The reality of the Japanese retail payments sector

At the 14th annual Digital Money Forum this week, Michael Salmony from Equens gave a talk about the reality of retail payments in Japan. Or, as he called it, his holiday snaps! He showed some excellent photos and a video to help us to understand what is really going on. We all know that electronic money of one form and another is huge in Japan, so that’s a good starting point for trying to figure out where they are and what it means for other markets.

Most of the population uses eMoney on a daily basis with mobile FeliCa RFID wallet phones to purchase train/bus fare, a beverage at a vending machine, a meal at a local restaurant or a snack at a convenience store. Many local business and convenience stores have their own chargeable eMoney cards as well as loyalty cards.

[From What the U.S. Can Learn from Japan’s eCommerce Ecosystems – pymnts.com]

As Michael noted, contactless e-money (ie, prepaid) cards are widely used. There are vending machines everywhere and contactless payments are used for them, in convenience stores, for buying tickets and in many other ways. No wonder that the basic numbers are bullish.

During the first half of 2010, the number of electronic money transactions swelled by 39%

[From E-money – Big, and Getting Bigger in Japan – Japan Real Time – WSJ]

Note, though, that most electronic money transactions are still made with these cards. I tried to find the most up-to-date statistics that I could to match them to what Michael was saying and they do confirm his impressions.

In December 2010, 9.8 million mobile users in Japan made a purchase using their mobile as the payment vehicle. That works out to about 10 percent of all mobile subscribers, according to comScore.

[From 10% of Japanese Use Mobile Payments | Mobile Marketing and Technology]

As far as I can tell, this means that the use of mobile proximity for payments (although not for loyalty, coupons and so on) has fallen over the last year. I wondered why it was not growing quicker, let alone growing at all. Michael showed a video that might explain why: in order to pay using mobile proximity, the user had to press several buttons and wait for software to load. It didn’t seem terribly convenient and, I have to say, it seemed a much worse user experience than the European and US mobile proximity payment systems that we are working on at the moment. This explained to me why the use of cards continued to dominate, but… there has also been a decrease in the number of people using the e-money cards as well. Why is this?

Well, if you delve around in the relevant sources of statistics (at least, the ones in English that I subscribe to RSS feeds for) you find an interesting and plausible explanation which I think has significant implications for the development of e-money services in Europe and in the US, especially given the pressure on debit interchange.

My IC card cash gets used on public transport and convenience stores only. All the other shops that accept it also accept the credit card portion, and most of them also award 3% points instead of just 1%, so it’s an easy choice. Furthermore, they more often than not don’t even ask for a PIN when using credit, so the extra effort required is minimal.

[From Japanese electronic cash card users continue to decrease | 世論 What Japan Thinks]

Contactless credit cards that give 3% rewards appearing to be winning out over other e-payment mechanisms, particularly contactless prepaid cards, whether they are in a phone or not. It seems as if the march of e-money continues, but the mix is changing (probably, in my opinion, temporarily), and cash is the main victim. We can deduce this because the fall in the use of mobile proximity and card e-money does not seem to have been matched by an increase in the use of small denomination banknotes or coins. In fact the coins in circulation fell again last year.

Michael noted that the the use of NFC in phones for non-payment purposes—coupons, loyalty etc—was actually far more prevalent, and I think this probably is one of the key lessons to learn. Customers aren’t going to buy NFC phones because they can make payments with them: they will buy NFC phones to do more interesting things than payments but we (ie, the payments industry) must be in position to take advantage of the platform.

NTT Docomo has begun the world’s first mass market deployment of mobile phones with NFC tag reading capabilities. Sixteen of the operator’s new range of mobile phones and a number of existing handsets will be able to perform both Osaifu-Keitai mobile contactless payments functions and NFC tag reading from next week.

[From NTT Docomo adds NFC tag reading to wide range of mobile phones | Alan Cheslow’s Consumer Electronics Industry News]

Who knows what kind of services will be successful in Europe or the US. Coupons, like McDonalds club in Japan? Something else? That is the fun area for exploration for our clients right now: what’s going to go in the mobile wallet alongside the payment applications and how will it change for national and regional markets.