Tokyo Cashless 2020: cashless transaction fees and platforms (Updated)

The tempest in a teacup over Marukame dropping QR Code cashless payments at some restaurant locations turned out to be parent company Toridoll Holdings updating their POS system. QR Code support will return with the same cashless payment lineup supported at all locations.

The brouhaha is a good opportunity to catch up with an issue I have been meaning to blog about for some time: cashless transaction fees. The ever reliable Junya Suzuki did everybody a favor reporting the Toridoll situation with his usual levelheaded expertise. He also puts out a wonderful series called ‘Pay Attention’ that covers Japanese cashless and payment issues with a unique on the ground reporting style.

In a recent installment, “The Cashless Transaction fee paradox” he discusses the complex Japanese cashless transaction fee landscape. Actually it’s complex everywhere because listed transaction fees are not necessarily what merchants end up paying. It’s an ever changing game of negotiation. And it’s a shell game of POS equipment rentals, extra software services and consumable gotchas like paper receipt printer rolls.

As Suzuki san points out there are basic transaction infrastructure processing costs associated with the NTT Data ‘Credit and Finance Information Switching System’ (CAFIS) backbone and gateway. There are newer players such as the SMBC, Visa Japan, GMO co-venture stera payment network that bypass CAFIS altogether. NTT DATA announced a new lower CAFIS fee structure today that reduces processing fees for small transactions and counters the stera move. The lower CAFIS fees should benefit a lot of smaller payment network players.

Let’s make a deal
The real issue is transaction fees. AirPay and other middle range mobile based POS system players like Rakuten Pay and J-Mups all offer similar transactions fees that range between 3.24~3.74%. As Suzuki san explains, this works out to be roughly 0.5~1.0% higher than a cashless transaction in America using Square.

Those fees are not what all merchants end up paying, but real rates are kept secret. Even Suzuki san, who has comprehensively covered the cashless scene for over 10 years, has no hard numbers, just ballpark estimates. In general 3~5% for goods, 5~8% for services. Low margin but large convenience store chains, i.e. merchants with clout, are aggressive and negotiate lower transactions fees with their large sale volumes.

Super low margin businesses like family owned supermarkets get caught in a catch-22 situation where the more cashless is used, the more that transaction fees eat into their margins (razor thin 1% margins for smaller chains). It’s fascinating stuff and you should read the original Japanese article if you have the ability or translation software.

This complexity makes me skeptical of article claims like, “Apple’s arrogance angers Korean card issuers.” The reality is plain old fee negotiation, by any means necessary, to get the upper hand. I suspect the fact that only 30,000 or so Korean merchants out of some 2.8 million are equipped with NFC readers, is the bigger reason for Apple Pay Korea not launching. Nobody wants to buy new POS hardware just for Apple Pay, so it’s back to the negotiation table.

stera all-in-one cashless platform
The stera terminal cashless platform is launching July 6. FNN has a nice overview video of stera and what it hopes to accomplish. All major protocols (EMV, FeliCa, QR) and payment networks are supported in an all-in-one reader. The difference between stera other mid-market solutions is the integration of hardware and software frontend all the way to the GMO internet based transaction backbone and gateway. SMBC and Visa Japan will certainly use stera to promote EMV and Visa Touch, but it’s a smart solution that runs on Android OS so it can be updated and tailored for multiple POS systems. It will be interesting to see what the impact of stera is and how CAFIS based payment solution providers compete with it.

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QR Apple Pay Cards for iOS 14 Wallet?

UPDATE: No WWDC20 mention of AliPay for Apple Pay Wallet, no sign of it in iOS 14, details here


The recent iOS 14 feature leak report from 9to5 Mac closed with an interesting line, “Another change includes AliPay support for Apple Pay with iOS 14.” A reader steered me to a set of images posted to the Octopus on Apple Pay thread on the LIHKG site.

The images suggest a few possible scenarios for iOS 14 Wallet:

  • QR Code payment system players have a PassKit API method to add a ‘QR Card’ to Wallet.
  • Wallet QR Cards set as the main card directly invoked with a side button double-click for Face/Touch ID authentication and dynamic QR Code payment generation without an app.
  • Direct static QR Code reads with Apple Pay payment.

