QR Codes and Big Data

After the 7pay QR Code launch and security meltdown, Twitter is full of Japanese tweets asking ‘why do we need QR when we already have fast secure FeliCa services like Apple Pay Suica?’

It’s a very good question. Finding the reasons behind the manufactured QR Code in Japan mania is not easy. On the surface it looks like a strange retro attempt to replicate the success of AliPay and WeChat Pay in the Japanese market and lower operating costs are certainly part of the allure. A close examination of actual QR use boils down to LinePay and using LinePay points to buy stuff on the Line Store (stickers, coins, etc.).

So why is 7-Eleven aiming to trash their FeliCa nanaco card and push their user base to 7pay QR, and why are all the other convenience store chains doing the same? IT journalist Junya Suzuki, Japan’s top reporter covering all things cashless has posted a great explanation: Big Data.

If you have lived in Japan for any length of time you are probably familiar with the T-Point card. A few years ago Doutor, FamilyMart and many other business were pushing T-Points. Now they are not. Doutor dropped T-Point for Docomo d POINT in June, and the arrival of QR FamiPay is FamilyMart kissing T-Point goodbye.

As Suzuki san points out, from the convenience store point of view, the problem with customers using Suica, nanaco or T-Point is that they don’t have personal data attached to them. Anybody can buy a Suica card at a JR station or a nanaco card at 7-Eleven and use it on the spot. The only piece of data going into the system is the card id#. They can’t get your name, phone, etc. and profile the customer.

With QR Code apps and an account signup/sign in, QR Code platform operators get the information they want to profile customers and plug it into Big Data. The customer ends up being the product. It’s not about offering better service or technology. How useful QR Code payment apps are in the long run, or how much they actually end up being used, is anybody’s guess.

Unfortunately the current messy situation is only going to get worse as Japanese bank QR Code platforms start launching this fall. Smartphone users will have to find their own way through a growing maze of QR payment apps and different UIs, each one vying for attention with campaign booty. The freebie startup campaigns will eventually end, The inevitable consolidation process will be painful. There is no doubt however that the 7pay startup fiasco is a tipping point, the reevaluation process has begun.

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Tweets of the Day: QR Code Tipping Point

I think we are witnessing the QR Code tipping point in Japan. After yesterday’s 7pay ‘latest in a series of QR Code payment system security meltdowns’, IT journalist Tsutsumu Ishikawa tweeted, “It’s time to promote FeliCa for Japanese cashless.” Ishikawa san also retweeted Twitter user S: “QR is so over,” who goes on to say that the low bar QR Code entry point only resulted in incompetent players setting up payments systems. The resulting mess and confusion ends up destroying the very cashless migration momentum the industry worked hard to create.

Mobile FeliCa has a 15 year track record of fast secure transactions that just work. Ishikawa san is right, the Japanese payments industry needs to leave any remaining Galapagos syndrome nonsense (which was a setup btw) in the past and focus on promoting FeliCa again. Apple Pay is a global NFC platform with FeliCa support as a given on every iPhone and Apple Watch it sells. Google Pay supports FeliCa too. For Apple and Google, it’s just one NFC thing. That’s all the support and encouragement necessary for the industry to march confidently into the future and ignore the QR Code sideshow.

Suica Tops Contactless Use in Tokyo Area

Another market survey, another few data points. MoneyZine writers Hideyuki Kato and Isamu Saito report some interesting results of 2 different cashless use surveys. As I reported a year ago, Apple Pay has brought a lot of changes to the Japanese payments market but it’s hard to make sense of it due to highly regional preferences: Suica is king in the Kanto area, ICOCA in the Kansai, and so on.

The 1st data point is a survey from Yumenomachi that ranks the different cashless payment methods:

  • Credit cards: 88.4%
  • Transit cards: 49.7%
  • Apple Pay/Google Pay/Osaifu Keitai: 35.4%
  • Prepaid Reward Cards (nanaco, WAON, Edy): 31.7%
  • QR Codes (Line Pay, PayPay, etc): 25.6%

The 2nd data point is a survey from One Compath. This survey reports 56% of the respondents as using cashless more than a year ago, with slightly different ranking:

  • Credit cards: 71.4%
  • Transit cards: 31.7%
  • Prepaid Reward Cards (nanaco, WAON, Edy): 53.0%

The 3rd data point from the same One Compath survey is very interesting but not surprising. It ranks prepaid card use separately for transit and reward cards by prefecture. Transit card use for payments in the Kanto Area (Tokyo, Kanagawa, Chiba, Saitama) is 85%, while prepaid reward cards are the overall winner on a national basis. This is because of the reach of AEON supermarkets and convenience stores in rural areas where people don’t use transit cards or the local transit cards do not support purchases. The next generation Super Suica format is aimed specifically at incorporating these small rural area transit cards so they can be used anywhere as Suica.

