An Introduction to the Cashless Payment Environment of Japan
Cashless payment methods are currently one of the biggest topics in Japan. In addition to the well-established, non-cash options such as credit and debit cards, newer forms of cashless payment, such as transit smart cards, virtual wallets and payment apps utilizing QR codes all fall under this umbrella term.
When it comes to tech-based cashless payment solutions (i.e. mobile payments), new contenders into the market are appearing one after another and Japanese consumers now find themselves with an abundance of methods by which they can make their purchases.
Yet despite the growing array of cashless payment options, compared to neighboring countries, such as South Korea, which boasts a cashless payment usage rate of nearly 90%, and China, a rate of 60%, Japan’s cashless payment usage rate stands out at only 20%.
However, signs of change in this cash-centric society are beginning to show. While the cashless payment rate in the country is still low by global standards, there has been a marked increase in the number of stores and retailers accepting various types of non-cash payments—a big departure from even just a few years ago—and this is having a significant impact on the consumer experience in Japan.
Looking back at the Japanese market over the past ten years, a number of factors, building up slowly over time, have helped contribute to the current landscape concerning cashless payments. These include the growth of ecommerce, the proliferation of smartphones, and the rise in inbound tourism.
The Growth of Ecommerce in Japan
The Japanese did not immediately embrace ecommerce, even at a time when it had become more or less firmly established in western countries. While there are a number of reasons for this, the general trustworthiness of exclusively online stores (i.e. those without a brick and mortar presence) was a major concern early on and, to a certain extent, still continues to be an issue for some wholesalers and customers.
However, despite this initial apprehension, for many Japanese consumers online shopping has become commonplace and the state of ecommerce in Japan now more closely resembles other markets which embraced online shopping much earlier on. While bank wire transfers, convenience store payment, and even cash on delivery (COD) are used more frequently than one might expect for online shopping, ecommerce has still played a significant role in furthering regular usage of credit cards among the Japanese.
Smartphones + eMoney
Smartphones totally disrupted the cellphone market in Japan, which was once noted for its advanced feature phones catered specifically for a Japanese audience—one of the industries the so-called ‘Galapagos Syndrome’ typically refers to. However, despite Japanese cellphones having a precursor to the virtual wallet called osaifu keitai (お財布ケータイ) or ‘cellphone wallet’ years before the first smartphone hit Japanese shores, this method of payment was not widely adopted by the general population—by most accounts it was simply too early for that innovation. It wasn’t until more recently, with the combination of smartphones and transit smart cards, that another significant turning point for cashless payments occurred.
This event was the launch of Apple Pay in Japan, back in 2017, which turned more Japanese consumers—especially younger, more technically savvy ones—onto the idea of the virtual wallet. In the case of Japan, more than the virtual wallet feature of smartphones themselves, it was the compatibility with JR East’s transit smart card/emoney system, Suica, that was the key to gaining more users.
Image source: JR East
For many Japanese, using Suica, or other transit smart cards with eMoney capabilities is an integral part of their everyday life due to their reliance on Japan’s vast public transportation network, of which railways play an important role. With a majority of Japanese accustomed to using transit smart cards for their daily commuting needs as well as quick purchases at vending machines and in-station convenience stores, the combination with the now indispensable smartphone was a perfect match.
The Rise in Tourism
The final factor we attribute to the growth of cashless payments in Japan is the rise in inbound tourism. The tourism boom we are currently experiencing in Japan began in earnest in 2012. In addition to the easing of visa restrictions for tourists from Asian and Southeast Asian countries, the devaluation of the Japanese Yen and the establishment of new low-cost carrier (LCC) routes helped usher in a surge of visitors to the country.
With this dramatic increase in the number of tourists to Japan, which according to the Japanese National Tourism Organization (JNTO) surpassed 31 million visitors in 2018, there was a subsequent need to improve payment infrastructure to accept foreign cards both at ATMs and in stores—as many tourists preferred to use their debit and credit cards like they could in their own countries. 7-Eleven, the number one convenience store chain in Japan, in particular, was a major contributor in making this possible via their ATMs, which were updated to accept a wide variety of foreign-issued cards.
This change, in particular, has been extremely pronounced. It is no longer the case that Japanese people tell those visiting from abroad that they need to bring or exchange cash to Japan, since there is now no shortage of ATMs which can accept non-Japanese cards.
And it didn’t stop at ATMs, an increasing number of retail stores began accepting credit cards as well. As a result of more stores accepting foreign-issued cards to accommodate tourists, Japanese consumers have also benefitted, as they are now able to go cashless at places they previously could not.
What is Hindering Adoption and Usage of Cashless Payments in Japan
While cashless payments in Japan are gaining ground among consumers, a number of obstacles still stand in the way of greater adoption.