It makes sense that Apple wants to encourage major Chinese QR Code players to join the ranks of top tier Wallet cards like any Apple Pay credit card and not be stuck in an app. Direct Apple Pay Wallet QR integration makes things more convenient for iPhone QR Code users. The Wallet card metaphor is rather strange for QR Codes but that is what the Wallet UI is built around and it differentiates cards from passes. Apple already refers to Apple Pay credit/debit cards as ‘Payment Cards’, QR Code cards will be just another Apple Pay Payment card.

Questions: Will it work offline like Wallet NFC cards? Will Wallet QR Code Payment cards require QR Code PassKit Certificates with NDA similar to NFC PassKit Certificates and will they be renamed Secure Element PassKit Certificates? Is this what the new “PKSecureElementPass” PassKit framework addition in iOS 13.4 is for (in addition to CarKey)?

We’ll find out details online this summer at WWDC20.

JR East Shinkansen eTicket Service Launch (Updated)

March 14 marked the end of Mobile Suica Shinkansen ticketing in Suica App and the start of a new open IC transit card eTicket Shinkansen service. It doesn’t have name. It’s just one of many ticket options available in the good old JR East ‘Eki-net’ (Station-net) online ticket reservation service, well known and not loved by many. A Japanese friend said it best, “You would think that a top tier Japanese company like JR East with many smart employees would create something better than Eki-net or pay somebody to do so.”

The problem is not that Eki-net doesn’t work. It works, but throwing everything new (IC transit card eTickets) and old (email tickets and paper tickets) in same Eki-net shoebox is a cluttered unwieldy package, a confusing and messy UI not nearly as convenient as JR East wants us to believe. Instead of a sleek new Shinkansen eTicket service, we get the same stodgy paper ticket service with a new hard to find eTicket option.

JR East would have been better off making a clean break by rebranding the new eTickets as a completely different service with a new spiffy name and separate multi-lingual app, just like JR Central’s SmartEX with the addition of new eTicket options over time. The less is more SmartEX approach focuses exclusively on Shinkansen eTickets and eliminates local line travel options because those are covered by Suica/ICOCA/Toica, etc. Eki-net on the other hand makes a big deal of ‘big trip’ options covering everything from Shinkansen and regular express trains to tour packages and car rentals.

The Eki-net approach does have one advantage over the 2-tier JR Central/JR West SmartEX (free membership with small discounts) and EX-Press Reserve (annual membership fee/special IC card/bigger discounts): Eki-net is ‘flat’ with free membership, offering the same discounts to all members in one service. Shinkansen eTickets are only available at launch from the online Eki-net site. I recommend the more streamlined smartphone online browser version. JR East has announced an updated Eki-net App for App Store/Google Play with eTicket support that should be coming March 21 (now postponed to an unknown future date). The new eTicket service is also available to JR West e5489 ticket reservation service members as JR West shares Hokuriku Shinkansen operations with JR East.

The end of Mobile Suica eTickets in Suica App means a mandatory app update that strips out the retired service. Users must update to the new 2.6 version by March 18. After this date older Suica App versions stop working. The migration from the old Mobile Suica Shinkansen eTicket service has good and bad points:

Good Points
JR East Shinkansen eTickets are compatible with all major transit IC cards. This finally opens JR East operated Shinkansen lines to plastic and mobile transit cards, the old system was limited to Mobile Suica. An interesting new twist is that up to 6 transit IC cards can be attached to one account for family or group travel.

Bad Points
The migration from the Mobile Suica Shinkansen/Suica App system means no more Suica App/Apple Pay in-app purchases, you must register an Eki-Net account, yes another JR East service, and a credit card. The current Eki-net system is designed around the account registered credit card for paper ticket pickup at station kiosks using the card PIN code, this effectively eliminates Apple Pay/Google Pay as an in-app purchase choice. Last but not least the new Shinkansen eTicket service is Japanese language only.

