MerPay on Apple Pay

If you were hoping for a streamlined cashless payment roadmap for Japan, forget it. Things are just going to get more complex as various reward point ecosystems (Rakuten point, d-Point, Ponta point, etc.) slug it out for dominance across smartphone apps (QR Codes) and digital wallet platforms (NFC). Mercari joined the fray with MerPay on Apple Pay, a virtual prepaid Mastercard provided via the Sumitomo Mitsui bank group and hosted on the iD contactless payment network.

Mercari was founded by a former Rakuten employee and follows their basic business model of hosting a virtual marketplace for buyers and sellers. The idea behind MerPay is that sellers can use money earned from sales or points via the virtual prepaid card for store purchases, Suica recharge, etc. Users can also recharge MerPay from a linked bank account.

Hachimaki san of Kanmu Ltd. has dug into MerPay details with a helpful flowchart.

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Joe Odagiri AirPAY Ads

OK, things are heating up in the Japanese cashless payments market ahead of the 10% consumption tax hike with cashless incentives. And things are getting fun. What other country in the world runs TV ads for cashless payment terminals?

Recruit’s AirPay POS system for small stores deftly navigates the entire Japan cashless map and is running an TV ad campaign featuring Joe Odagiri and rich visitors from abroad in various roles with credit cards. The punch line is “Do you take cards?” to which Joe Odagiri the store owner invariably replies, “cash only”. The rich customers walk away and Joe says, “I wish we had AirPay.” It pokes fun at the Japanese penchant for cash.

Japan Cashless Map for 2019

The Crowd Cast cashless map illustrates the rich variety of Japanese payment platforms

Because of its long history pioneering many of the technologies used for contactless payments, Japan is one of the most interesting, complex and difficult markets to study and analyze cashless payment trends. Accurate analysis of Japanese cashless/contactless payment trends is challenging because of fragmentation and regionality. Every market report or survey is just one tiny fragment of a much larger moving picture. An accurate map is good starting point.

Fintech startup Crowd Cast, Ltd. CEO Takashi Hoshikawa has a blog and posted a handy helpful cashless map for 2019. It’s not perfect however so I tweaked it a bit to clearly outline the 3 basic cashless groups: plastic cards, NFC, QR.

Digital wallets like Apple Pay and Google Pay work with all the NFC flavors (A-B-F) but Apple has made a much deeper investment integrating FeliCa into the basic technology bundle that powers Apple Pay alongside EMV, delivering it globally as a payment solution that “just works”. EMV contactless is called NFC Pay in Japan and is slowly being deployed alongside existing FeliCa payment networks so that POS systems and readers “just work” with everything. Hopefully it will all be up and running in time for the 2020 Tokyo Olympics.

QR Codes are not big outside of China and I don’t see conservative markets like Europe or the US taking them up. Japanese QR Code payment platforms are cropping up thick and fast but availability has not translated to actual use. ICT Research & Consulting has released a market report on mobile cashless payments (for ¥95,000) that basically covers 2018 with a web survey of 4,062 participants. The teaser page offers a few interesting free data tidbits. I don’t trust web based surveys as a tool for analyzing a highly regional and fragmented market, but the cash vs cashless chart illustrates exactly what I wrote in the Apple Pay Japan One Year Mark: people use contactless payments like Apple Pay for coffee and train fare but do not use Apple Pay for buying a couch. However the chart offers an interesting point: Japanese people use (plastic) credit cards for larger purchases and cash for smaller ones.

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The Apple Pay Japan Story so far
Japanese IT journalist Junya Suzuki predicted that Apple Pay would be the ‘black ship’ that would revolutionize contactless payments in Japan. Apple Pay turned out to be the match that finally lit the fuse of the huge Japanese contactless transit and payments infrastructure investment and launched it into orbit. The global FeliCa iPhone is a inflection point that many people have yet to recognize, one that will soon provide Apple Pay another growth opportunity in Hong Kong. A year ago I wrote:

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… What used to be ‘some people some of the time’ is quickly transitioning to ‘most people most of the time’.

Stores and businesses interviewed for that post report that contactless digital wallet payments (Apple Pay, Google Pay, Osaifu Keitai) use continued to grow throughout 2018 but nothing is simple or straightforward:

  • Apple Pay Suica continues to drive the Apple Pay story in Japan but is highly regional as initial uptake is tied to commuter passes which are currently restricted to the JR East rail network. Nevertheless Suica issuance continues double digit growth. Japanese customers prefer easy to use prepaid cards, they will always be the gateway to cashless for the majority.
  • Only 30% of iPhone users with Apple Pay Japan capable devices (iPhone 7 and later) use Apple Pay. I suspect Osaifu Keitai and Google Pay uptake is similar or lower.

The upcoming 10% consumption tax increase will offer incentives and tax discounts for cashless purchases. The cash vs cashless trends outlined above are positive signs that change is possible with the right set of incentives and ease of use environment:

  • Plastic will continue to be king with prepaid cards the king of kings. One of the many advantages that digital wallet platforms like Apple Pay have over QR Code platforms is that plastic cards are always there as a last resort physical option. This is very important for many customers, especially the elderly. And they don’t need a battery.
  • Reward point systems and cards need to be digital (such as VAS powered Ponta) that automatically link with the appropriate transactions. Digital wallets only replace physical ones when everything can be matched and loaded on smartphones.

For Apple the key will be getting more Japanese iPhone customers to use Apple Pay by making different service parts work together in new ways that don’t play together well, i.e. the sum must be greater than the total of the parts. Think Rakuten. Rakuten has done an excellent job building an ecosystem of e-commerce, travel reservations and other services that offer members large discounts and points. This approach will pay huge dividends when the 10% consumption tax arrives October 1.

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.