Have a Good Cashless: 2019 Contactless Payment Trends in Japan and Beyond

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.

Credit Cards
Mitsubishi UFJ NICOS
Sumitomo Mitsui Card Co
UC CARD Co
JCB

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. 

E-money/Prepaid Cards
WAON
nanaco
Suica
Rakuten Edy

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.

QR Codes
Origami Pay
Line Pay
PayPay

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.

Transaction Processing
Rakuten
Coiney
Square

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 Pay
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.

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Skin in the Game

The so called Renault-Nissan ‘crisis’ has been fascinating to watch, not the actual event but how it is reported in the western press. It’s like time warping back to culturally biased 1980s style ‘Japan Inc. doesn’t play by the rules, has vested interests (what country doesn’t?), etc.’ reportage. When things get hot western journalists trot out the old stereotypes and prejudices with titles like “Carlos Ghosn: A criminal or just a foreigner?”, because it still sells. French cartoonists and FCCJ based journalists who should know better take the easy path and pander to the gutter, cringe worthy nasty stuff, instead of doing actual research and reporting such as Ghosn illegally funneling Nissan profits to Renault-Samsung to cover loses and show profit instead.

Only now is Reuters picking up the French connection side of the story which has been reported in Japanese media since day one and is a well-known narrative: Seeds of Renault-Nissan crisis sown in Macron’s ‘raid’When Ghosn came to Japan to fix Nissan he promised that Nissan stay separate and would never be merged with Renault. Macron the “former Rothschild dealmaker” broke that promise:

Then, on the evening of April 7, (2015) Macron called Ghosn to let him know – as a courtesy – that the state had bought another 4.73 percent of Renault for 1.2 billion euros ($1.4 billion), would announce its maneuver in the morning and planned to sell back down to 15 percent only after defeating his (Ghosn’s) opt-out.

and

With that step, seen by detractors and admirers alike as an unprecedented government “raid”, the simmering battle of egos between Ghosn the global CEO and Macron the wunderkind banker-turned-minister had burst into the open.

Brushing aside warnings, Macron pressed ahead and defeated the opt-out. The vote handed France an effective blocking minority at Renault, which in turn controlled Nissan shareholder meetings via its 43.4 percent stake in the Japanese firm.

Alarm bells rang in Tokyo as that sank in, ratcheting tensions higher over the months that followed.

Macron’s actions to push a Nissan-Renault merger broke all the trust Ghosn had built over the years with Nissan. Ghosn is certainly a victim as the western press likes to portray him but not at the hands of “the Japanese”, but by Macron himself. As the Reuters story makes clear, “President Macron himself has skin in the game,” Ghosn was just a disposable tool and stepping stone to the Élysée Palace.

Global FeliCa vs Galapagos Syndrome QR Codes

Back in the pre-iPhone era Japanese manufactures were busy churning out internet connected, e-wallet capable handsets with high quality cameras (for that time) that most of the western IT media pooh-poohed: ‘nobody needs all that fancy stuff’.

Unfortunately the Japanese IT media paid way too much attention to it all endlessly handwringing over the Galapagos Syndrome of Japanese technology that nobody seemed to need or want. Worse than that, people actually bought the media con. Then something strange happened in 2016 when Apple unveiled FeliCa Apple Pay and went global with it in 2017.

Google is now following the same path with a FeliCa Pixel 3 in Japan. Why would Apple and Google do that if FeliCa was stranded in the Galapagos? There is business value there, otherwise they would not be spending resources to do it. Most of the Japanese IT media has ignored this fascinating turn of events, focusing instead on the new darling of manufactured “QR Code mania” payment platforms: AliPay, Origami Pay, Docomo d-PAY (d-HARAI), Line PayRakuten Pay, Pay Pay. The merits are dubious:

Demerits of OR Code Payments

  • QR requires a good network connection
  • Slow transaction speed
  • Weak Security and QR Code Chinese payment apps keep transaction records in Mainland China
  • Device needs be on and screen active
  • No ‘on the spot’ refunds

Merits of FeliCa (NFC-F) Payments

  • Works without network connection
  • Very fast transactions
  • High security and transaction records stay in Japan
  • Device can be in battery reserve mode sleep or screen off
  • On the spot refunds

Fortunately there is one Japanese journalist who is calling it: Masahiro Sano. Sano san’s latest piece on Nikkei notes the irony of Japanese companies falling over each other to roll out useless redundant QR Code platforms because QR Codes are “standard in China” (and nowhere else), while Apple and Google are deploying FeliCa as one more standard checklist item on their digital wallet platforms.

Fake QR Code payment mania confuses customers. Put another way QR Code payment platform apps are about de-centralizing the digital wallet into an ever-growing collection of apps while Apple Pay and Google Pay are about centralizing different technologies into a unified and smooth user experience for payments, tickets, IDs, reward cards and more. Which approach do you think will win in the long run?

Sano san thinks QR Code payment platforms in Japan are not about public demand or customers actually using them. They’re just a fad that will fade and eventually be shipped off to the Galapagos. I think he is right. The evidence so far certainly backs him up.

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.

