Return of the Secure Element Wars?

Visa has been phasing out payWave on SIM cards in Japan and other countries because the secure element wars are over and the SIM mafia didn’t win. Unfortunately nobody gave the news to INCIR, yet another FinTech startup in Japan (founded by Singapore startup Gooute) with yet another payment platform idea: instead of selling NFC A/B SIM cards, let’s sell NFC A/B microSD cards for cheap shit Android phones and call it INCIR WALLET.

This might sound like a viable business plan for India or China but it doesn’t sound like a good idea for Japan where:

Good luck with that.

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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.

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.

Apple Pay Japan Market Info Update December 2018

The Bank of Japan posted presentation material from the 7th FinTech Forum held November 30. The Rakuten presentation has some contactless payment market data for Japan that is worth a look.

Year over year contactless payments use in the first slide basically covers the same period of the MMD Labo report but with different questions. The Rakuten data shows Rakuten Pay in the lead, naturally, at 15.2% and Apple Pay in 2nd place at 12.9%. The MMD numbers showed Rakuten Pay at 13% and Apple Pay at 20%. Google Pay only added Japanese payment support in May 2018 so the full impact will take time to play out, the 30% Osaifu Keitai use figure from the MMD report suggests a possible outcome. 

As I explained in the earlier post, Apple Pay use is highly regional and tied to Suica compatible transit routes. In major metropolitan areas Apple Pay use is higher than Rakuten but Rakuten has done a good job building an ecosystem of e-commerce, travel reservations and other services that offer members large discounts and points. That’s the reason behind the robust growth from 3.4% and the larger nationwide average use figure.

Apple Pay Suica is the entry point for Apple Pay use, the more incentives that customers have to use Suica the faster Apple Pay use in Japan will grow. Sachiko Watatani pointed out that only 27% of Apple Pay Japan capable device users actually use Apple Pay, that represents a lot of potential users sitting on the fence. The Rakuten Pay growth rate shows that points and discounts are great incentives but Apple Pay Suica, convenient as it is, doesn’t offer that. At least not without going to the trouble of getting the right Apple Pay credit cards for the right points. And even then, as setting up and using the JRE POINT app makes clear, it’s not user friendly.

The next big opportunity for Apple Pay Suica growth is ‘Super Suica’ that will unite transit cards, commuter passes and various transit point systems in a single format for plastic and mobile. Unfortunately this doesn’t happen until April 2021. Until then Apple Pay Japan needs to add the other e-money prepaid cards (WAON, nanaco, Rakuten Edy) and as many point system reward cards to Wallet as possible to keep growing. Not only that but also make them work better together than they do on their own. Think PONTA card with the kinks ironed out.

SoftBank Outage Outs QR Code Weakness

The December 6 Ericsson induced SoftBank network outage could not have come at a worse time for SoftBank. The outage took down voice, data and SoftBank WiFi hot spots along with the just launched SoftBank/Yahoo Japan QR Code PayPay platform which was already off to a rocky start. Line Pay experienced serious problems as well.

Many SoftBank iPhone users on Twitter assumed Apple Pay Suica wouldn’t work without a network connection and they would be stranded, but this was not the case, Apple Pay works fine without a network connection. As Apple says in Using Suica on iPhone or Apple Watch in Japan:

Your iPhone or Apple Watch must be turned on, but it doesn’t have to be connected to a network. You don’t need to wake or unlock your device or open an app when you enter or exit the ticket gates. You’ll see Done and a checkmark on the display.

A network connection is necessary only when recharging Suica with Apple Pay, but not for an old fashioned cash recharge which can be done at any convenience store checkout, JR station smart charge kiosk or 7-Eleven ATM.

The network outage clearly reaffirmed the strengths of stored value cards like Suica: payment transaction processing is local and works without a network, stored value money and adding cash works anywhere, anytime. The outage also highlighted the perpetual QR Code weak point, they don’t work when networks are down.

There is also an important but overlooked advantage in this age of digital wallets, Suica is also a plastic card, the ultimate portable hardware backup in case of emergency or for elderly people who don’t like using mobile phones for anything other than, you know, talking.

The lack of a physical backup is what ultimately kills QR Codes as the front end transit payment solution. QR Codes will always work best in the role they are suited for: a backup role for adding money to smart cards or one-off ticket/coupons when neither time nor speed is a concern.