Japan’s economic revival, the cash tax and the contactless payments boom

Anybody who has lived in Japan any length of time knows the economic reality here is rarely reported accurately in the western media. The worn out narratives of the ‘lost decade’ (or is it two?), the ‘aging society’, the ‘Japan is so over’ are just too easy for the challenged journalists of our era not to use. Otherwise they might have to actually do research and fact checking.

When some American friends visited Japan in 2010 I took them on a hot spring tour. For the entire trip they marveled at how prosperous things seemed, “the media always says that Japan is in such bad shape. I can’t believe the difference.” I imagine that lots of inbound visitors are surprised by the reality they find in Japan, especially visitors from the West where the worn out narratives are endlessly recycled.

Japan’s economic revival began with the Nikkei stock market revival when the Abe Government took power on December 26, 2014. A nice little Christmas present that keeps on giving. And now Morgan Stanley is taking notice, it even mentions the role of contactless payments in Japan’s continuing economic growth:

Another contributor to growth will come from Japan’s shift away from cash. Just 21% of transactions in Japan are currently cashless, versus an average of 45% outside Japan. “Reducing the cost of cash processing is a key element of productivity reforms,” says Japan Banks analyst Mia Nagasaka, who forecasts that cashless transactions will expand to 30% of the total by 2025.

Although a reduction in cash transactions is good news for the economy as a whole, it is particularly important for banks. As in the U.S. and other markets, Japanese banks stand to save a great deal as consumers switch to mobile banking and paying with credit cards or digital wallets rather than cash. All told, Nagasaka believes that Japan’s megabanks could raise their average return on equity from 6% currently to 8% by 2025 through cost-cutting and technology adoption. Under this scenario, valuations for Japanese banks would improve from 0.6 times book value to nearly 1x—a big leap in an industry that many investors had written off.

With just one year to go until the Japanese sales tax is raised to 10% there are some very interesting implementation proposals the Abe Government is putting on the table. The most interesting one is the ‘cash tax’: when you pay for things in cash you pay a 10% sales tax, when you pay for things with contactless payment you pay 8% sales tax, exactly what everybody pays now.

If the proposals are passed by the Japanese National Diet, it will certainly drive the growing contactless payments wave to tsunami size. Everybody who does not use contactless payments now will certainly start doing so to save 2% at at checkout. The changes will be fascinating to watch. Apple’s global FeliCa move is looking more genius all the time.

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NTT Docomo and SMBC kiss and make up for VISA…maybe

It’s very strange that the JCB QUICPay network has gained the most benefit from the Apple Pay makeover of the Japanese contactless payments market instead of the Docomo iD network. Docomo invented the Osaifu-Keitai standard with Sony in 2004 and was the natural favorite, but iD has only treaded water while JCB has seen steady gains in QUICPay issue cards, customers and transactions.

Docomo iD problems boil down to bad blood between Docomo and Sumitomo Mitsui Banking Corporation (SMBC) who issue and manage Docomo d-CARDs and help run the iD payment network. Up until 2016 VISA d-CARD was king. Then something happened. Things got so bad between the 2 companies that Docomo removed all VISA branding from their website and Docomo stores strongly urge new customers to create a Mastercard d-CARD not a VISA d-CARD. VISA might seem like the target here but SMBC, the first Japanese bank to issue VISA back in 1968, are the real power behind the VISA throne in Japan, and the real target for Docomo ire.

VISA refusing to sign on directly with Apple Pay Japan or offer NFC switching that Mastercard, JCB and AMEX do is undoubtably a big friction point because it diminishes the iD brand and VISA d-CARD. VISA also half-heartedly pushing VISA Pay Wave again, with SMBC pulling, doesn’t help. Which makes the NTT Docomo/SMBC detente ‘let’s build a new future together’ announcement so interesting. Here are the 3 announcement points <with comments>