New IC/QR gates at JR Takanawa Gateway Station opening March 14

Shinkansen eTickets are only the first step in a long term migration away from mag strip paper tickets. Mag strip ticket gates are more expensive than transit gates with NFC or QR readers with higher maintenance costs, there is also the increasing cost of recycling the special mag strip paper.

Paper tickets for all transit will remain a cash purchase at station kiosks, as they must, these will be QR codes instead of mag strip. The tricky parts are: 1) how much ticketing can be ported over to the transit IC card side 2) what local transit fare tiers apply to QR. Since Shinkansen eTickets are simply one time purchase options attached to a transit IC card number in the cloud, theoretically any purchased option can be attached to a transit IC card number. Local transit has fare tier for cash tickets and a less expensive one for transit IC cards.

I see local transit cash fare tiers staying in place for station kiosk purchased QR paper tickets, but I don’t see smartphone app QR Codes for one time local transit. The cheaper fare tier incentive for reusable transit IC cards will likely remain in place. This leaves smartphone app QR Codes for express trains, limited use tourist/season/campaign passes and group travel.

Mag strip tickets have served us very well for the past 30 years. The final migration to Mobile/NFC/QR will be interesting but I’ll miss those marvelously mechanical ticket gates from Omron.


UPDATE
Eki-net app v1.2 is out and supports Shinkansen eTicket reservations. The reservations process is straight forward and similar to SmartEX: choose the Shinkansen line, set stations points+date+time, select a Shinkansen train. The next step is departs from SmartEx because the Eki-net eTicket service supports up to 6 transit IC cards (plastic, Mobile Suica, Mobile PASMO), you select the transit IC card to attach the eTicket. The final step is ticket purchase with the Eki-net account registered credit card. A big difference with the old Suica App Shinkansen service is that Apple Pay in-app purchases are no longer supported.

I hope that JR East restores Apple Pay in-app purchase at some point. Setting up a new account and registering cards for every new JR East service, (Mobile Suica, JRE POINT, Eki-net, etc.) is also a huge pain and practically impossible for occasional users. Sign in with Apple ID and Apple Pay support for on the spot purchases is a much better deal for people who don’t want to juggle multiple accounts, passwords and credit cards. Last but not least Eki-net is Japanese language only, and account creation/management requires a trip to the awful Eki-net web site. Please fix this JR East, with so few people riding trains right now you have the free time to do it.

5G Contactless Payments Part 1: Fast QR vs Ultra Wide Band enhanced FeliCa and MIFARE

Payment empire players envision a brave new world of 5G enhanced contactless payment solutions, seen in recent moves by JR East and other major Japanese transit companies to replace expensive legacy mag strip ticketing with lower cost QR Code ticketing. 5G flavored QR Code and ‘Touchless’ Ultra Wide Band (UWB) Mobile FeliCa solutions were also on display at last months Docomo Open House 2020. How can it be that Docomo is developing Ultra Wide Band Mobile FeliCa and QR Code solutions?

The endless push pull of ‘this contactless payment works great for me’ that drives somebody else crazy is endless fascinating. We have more choices than ever: digital wallets, plastic cards, face recognition, NFC, QR Codes, etc. 5G and UWB promise to mix things up even more.

Ultra Wide Band enhanced FeliCa and MIFARE Apple CarKey?
The evolution of EMV, FeliCa, MIFARE and other similar protocols as they transition from plastic smartcards to digital wallets devices opens up opportunities to include other radio technologies like Ultra Wide Band and Bluetooth in addition to NFC. Ultra Wide Band Touchless FeliCa on display at the Docomo Open House was all about cars, not Touchless walkthrough transit gates that will appear in a few years.

Touchless FeliCa makes great sense as a ‘NFC car key’ that utilizes UWB for operation at greater distance and better accuracy when needed. Touchless makes even more sense as a ‘keep phone in pocket’ touchless payment method for drive thru purchases. The addition of UWB into the mix makes smartcard protocols much more useful than just NFC. I would certainly welcome a smartphone UWB powered Touchless FeliCa replacement that ditches the need for automobile ETC cards and readers on Japanese expressways.

