Happy New Year! May 2019 be a great year for everybody. It will certainly be a very interesting one for contactless payments and Apple Pay: now that Apple has officially acknowledged that smartphone sales have peaked out, expanding services like Apple Pay and growing service revenue, is more important than ever. Contactless payments in Japan will be fascinating to watch as various payment networks and technologies vie for market share in an already crowded market that is heating up before the 2020 Tokyo Olympics.
If you don’t know anything about Japanese contactless payments, here is a handy intro presentation video Going Cashless in Japan made by Michael Sunderland during his internship at Tokyo FinTech Association. It’s not fancy or deep but covers the basics well such as why cash is so important in Japan. One important observation is that every country has its own money culture, so there will never be a ‘one size fits all’ solution. As I have always said, people don’t go cashless and use contactless payments like Apple Pay for buying a couch or a TV, they start using Apple Pay for coffee, sandwiches and train tickets, then migrate up from there. Here are some trends to keep an eye on in 2019, a year that may see some real progress in going cashless.
The 10% Consumption Tax
The #1 issue this year for Japan is the October 1 consumption tax hike from 8% to 10%. The Japanese government is still working on the details but the shape of it looks messy and stimulating. It has the potential to kickstart a cash to cashless transformation leading up the 2020 Tokyo Olympics and beyond. There are 2 main components of the package:
- Point rebates for purchases made with cashless payment effectively reducing the tax down to 5% depending on the type of store. For example a customer who purchases items with Apple Pay Suica would pay the 10% consumption tax at the cash register but receive 5% back as JRE POINT.
- Subsidies to smaller businesses and merchants to subsidize contactless payment equipment (readers, POS systems, etc) leading up to the 2020 Olympics.
JiJi News reported a preliminary list of 14 companies supposedly under consideration by the Ministry of Economy, Trade and Industry (METI) to carry out the point rebate program with more to come. Here is the initial list with comments for each section.
Mitsubishi UFJ NICOS
Sumitomo Mitsui Card Co
UC CARD Co
Trend: The Kyash Visa prepaid card was easily the most innovative product from the credit card side in 2018 in a market already full of prepaid cards, the biggest advantage being person to person transfers that other mainstream prepaid cards do not, as yet, offer. Meanwhile Visa JP is busy sending mixed signals: they offer dual function EMV contactless/FeliCa plastic cards but still refuse to provide NFC switching services on Apple Pay and Google Pay for outbound Visa card users, a service that Mastercard, AMEX and JCB are providing. 2019 will probably be a holding pattern but could see some big gains with NFC Pay (EMV contactless) with major retail chains. Apple Pay can gain some traction by adding JCB branded Line Pay prepaid cards that are available in convenience stores and popular with younger customers.
Trend: Unless Apple Pay finally offers the remaining top-tier prepaid cards that are already on Google Pay (WAON, nanaco, Edy) there won’t be much action. JR East will roll out a Shinkansen e-ticket service for all Transit IC cards in April, the JR East version of SmartEX. Outside of that I don’t see anything new this year or even 2020. At least not until the Super Suica format arrives in early 2021 which will unify all the Japan Transit IC cards and get them on mobile.
Trend: Everybody and their uncle setup a QR Code payment system in 2018, creating smartphone apps and frantically building payment platforms like prospectors in a gold rush, all based on capturing merchants supposedly attracted by the allure of low transaction fees and minimal hardware investment. This will continue in 2019 and Japan will have “a QR Code payment app for that” for just about everything from convenience stores (FamiPay) to vending machines. Like prospectors of old the majority will end up bust. The real question is will Japanese customers actually use QR Codes again. The PayPay security meltdown poisoned the well already and merchants aren’t happy either: PayPay has mistakenly (?) listed business as accepting PayPay when they don’t, leaving customers irate with merchants when they really should be angry with PayPay. It’s a new form of blackmail. Last but not least don’t expect METI to add Chinese QR Code AliPay or WeChat Pay to the point rebate list.
Trend: Subsidized payment terminal hardware for smaller businesses is a good start but real change will require the right balance of lower processing rates and ease of integration/operation. Right now there are far too many POS systems that require double entry, once for the cash register, once for the cashless payment terminal. This must be eliminated and the entire transaction process ruthlessly streamlined for smaller businesses. Rakuten, Coiney, Flight Holdings, J-Mups and many others are marketing low-cost, easy to use payment terminals but they need to do a better job of making everything work together as a seamless whole.
Apple can grow Apple Pay use in Japan by filling the gaps in the top-tier prepaid card lineup: WAON, nanaco, EDY, and work to get 2nd tier prepaid cards like Dotour onboard which don’t exist on digital wallets yet. Cards like Dotour would play very well as one year exclusive deals. There are big opportunities with Value Added Service (VAS) reward cards beyond Ponta as well such as T-Point and JRE POINT. Google Pay is well ahead of Apple in the reward cards area and they need to catch up.
Apple Pay VP Jennifer Bailey recently said that Apple Pay is doing well in Japan and has identified customer loyalty programs, access (contactless passes, hotel key cards, etc.) and transit as key growth areas worldwide. Smart Octopus will be arriving on Apple Pay soon thanks to Apple’s global FeliCa strategy and the expired Samsung Pay one year exclusive. The soon to open Hanoi Metro will also use FeliCa IC cards. Taiwan’s EasyCard and South Korea’s T-money are MIFARE based cards that could be added Apple Pay now that the technology is supported in iOS 12.The opportunities are there, it’s simply a matter of how aggressively Apple goes after the business.