Reluctance of Small Businesses and Retailers
First off, high transaction fees for payment processing of cashless options presents a significant hurdle for wider adoption among small businesses and retailers, especially those with low margins.
This is actually an important distinction to make here, because it is not as if the Japanese didn’t have credit cards until recently. In fact, Japanese consumers have on average 3 cards per person.
For the longest time, one of the reasons that usage of non-cash payments, traditionally credit and debit cards, lagged behind other countries such as the US was due to fewer merchants accepting them so they could avoid paying processing fees. After cash, bank wire transfer is often the preferred method for many Japanese businesses, as the fees to make such a transfer are borne by the customer or the person making the payment.
However, if consumer demand for cashless payments continues to grow, more businesses, especially small businesses, may need to acquiesce and start accepting non-cash payments, whether it be credit and debit cards or mobile apps and QR code payments. If they don’t they may risk losing out on both potential customers and revenue.
That being said, while merchants and retailers can play an important role when it comes to advancing the cashless payment agenda, at the heart of the matter is actually the simple fact that for Japanese consumers the current system works well and there is no real reason to change.
Lack of a Compelling Value Proposition
While the previously mentioned factors of ecommerce, smartphones, and tourism have helped to create an environment for non-cash alternatives to begin to be more widely used in Japan, cash is still king.
In the case of Japan, not only has cash been so dominant for so long, but the country’s safety and its existing payments infrastructure have made people comfortable with the status quo—a sentiment that is always a large impediment to change.
In contrast to the Japanese system, in countries like China a different set of circumstances and lack of infrastructure similar to Japan’s made the rise of QR payment services such as Alipay and WeChat Pay possible. This is why the value proposition for QR code payments in the Japanese context is questionable when considering the growing acceptance of credit cards and the already widespread use of transit smart cards.
Too Many Services Leads to Confusion
In addition to the value proposition of mobile payments or QR code payment apps being somewhat questionable for Japanese consumers, the sheer number of companies in this space is making things incredibly confusing.
Below is a graphic that shows, in the upper right hand corner, just a sampling of the QR code payment options currently available in Japan. This is not even a full list and new services are constantly entering the market. In fact, convenience store chains 7-Eleven and Family Mart have plans to launch their own apps in the near future as well.
Image source: Softbank
With essentially no interoperability, and uncertainty about who will be in it for the long haul, the majority of Japanese are not rushing to adopt this payment method. Especially in the case of convenience stores and cafes, two of the places where eMoney is currently used the most, QR codes are actually less convenient and slower than the FeliCa (NFC) technology found in Suica or other transit smart cards.
With Suica, for example, one only needs to briefly tap their phone on a card reader for the transaction to occur. Compare that with QR codes which require opening an app, showing the clerk, and having them scan the QR code—or vice versa; It’s just not as big of an innovation given Japan’s existing cashless payment solutions.
The QR Code Payment Wars
All potential questions regarding QR payments in Japan aside, as the newest entrant to the cashless payment space, there is no shortage of companies who are eager to take this opportunity to enter the market.
Unlike in China, where there are basically two players for QR code payments—WeChat Pay and Alipay—in Japan there are numerous companies in the mobile payments space, which has created an incredibly fragmented and complex market. Two of the more prominent players in the QR code payment app market in Japan are PayPay and LINE Pay. Recently both services have taken an aggressive approach to gaining new users through high-profile campaigns.
PayPay is a QR code based mobile payments app operated by PayPay Corporation, a joint venture from Softbank, Yahoo! Japan, and an Indian company called Paytm. Currently the second most popular QR based solution in Japan, PayPay garnered a great deal of attention—and users—in December 2018 when it announced a 10 billion yen (100 million USD) cash back campaign. It was so well-received, because who doesn’t like a good cash back deal, that they launched a second campaign (poster below).
Image source: PayPay
LINE Pay is a QR code payment service from LINE, the most popular messaging/social media app in Japan. LINE Pay is integrated as part of the LINE app itself. Drawing on its built-in user base of nearly 80 million, LINE seeks to become an even bigger part of Japanese consumers’ lives—the company already offers a number of other services such as in-app shopping and food delivery—by expanding into the mobile payments space. In response to PayPay’s 10 billion yen campaign, LINE Pay responded with a major promotion of their own that offered back 30 billion yen (300 million USD) to those who made purchases with LINE Pay (poster below).
Image source: LINE Pay
Although these two mobile payment services—along with current number one, Rakuten Pay— are leading the pack, they do not command a convincing lead and QR code payments are still far from mainstream.