How UWB enhanced FeliCa would fit with Apple’s new CarKey feature said to be coming with iOS 13.4 is unknown but iPhone already supports FeliCa. UWB touchless support for iPhone 11 and later models is a logical evolution. Sony and Docomo are developing the technology with NXP which certainly means that MIFARE will also support UWB enhancements. The long history of FeliCa and MIFARE as keycard solution providers is a natural fit with Apple CarKey. NFC is the only protocol that has been discovered in iOS 13.4 beta CarKey framework so far but I would not be surprised if UWB code references turn up at some point.

5G Cloud vs Local Processing
The Docomo Open House also showcased a QR Code transit gate with 200 millisecond (ms) transaction processing but the real star was the speed of 5G. 5G powered cloud processing promises to upend the current advantage of locally processed prepaid stored value cards…cards like Suica.

The basic promise of 5G is that IT system designers finally achieve a nirvana of everywhere, always available, big pipe central processing without wires, the big cloud. The original Suica card design effort back in the 1980’s had to leverage local processing because central processing wasn’t up to the task of handling massive transaction volumes of a Tokyo-Shinjuku-Ikebukuro station at peak rush hour. This is why Suica cards are stored value by design, the FeliCa technology behind the card design delivers 200 ms and faster transaction times for local processing at the transit gate. What happens when 5G promises, in theory, to deliver 200 ms central processing?

Kill mag strip paper tickets first then Suica?
As Junya Suzuki points out in his article ‘Is QR the future of Suica?‘, transit QR Codes on the complex Japanese transit network only need be a unique local passkey with everything else, verification, transaction, etc., done in the 5G cloud. The same concept applies for facial recognition systems where the registered face is the unique local passkey. With the power and speed of 5G, Suzuki san argues that the need for Suica-like local processing falls away. In his scenario all Suica needs to be is a unique passkey that can lose stored value functions.

I understand his point, Suzuki san comes from an IT system background, as a journalist he has covered JP transit payment system developments for a long time. For low traffic stations a Suica-lite 5G cloud based network makes sense and does away with the expensive hard wired transit gates. Just one year ago JR East said they are building a cloud networked Suica to cover all non-Suica areas.

However the old Tokyo-Shinjuku-Ikebukuro station peak rush hour central processing crunch problem remains. I’m not convinced super fast 5G enabled cloud processing is going to solve that problem any better or cheaper than Suica does now, and reliability is a complete unknown. We also have the next generation ‘Super Suica’ format and FeliCa OS coming in the next 12 months, the design goals here include a flexible, modular cloud friendly architecture and lower costs. Next generation Suica coupled with a flexible local processing~cloud processing backend may be a compelling solution that finally delivers a practical inexpensive Suica infrastructure to the little end of the line station which only gets a few trains or buses a day.

New JR East Suica / QR Code transit gate for Takanawa Gateway station

JR East, Hanshin and Osaka Metro are testing QR Codes and facial recognition ID ticketing to replace mag strip paper. As Junya Suzuki points out, mechanical paper ticket transit gates are more expensive to install and maintain than IC transit card gates but the real expense is mag strip paper recycling costs. Mundane but not surprising. The more important long term question is this: do transit companies keep the current more expensive cash base paper ticket fare vs less expensive IC card fare structures in place, or do away with it when QR Codes replace mag strip tickets? I don’t think we’ll see an answer to that question for a few years.

There is no doubt that 5G will enable new payment possibilities, and a lot of debate. But I don’t see 5G cloud completely upending and replacing the need for local processing and stored value cards. Both are evolving, both have their place. It doesn’t have to be, and should not be a one size fits all solution. Each approach has strengths that can be complementary and build a better stronger system.

For me it comes down to one simple thing. My Apple Watch can be buried under multiple sleeve layers but Apple Pay Suica works great going through rush hour transit gates every time. It’s the best argument for UWB enhanced FeliCa and MIFARE touchless transit gates and stored value local processing I can think of. QR can never match that, nor can face recognition…think face masks during an epidemic or pollen season.

In the next installment I hope to explore 5G and the evolution of digital wallets.