The Contactless Payment Turf Wars: PiTaPa Pitfalls

Japan Transit IC Mutual Use Association Map
The Japan Transit IC Mutual Use Association project started in 2007 and achieved transit and e-money interoperability in 2013. It continues to evolve and incorporate other transit smartcard systems into a single standard. Wikipedia

PiTaPa is the perpetual outliner of the major Japanese transit smartcards: Suica, ICOCA, TOICA, SUGOCA, Kitaca, PASMO, manaca, Nimoca, Hayaken. Starting in 2006 the major transit cards were stitched together into one common national platform for mutual transit and e-money use achieved by 2013. The result is the fertile ground that Apple Pay Suica is growing and thriving in. Apple Pay VP Jennifer Bailey recently said that Apple Pay is doing well in Japan. The Apple Pay Japan story is all Suica and transit reamains the golden uptake path for contactless payments on smarphones.

And then there is PiTaPa. PiTaPa is the main transit smartcard for non-JR ‘private’ rail companies in the Kansai: Hankyu, Keihan, Nankai and Hanshin. The excellent Japanese Transit IC map graphic on Wikipedia perfectly captures the problem of PiTaPa incompatibility and isolation: the background blue is transit only compatibility, the red is transit and e-money compatibility.

The PiTaPa Story
PiTaPa has an interesting history but not a particularly happy or successful one. It’s the perfect case study of what happens when banks and credit card companies call the shots on transit ticketing system infrastructure instead of letting transit company management make those decisions. It’s also a story of how most Japanese transit companies, except for JR East, failed to see the coming revolution of mobile digital wallet platforms.

The PiTiPa founding members originally planned to build a transit IC smartcard system just like Suica: pre-paid stored value (SV). Then Sumitomo Mitsu stepped in with a seemingly good idea: a Sumitomo Mitsui credit card + transit card post-pay combo card to save transit users from having to recharge the transit card smartcard at all. A credit card transit card for transit and shopping. What could go wrong? The Kansai area is home town for Sumitomo Mitsu, the Kansai banking indsutry Godzilla for over a hundred years, how could transit companies, Sumitomo Mitsu borrowers all, resist?

And so PiTaPa was born in 2004 as a Frankenstein credit card grafted with a transit card appendage that was supposed to do it all, but never delivered the benefits of either one. Sumitomo Mitsui imposed all the hoary old credit card conventions on the shiny new creation: credit checks and spending caps. It immediately shrunk the PiTaPa user base from everybody to people with good credit ratings who passed Sumitomo Mitsui credit checks. Compare this to Suica where everybody from kids to retirees with a ¥1,000 bill can buy Suica card at a station kiosk. That’s the beauty of stored value cards, simple immediate purchase and use.

The original PiTaPa did not sit well with a lot of transit users so a ‘PiTaPa lite’ card with deposits instead of credit checks, without the e-money function, was added in 2007. Unfortunately since PiTaPa was post-pay, PiTaPa didn’t work with the Japanese Transit IC e-money standard and was shunned by payment networks and merchants. Good luck trying to use PiTaPa credit outside of its core transit ghetto at 7 Eleven, other convenience stores or anywhere else.

If you want to know how well PiTaPa is doing in 2018 all you need to do is check the commuter pass pages of the PiTaPa member railroads: Keihan and Osaka Metro offer ICOCA commuter passes. Not only that but Osaka Metro and Keihan have moved away from PiTaPa commuter passes for general issue and use ICOCA instead.

No Future
The decision to let Sumitomo Mitsui call the shots instead of transit management killed any viable future for the PiTaPa system. PiTaPa uses the same FeliCa technology behind the highly successful Mobile Suica and Apple Pay Suica, but the unique one-off system architecture, limited user base and transaction volume mean PiTaPa will never be hosted on any mobile digital wallet platform. PiTaPa transit partners don’t want to spend resources to build a cloud and host mobile service because there is too much cost for such little return. And Sumitomo Mitsu will certainly never foot the bill to clean up the mess they created.

Now that JR East and Sony have announced ‘Super Suica’ for April 2018 that will incorporate all Japan Transit cards into one card system for transit, e-money and mobile, the PiTaPa participants face a choice: junk the old PiTaPa and get onboard the Super Suica express or be left behind in isolation with no future.

Transit payment platforms
The basic unsolvable problem is that banks and credit card companies want different things than transit companies. Banks and credit card companies want credit checks and caps, transit companies need as many people going through the transit gate as efficiently and safely as possible. These fundamental business differences will never be resolved, there will always be tension. That is why banks and credit card companies should never be in charge of running transit gates. They simply want to take their credit card cut and run, leaving the scene of crime, and the cleanup bill, to others.

You can see the similar things playing out on other transit systems such as Hong Kong’s Octopus system with AliPay and other QR Code ‘virtual banks’ putting pressure on operators to change transit ticketing system infrastructure to suit their needs, all paid by the transit operator of course.

It’s wasteful nonsense and who needs it? It’s last century credit card vs. smartcard, open loop vs. closed loop thinking. Digital wallet platforms like Apple Pay and Google Pay conveniently collapse the differences of open loop vs. closed loop rendering the whole argument pointless while offering a whole new game. Build a transit payment platform instead, in the long run it’s a win-win for transit companies and the banking industry.

It’s very simple: transit companies and a finance industry that stick with the old ways of thinking will miss the major unique new business opportunities offered by transit payment platforms hosted on digital wallet platforms, opportunities that build on transit but also extend it to exciting new places, a transit platform that grows and benefits everyone.