  • First of all Docomo and SMBC agree to start all over again to rebuild the d-CARD business and develop new services. <Nice boilerplate stuff with no promises and no deadline for delivering anything>.
  • Sumitomo Mitsui Financial Group will buy back all outstanding shares of Sumitomo Mitsui Card Co. (34% of the company) from NTT Docomo by April 1, 2019. <Why does Docomo want out of the credit card business? Do they think that credit card industry pricing and fee structures are unsustainable in the face of ubiquitous contactless payments of all flavors, online banking and ever more competition? Do they think the credit card industry is going to have to live on far less and have to aggressively restructure? Or is it something else like getting out of the 2 year contract subsidizing business? Inquiring minds want to know.>
  • Docomo NTT and SMBC will work together to develop and deliver more cashless solutions and expand the iD network. <That sounds nice but what does it really mean? Is VISA finally joining the Apple Pay Japan party? Is Google Pay support coming on iD?>

Like all cold war detente agreements, the proof will be in the pudding.

New NFC Pay Readers for J Mups and CardNet

New NFC Pay / EMV contactless capable readers are being deployed on J Mups systems along with the necessary backend support for VISA / Mastercard / American Express / J Speedy EMV contactless transactions. The flaky old FeliCa only but Apple Pay Suica Express Card dumb JREM readers are being swapped out with ultra reliable Panasonic JT R550CR units.

The finicky UT1-Neo readers used by CardNet systems will also be gradually replaced with new EMV capable UT-X10 readers with the necessary EMV backend support that CardNet announced back in 2015. The current installed base of UT1-Neo readers is 200,000. Hopefully the migration to the new NFC Pay capable devices will not take too long.

J Mups and CardNet are very popular payment systems for smaller Japanese retailers and shops.

Apple adds support for contactless student ID cards in Wallet

Campus-Apple-Pay_Duke-entrance_10022018

Apple hit the on switch for contactless student ID cards today. The press release has nice photos but is vague. There is much more detail on the Apple support doc Use student ID cards in Wallet on your iPhone or Apple Watch.

The most interesting detail is the device eligibility: iPhone 6 or iPhone 6 Plus and later, Apple Watch Series 1 and later and Express Mode isn’t available on iPhone 6 or iPhone 6 Plus. NFC-A/B, definitely not FeliCa powered as some sources were saying and not MIFARE powered either. It looks like Blackboard has something else up their sleeve for middleware but I’m willing to bet you that Student ID Express card performance is slower than Apple Pay Suica Express Card with power reserve even on the same iPhone XS/XR device. The Blackboard card format is FeliCa, the implementation appears to be PassKit NFC Certificate powered card emulation.

The rest of the support doc details confirm the cards are stored value (SV) with Express Mode and students can recharge them with Apple Pay, a credit/debit card in the eAccounts app or cash at the “school’s self-service machines”. In other words it’s just like Suica App and Apple Pay Suica for door locks instead of transit.

Update
There is conflicting information about the Blackboard middleware technology used for Apple contactless student ID cards. The Express Card function is exactly what FeliCa offers and Blackboard supports. On the hardware side iPhone 6/6 Plus and later all have NFC A-B-F chips as do Blackboard NFC readers. There is a (very) remote possibility that Blackboard is utilizing its own FeliCa licensed middleware (and per device unique FeliCa Networks keys) on non-FeliCa devices and Apple built-in FeliCa on global FeliCa devices. I am trying to confirm details and will post developments here.

Update 2
The Blackboard card format is indeed FeliCa. The implementation appears to be Passkit NFC Certificate powered card emulation used across the board. It’s impossible to confirm if the ID cards are using standard FeliCa middleware on global FeliCa devices and something else on older devices but Apple’s agreement with FeliCa Networks includes a keys server for Apple devices. It’s possible that Apple is activating FeliCa keys on older devices just for Student ID cards.

Wallet NFC Passes and More Coming Later Today?

iOS 12 Golden Master

Apple is taking a very long time to refresh the Apple Pay Japan page with new iPhone related Apple Pay information. It may be a long shot but we could see some minor NFC related announcements later this morning after Japanese companies open for business: NFC Passes, NFC Reward Cards, etc.

The iOS 12 golden master lists the new Contactless Student ID Card feature in Japanese but Student ID Cards are only for America at this point.

UPDATE
Apple has still not updated any of the Apple Pay or related support page information yet and may be until the iOS 12 launch before we see anything.

UPDATE 2
There is much much more: Welcome the new era of A12 Bionic NFC and iOS 12