One of the main drawbacks facing QR code payments is the need to pre-charge money. Having to spread out one’s money among a number of apps seems silly to many Japanese, when they could just use cash, credit, or transit smart cards.
Furthermore, due to there being so many competing systems all vying for market share, QR code mobile payment apps are not universally accepted. Having witnessed firsthand the awkward situation where all of the payment methods EXCEPT the one a customer uses is accepted at a store, and said individual was not carrying cash or credit, new entrants may in fact be doing more to strengthen the argument for the tried and true reliability found in other payment methods.
Growing Number of Advertisements Promoting Cashless Payment In Japan
As mentioned in the beginning of this article, cashless payments encompass not only newer mobile payment apps utilizing QR codes, but also the more familiar cashless options: plastic credit and debit cards.
Thus it should not come as a surprise that given the current environment and the opportunity that cashless payments market represents, banks, credit card companies, and payment processor terminals have begun heavily advertising and promoting various non-cash solutions.
Below we will introduce and analyze a number of advertisements that have come out recently.
Japanese megabank, SMBC, recently released a series of 4 commercials encouraging people to go cashless. Whether this means to sign up for a credit or debit card is not made clear.
The first ad in the series (shown below) was deemed by Japanese netizens to be particularly lacking in taste.
In the commercial a character played by popular Japanese actor, Oguri Shun, asks to borrow a $20 bill from a man in glasses sitting at a bar. Upon receiving the money Oguri’s character then proceeds to question whom the $20 bill now belongs to, seeing as it’s now in his possession.
At best its attempt at being philosophical fell flat. But to most people it simply came off as a negative ad that brings to mind a schoolyard bully stealing someone’s lunch money. In other words, alluding to money being swindled from someone might not have been the best approach for a bank to take.
Another reason the ad wasn’t all that well-received is its messaging which attempts to question the security and credibility of cash itself, hence the name of the campaign, “Thinking Man”. This message does not really resonate with the reality most Japanese people know—a society where one can carry large amounts of cash without worry of theft—thus the commercial missed its mark there as well.
Finally, to claim that cashless payments are inherently safer is also debatable. Any payment method carries certain risks as well as pros and cons. When it comes to cards, non-liability statements in terms and agreements, can make this argument more flawed than card issuers would have you imagine.
The one aspect of this campaign that was on-target, however, is the outdoor ads.
After watching the commercials, the campaign poster (below) imploring people to “Have a good cashless,” is infinitely preferable.
Image source: SMBC
Within the context of the Japanese market (i.e. a non-English speaking audience) these ads are effective because of the simple message that could best be translated as saying, “Hey, go cashless and the money is in your phone!”
Visa has also released a campaign promoting its cards in Japan featuring Japanese-American surfer, Kanoa Igarashi, that encourages consumers to “ride the cashless wave.”
In the commercial (screenshots below), after shredding some waves made up of Visa cards, the scene changes and Igarashi confidently walks up to the register of a shop proudly announcing his intention to pay with Visa.
Image source: Visa
Image source: Visa
They’ll not be winning any Cannes Lions or Golden Pencils for this effort, but the overall media strategy is solid—we have seen the campaign in various mediums and on a number of different platforms—and the OOH placements, especially the billboard at the Shibuya scramble crossing, have been excellently chosen.
Furthermore, the campaign also stands to be effective because not only is cashless trending right now—as the ad copy itself recognizes—but with the Olympics right around the corner and VISA being a major sponsor brand awareness will be extremely high.
Airpay, a payment processing terminal developed by Recruit, does the best job out of the three campaigns promoting cashless payments with their series of commercial spots featuring actor, Odagiri Joe.
Image source: Recruit
The first ad (shown below) features Odagiri as a bartender whose idol, fictional singer “David Jaguar,” just happens to enter his establishment. When the man in the suit asks, in broken Japanese, if the bar accepts cards Odagiri replies, “We only accept cash.” The group immediately turns around and walks straight to the izakaya right next door which is more than happy to accommodate them.
The rest of the ads are all variations of this scenario, and all successfully provide and showcase a valid reason for different kinds of small businesses to offer cashless payment options, in this case credit cards—although the terminal also accepts emoney and QR codes.
The messaging, aimed at small business owners, is clear: some consumers, like the growing number of people who don’t carry much cash on them, will choose a restaurant, shop, or store based on whether or not they can use cards; your business is missing out on things. It’s as simple as that, and the ad is incredibly straightforward with the benefit for its intended audience.
What Might Help Spur Greater Adoption of Cashless Payment Methods In Japan
The Japanese government has made clear its intentions to promote cashless payments to lessen the costs associated with printing and managing physical currency such as bills and coins. The Abe administration has set a goal of a 40% cashless rate by 2025.
