More Smart Octopus

I assumed the Smart Octopus Coming to Apple Pay post would be ignored in the end of year rush period. However the timing perfectly coincided with an Octopus Cards Limited press conference where the CEO demurred any Octopus tie-up with Apple and the post got much more attention than I ever anticipated. Obviously there are lots of iPhone users in Hong Kong who want Smart Octopus Apple Pay. A few readers were confused by the situation and asked for some clarification.

First of all the source who correctly predicted last years Smart Octopus on Samsung Pay launch tipped me about the Apple Pay launch. That in itself was enough for me but here’s the thing: if Octopus Cards Limited (OCL) is really serious about expanding Octopus use on mobile platforms, taking the next step of getting Smart Octopus on Apple Pay is the only way to achieve that.

Digital Wallets like Apple Pay and Samsung Pay are the most tightly integrated NFC software and hardware digital wallet platforms out there with integrated FeliCa, but Apple is the only one to integrate the necessary Secure Element on their own A Series/S Series hardware with FeliCa Networks keys, and sell the package globally. All the major NFC technologies are standard on Apple Pay: NFC A-B-F, EMV, FeliCa, MIFARE, VAS.

Smart Octopus on Google Pay might look nice on paper but it can’t achieve anything of scale yet because of the highly fragmented nature of Android: to date hardware manufacturers have yet to produce an answer to Apple’s global FeliCa iPhone and Apple Watch, even though everybody’s smartphone has a NFC A-B-F chip. Not even Google has pulled it off. Huawei says they are planning to add global Felica but it will take time.

OCL is playing coy because majority shareholder Hong Kong MTR has added QR Codes and EMV contactless to the transit gate mix removing the exclusive Octopus Card franchise, but the technology and market politics don’t mesh. On one hand you have a fast, established and ‘open’ in-house contactless payment system (as in anybody can buy a plastic Octopus card and ride) basically run by public transit companies. On the other hand you have slow and ‘closed’ contactless payment systems (as in only people with certified credit cards and bank accounts can ride) run by major outside credit/debit network companies chipping off money from both customers and transit companies.

In this context putting Smart Octopus on Apple Pay isn’t just adding a card to a digital wallet platform, it is also a statement of who ultimately controls, operates and benefits from the public transit gates. It’s more about market politics than technology, in other words another battle in the contactless payment turf wars. The outcome will be fascinating to watch but determines whether Octopus will remain a great transit payment platform for Hong Kong with a future, or not.

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Tweet of the Day

Line Pay QR Codes can now be used with, some, vending machines. It is just 3 easy steps and 1 minute of your time. Gotta love the gadget geeks who test this stuff. File under: #what’s the point

For reference here is Apple Pay Suica:

PAYGATE Station Android based smart payment reader

It’s rather unusual that a company would hold a press conference for a payment terminal but Daiwa House Group subsidiary Royal Gate Inc did just that last week for their new PAYGATE Station smart reader. Japanese IT journalist Satoshi Tanaka covered the rollout for IT Media.

The ‘thin client’ mobile Android based smart reader handles every payment protocol there is.

Contactless: EMV, FeliCa, MIFARE
Hardware: EMV IC, Magnetic stripe
QR Codes: D-Harai, Pay Pay, Line Pay, Ali Pay, WeChat Pay, Origami Pay, Rakuten Pay
Reward Cards: D-Point, Ponta, Rakuten

GMO Payment Gateway provides the payments processing backend for Royal Gate and Daiwa House Financial handles the business client support side. The product video shows the business target: small cafes, restaurants, boutiques. With the ever-widening rollout of EMV contactless and QR Code payments, Japan is turning into a very interesting and unique intersection point of Western EMV payments, home-grown FeliCa and China market driven QR Code payment schemes.

I don’t think having home grown QR Code payment systems around is a bad thing even though most Japanese don’t use them. The value is that it gives Japanese banks and companies a bargaining tool to use with Apple, Google, Amazon, Alibaba Group and WeChat. Never get in a sword fight without a sword.

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.

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.