The Apple Pay Japan One Year Mark

The short story
Apple Pay in Japan is all about Apple Pay Suica which we already knew. In the Suica home base area, the Kanto region, contactless payments grew from 20% of total transactions to more than 40% in the year that Apple Pay Suica has been available. My analysis is that Apple Pay Suica is responsible for driving that change. What used to be ‘some people some of the time’ is quickly transitioning to ‘most people most of the time’.

One 7-Eleven store owner summed it up nicely: “eMoney (Suica) purchases have really taken off this past year.”

The long story
There has been hand wringing in the Japanese media recently that Japan is missing the contactless payments boat because QR Code payments are all the rage in mainland China and Japanese don’t care about them. How ridiculous. IT journalist Junya Suzuki and NHK both ran similar stories the same day.

The NHK piece in particular reads like QR code payment stealth marketing in a news report wrapper. If you have ever eye-witnessed the incredibly shoddy and slanted NHK report creation process from the inside, you know that outside of weather, traffic news and the occasional nature program, believe NHK news at your own risk.

Junya Suzuki’s report has much more depth and insight but suffers from what I feel is poorly focused analysis. Sometimes the big data doesn’t convey the big picture because in this case it only shows Japanese smartphone contactless payment usage rates endlessly stuck at 7.5% of the install base.

Credit Card Usage
Credit Card usage by country. The VISA marketing slide doesn’t communicate anything useful.

For example Suzuki san points out the Visa Corp marketing slide showing Japanese credit card use at 17% vs. South Korea at 73%. That sounds like a huge gap. But the reality is that the entire economic volume of South Korea comfortably fits into the Tokyo area economy with room to spare. The Japanese 17% represents a much larger amount of money.

Analyzing the rich and complex Japanese contactless payments landscape demands a different measuring stick and approach.

Unpacking the big picture
People in Japan, America, and Europe, countries where credit cards have been around a long time, have entrenched spending habits. My mother for example used checks for bread and butter supermarket purchases, and department store credit cards (Lord & Taylors, etc.) for bigger ticket items.

In the 1980’s her local checking account bank issue VISA card finally replaced the checkbook but different cards filled different purchase needs: one for small, one for medium, one for large. This is exactly what most Japanese seem to do as well.

The logical starting point for contactless payment uptake is small purchases. The 7-Eleven lunch, the cup of coffee at Doutor, the vending machine bottle of green tea. The convenience for customers is they don’t have to deal with coins.

The Japan e-money map
Japan pioneered contactless payments built on FeliCa technology and the market is rich, complex and regional. Denshi Money, e-money, is a Japanese term that specifically refers to FeliCa based payment networks.

Japan e-money map
Apple Pay in Japan supports QUICPay, iD and Suica. Transit cards are compatible so Apple Pay Suica works nationwide.

Stored value cards are the contactless payment entry point for the masses. They are not credit cards so anyone can buy one at the convenience store or local station and start using it right away. Stored value transit cards in general and transit card commuter passes in particular however are the golden uptake to contactless payments and constant use.

Japanese companies reimburse worker commuting expenses every month and workers can squeeze a little more money out of the arrangement by purchasing 6 month transit passes. For a Japanese iPhone user with a Suica commuter pass it’s a no brainer to add the pass to Apple Pay because the company pays for it.

When a person adds a Suica commuter pass to Apple Pay they quickly discover how convenient Express Transit is, but the secret ingredient is the Apple Pay credit card ‘anywhere, anytime’ Suica recharge feature. This completely changes how Suica is used and makes the experience entirely different from using plastic Suica. The convenience of the Apple Pay backend also sets Apple Pay Suica apart from other stored value cards. The next step is using Apple Pay Suica for convenience store and cafe payments. Apple Pay usage takes off from there.

There’s one very important point to remember however: Apple Pay Suica works across Japan, but Apple Pay Suica Commuter is limited to the JR East region. All commuter transit cards in Japan remain locked to the card locales they are issued in. This effectively limits the golden uptake of Apple Pay Suica to the JR East Kanto region.