How realistic this goal actually might be is up for debate.
Efforts to encourage further adoption of cashless payment from the government so far do not seem likely to yield results on their own, and tie ups with failed campaigns such as the often criticized “Premium Friday” (an attempt to get businesses to let workers go home early one Friday a month), simply highlight the government’s lack of ability to influence behavior without any real legislation.
Image source: Payments JAPAN
However, a planned increase in Japan’s consumption tax, from 8% to 10% this coming October, may provide a reason to those who don’t currently use cashless payments to reconsider their relation to cash.
The Abe administration is considering offering rebates of up to 5% for purchases made with cashless payments. These rebates will be accumulated as “points,” as opposed to cash back, but regardless of what shape this rebate takes, being able to save money despite a hike in the VAT would provide a good incentive for many Japanese consumers to jump on the cashless bandwagon.
But even more than a rebate, what could steer more people away from cash is something we all experience on a recurring basis: bills.
Paper bills, whether it be utilities, credit card statements, or any number of possibilities, can be used to pay at convenience stores, banks, post offices, etc. However, they are increasingly NOT free and often incur fees of a few hundred yen per paper or statement. As a result, more people are opting to be billed via their credit card, if available, or automatic bank withdrawal. In other words, our hands are being forced to move towards cashless payments.
A few hundred yen per bill payed out over the course of an entire year, is not exactly insignificant and is enough reason for many to consider not using cash for this purpose. When something as basic and frequent as bills are paid by non-cash options, it has the potential to make people consider not paying by cash for other things as well.
Cashless Payment in Japan: A Time of Transition
At the end of the day, we are currently in a transitionary period when it comes to cashless payment in Japan.
While cashless payment usage in Japan has increased, cash still rules and tech-based solutions are not nearly as widely used as physical cards and smart transit cards.
But even when it comes to credit cards, while online shopping definitely has helped noticeably increase their usage, a multitude of payment options for online shopping are still accepted in Japan. For example, besides credit or debit, you can pay by bank wire transfer or cash-on-delivery (COD). Not to mention, when shopping on some sites, such as Amazon Japan, you can even ship to a specified convenience store (usually one near your home) and at the store use a touchscreen kiosk to print out a paper slip with a barcode that allows you to pay at the register and receive your packages.
While transit smart cards such as JR East’s Suica are widely used by those living in the heavily populated Kanto region of Japan, of which Tokyo is a part of, in areas outside of Japan’s major cities and metropolitan areas they are far less relevant to consumers. Furthermore, while this form of eMoney is more popular among people in their teens than credit cards—which is actually more a reflection of the fact that teens in Japan rarely have credit cards—for all other demographics, credit card is solidly in the number two position after cash.
Finally, as for mobile payments, younger Japanese, especially those already in the workforce, tend to be more likely to use smartphone-based payment systems and they are leading the way when it comes to QR code payments. But the usage of mobile payment apps among older Japanese is unlikely to increase anytime soon. With the rapidly graying population to contend with, there are significant demographic hurdles for QR code payments to overcome in Japan.
Despite the recent activity in the cashless payment space, it is unlikely that Japan will ditch cash any time soon. The reasons range from the cultural—the chances of theft or robbery are very low and even deposits of nearly $10,000 USD in cash can be made in ATMs—to the practical, currently one-third of Japanese are over the age of 60 and change is exceptionally hard for this demographic.
As of right now, Japanese customers have more options than ever to go cashless, but credit cards and transit smart cards (including ones connected to virtual wallets) are proving to be more than sufficient for the overwhelming majority of Japanese.
For all the hype that QR code payments have generated of late, the fact is credit cards are still the most widely used cashless payment method. Although mobile payment apps are used more frequently than debit cards, their usage is still dwarfed by cash, credit, and eMoney/transit smart cards.
Currently, no single mobile payment solution on the market has really made a convincing argument for supremacy among Japanese consumers. In fact the fragmented market makes it difficult for users and merchants alike to adopt these newer cashless payment methods. However, with their respective ecosystems of connected products and services, large corporations and established players, like Rakuten, Softbank, Yahoo! Japan, or LINE, may be the only ones left in the QR code payments space once the dust settles.
Physical retailers, who face increasing pressure into accepting more non-cash payment options, would probably be best served with QR payments like those being offered by LINE and PayPay, due to the lower fees compared to traditional credit card processors. However, whether or not QR is here to stay in Japan is up for debate given Japan’s pre-existing infrastructure that makes the value proposition of QR code payments less practical.
Although the Japanese Government is increasingly calling for wider use of cashless payments, regardless of the shape or form this takes, it is clear that there are still not enough incentives in place for a pronounced move towards a cashless society in this country.
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