One take away is that in the Kanto area Suica is easily the most used contactless card at checkout (Suica issuance is twice that of PASMO). Credit cards lead in cashless, but are still mostly swipe or Chip and PIN at checkout. When prepaid cards are totaled together, credit card and prepaid card use is almost equal. The surveys do not look at average purchase amounts for the different cashless methods. I suspect that Suica and other prepaid card use leads for smaller purchases while credit cards are used for larger purchase items.

We also know from a previous survey by IT journalist Sachiko Watanabe that most iPhone users do not use Apple Pay:

  • Only 27% of iPhone users who can use Apple Pay use it
  • 50% don’t use Apple Pay but are interested in using it
  • 22% don’t use Apple Pay and don’t care about using it

These numbers jive with the 35.4% digital wallet use figure in data point 1. The short summary here is that there is still plenty of opportunity for Apple Pay to grow in the Japanese market, and the Super Suica format in 2021 has the potential to break down the regionality and shake up the market.

Security weaknesses cool China QR code use

Not all Japanese IT journalists are gaga over QR codes. Takefumi Makino writes on ASCII that QR codes really don’t make much business sense given that Japan already has a massive NFC/FeliCa contactless payment infrastructure in place. It’s so massive that QR payment players Line Pay and PayPay have said they are considering FeliCa cards for their respective payment networks. It’s all about accessing the mature population segment (60 and above) who hold the family purse strings but don’t like using smartphones and apps to pay for things, but they will use plastic.

As Makino san points out, the most attractive aspect of QR is the low cost that cleverly leverages the existing mobile and internet/cloud infrastructure: any store owner with a smartphone can offer contactless payments. Throw in lots of reward point goodies and you have a nice payment platform lock-in. In countries without a long history of credit card use like China and India, low overhead QR codes are an attractive ‘launchpad’ to bigger, better things. But there are well known QR code security weak points.

In China ‘static’ QR codes used for paying parking ticket fines quickly became a scam problem. QR players migrated to one time use/one minute window ‘dynamic’ QR codes, but even those codes have been hijacked from customers waiting in line with smartphone out and QR code ready:

The latest trend in China is paying for things ‘in-app’ or using face recognition technology, both of which have nothing to do QR. Makino san argues that QR is really just a convenient startup technology for contactless payment systems that migrate to better and more secure technologies. I think it is a valid point. Competing payment system technologies like FeliCa/Suica will soon leverage mobile and cloud infrastructure that could eliminate the QR cost advantage. It will be fascinating to see how the QR payment startups in Japan pan out over time.

Yes, QR Codes Suck for Transit

Here are QR Codes in action at subway transit gates in Beijing.

And here is Suica in action.

Working Backwards from the User

The Suica development starting point was a user problem with magnetic card commuter passes. Old style paper passes were visually inspected at gates and could stay ‘in-wallet’ with a clear plastic opening. Magnetic card commuter passes had to be removed from the wallet and feed through the gate reader. Engineers wanted to recapture the simplicity of paper passes with IC cards.

The development process involved a lot or trail and error but Suica turned out not only to be convenient and fast but also user friendly in the way that people use things, in-wallet or otherwise. This is a classic Steve Jobs design principle: start with the user experience and work backwards to the technology.

Smartphones replicate the in-wallet experience as ‘Express Cards’ on digital wallet platforms like Apple Pay and Google Pay. The user pulls out the device and holds it to the reader. No unlocking or Touch ID/Face ID required.

QR Codes and EMV contactless on smartphones share the same transit problem of old magnetic card passes: they are not ‘in-wallet’. Devices have to be unlocked to open an app or perform a biometric authentication. This problem is compounded by poorly designed transit gate QR and EMV readers that end up forcing users to adapt to the technology and it slows everything way down. This is a design failure that would never meet the requirements of Tokyo stations where a gate has to clear 60 people a minute.

What’s fascinating to me is the assumption by some people in China, Hong Kong and even Japan that the QR Code success in China automatically qualifies it as a global payment standard regardless of the technology and business models already in place. This doesn’t ring true to me, there is something else going on.

China for example has put a lot effort into creating and promoting the China T-Union transit card standard which can be added to MI Pay, Apple Pay and Huawei Pay. Nevertheless there are not many people using China T-Union in the video. The Japanese tweet comments say that recharging China T-Union cards are not very convenient and do not offer the point goodies that AliPay and WeChat Pay do. Bingo. Is it really is that simple?

Technologies that have viable business models attached to them work better in the long run. FeliCa fares better than China T-Union or CEPAS (EZ-Link) because a transit platform like Suica does better job of attaching services and point goodies on the back end. Perhaps if China T-Union had a better business model that offered more recharge reward goodies and services on the backend to compete with QR ecosystems people might use it more, unfortunately business promotion is hard for government run transit authorities.