The Golden Uptake in Kanto
Junya Suzuki’s piece refers to the Mobile Marketing Data Labo report released in December. It’s a good take on what is happening in the Apple Pay Suica Commuter home base Kanto region one year after the Apple Pay Japan launch.

MMD Data 5
Contactless Payments: Plastic vs. Smartphone
MMD Data 3
e-money payment network usage ranking (plastic and smartphone). Note that stored value cards are the top five and used much more than credit cards.

Important points:  Nearly 40% of contactless payments are on smartphones and the majority of smartphone contactless payments are stored value cards, not credit cards.

MMD Data 1
Smartphone contactless payment method usage ranking.

Osaifu Keitai is the FeliCa e-wallet feature phone service that Docomo launched in 2004 and was later offered by KDDI and SoftBank. Today it more or less refers to the e-wallet services that Docomo, KDDI and SoftBank bundle with their Android based carrier models.

Line Pay is a complicated stored value beast that is an outliner for this analysis because Line Pay has no plastic card equivalent and requires an online account that covers: online Line Store purchases, payments between Line users, and convenience store purchases. Also Line Pay’s core user group is college age and younger, in other words people without money. In short Line Pay doesn’t see much action at the cash register.

The interesting point is that Apple Pay has made a big impact in one year beating out the long-established Rakuten Pay.

MMD Data 3
e-money payment network usage ranking. Note that Stored Value cards are used more than credit cards and Stored Value transit cards the most.
MMD Data 2
Smartphone contactless payment usage ranking. Suica is the only transit card on mobile. Not having PASMO on mobile is holding back mobile payment uptake for transit.
MMD Data 4
Japanese e-money (Plastic and smartphone) usage ranking. PASMO is still only plastic which accounts for the usage ranking difference compared to smartphone usage ranking.

Important points: top ranked Suica and PASMO simply confirm that stored value transit cards are the golden uptake path for contactless payments. If PASMO was on Apple Pay transit use would likely be the top item in both usage ranking charts.

My private data
I have 10 or so stores where I regularly use Apple Pay Suica. I’m friendly with the store managers, the ones who have manned the cash registers for a long time and know what they are taking about. Every month I ask them the same questions: what’s the ratio of contactless payments from total transactions and what % of those are Apple Pay Suica?

Area: Suica/PASMO Home Region (Kanto)
Time: October 2016 ~ December 2017
Store profile: Convenience stores, cafes, bread stores

Theory: Japanese customers use contactless payments most for small daily ‘on the go’ purchases.

Finding: Store managers report a surge in e-money contactless payment use for the period. On average e-money contactless payments of total transactions grew from 20% to 40%. In JR East station area malls and stores located near stations usage is approaching 50%.

Key quote: “e-money (Suica) purchases really taken off over the past year.” 7-Eleven Store Owner/manager in Ikegami Ota-ku

Analysis: Most of the growth seems to be stored value transit cards on smartphones. As Apple Pay has been the single largest change in the market this past year I think it is safe to conclude that Apple Pay Suica has been driving this change.

Summary and thoughts
Apple Pay has brought tremendous change to the Japanese market but it is hard to see because it’s regional and tied to the Apple Pay Suica commuter Kanto area. If Suica supported commuter passes nationwide or the other transit cards were on Apple Pay, the ‘golden uptake’ would be much larger and easier to see.

The challenge for Apple is to get the other commuter transit cards on Apple Pay. The challenge for the other transit cards is to get their mobile service act together, or cut a cloud deal with JR East.

The story arc is very simple. Once Japanese users start using mobile contactless payment services like Apple Pay Suica for small purchases, the usage sticks. It will evolve to bigger things over time.

If Apple can keep the momentum going, and if the other transit cards can get on both Apple and Android platforms, the next 2 years leading up to the Tokyo Olympics are going to be very interesting indeed.

Update: Junya Suzuki reached out and explained that his article was ‘repositioned’ by the editor to focus on QR Code payments which was not his original intent. It is good to know that he has not lost his keen insights on Japanese contactless payment market trends.