried to encourage consumers towards using cashless payments during a consumption tax increase from 8% to 10% in October 2019. Lasting until June 2020, the campaign gave customers 5% rebates for cashless payments by credit cards, debit cards, e-money and QR codes made in smaller businesses. These companies had been reluctant to accept cashless methods due to the cost of implementation, so they were also provided with financial support to become cashless, while the government asked payment operators to lower their commission fees. While this saw more than one million small stores adopting cashless methods, it still did not create a wholesale change in behaviour.
PayPay attempted to promote adoption of its payment platform through the Support Your Local Town Project, launched in July 2020 in response to falling consumer spending during the pandemic. Operating in 187 local governments in 41 prefectures across the country, customers receive a bonus for shopping at participating stores during a set timeframe.
Carrot and stick approach
With consumers showing reluctance to drastically change their habits, and payment providers fighting over a small slice of the market, incentives have become a key battleground in winning over customers.
A joint survey between mobile payments aggregator G-Plan and internet service provider Biglobe conducted in July 2020 found 78.6% of respondents cited collecting loyalty points as their primary reason for moving to digital payments. Wishing to avoid touching cash during the pandemic was stated by 31.4% of respondents.
Points programmes are an important consideration for consumers. The person involved with the TFA says: “In Japan, consumers mainly care about whether there is a point reward, and how [many points] you can get. In fact, there is a general opinion that the recent growth of QR code payment was due to the campaign which set a higher point reward of QR code payments (5%) compared to contactless IC card (0.5–1%) or credit card (average 0.5%).”
Yuuki Fukumoto, NLI Research Institute
Mr Galvin adds: “The motivation to use digital payments is driven at least as much by rewards and loyalty points as the inconvenience of cash. Rakuten, for example, has a strong loyalty programme, which keeps people in its ecosystem. PayPay and Line Pay also have potential with the SoftBank connection, but to date have not been as successful with their loyalty programmes, though it’s probable that they will push this aggressively through their ecosystem in the future.”
Points can also increase through special offers. The Rakuten Point programme earns customers points for using the company’s services, with the total rising when they are members of multiple Rakuten services. The points can be earned and spent through Rakuten Pay. PayPay, meanwhile, offered a limited-time promotion in February 2021, offering customers up to 40% of the value of their purchase back in points, up to Y500 per purchase and capped at Y1500 for the month.
The result is that consumers are switching payment methods between stores in search of the best rewards. “Consumers are used to using a combination of multiple payment methods, as people tend to always have many ready so that they can choose their favourite payment method available in the store,” says the person involved with the TFA.
Next generation
Even with the stubborn reluctance to let go of cash, some view the Japanese market as an opportunity. Google is in the process of buying Pring, a cashless payment provider. While Google already has a presence in the payments space through its Google Pay service, linking it with Pring would give the company access to payments, withdrawals and cash transfers via smartphones. Pring also has 400 corporate clients who use its service to make small payments or reimbursements to customers.
The existing digital players are also looking at how they can capture further market share. PayPay is looking to expand its reach beyond payments with plans to introduce send-and-receive features to allow users to transfer their balance between users, and a bonus management service gives users access to a simulated investment experience using their PayPay Bonus points. Rakuten, meanwhile, has taken the first step into bitcoin after releasing new functionality in February 2021. Customers can now charge their cash balance using bitcoin and other cryptoassets, with no handling fees.
They are not the only ones looking to cryptocurrencies. Mitsubishi UFJ Financial Group (MUFG) is looking to launch a blockchain payment network in 2021, in collaboration with US tech firm Akamai. MUFG is also aiming to launch its long-anticipated digital currency. Dubbed MUFG Coin, the currency will be used as a form of mobile payment, with each coin worth one yen. However, despite reports of the currency’s impending launch at the end of 2020, a date has yet to be confirmed.
The bank’s plans for a digital currency may be soon followed by one from Japan’s central bank. The Bank of Japan launched the first phase of its central bank digital currency in April 2021, with plans to move into the second phase in 2022. While there are no definite plans to launch a digital yen, the early steps indicate the authorities are taking the country’s move towards digital seriously, and may be the catalyst needed to finally leave cash behind.
