Japan has found a successful formula to integrate the world of e-commerce and traditional retail. Its approach to technology, business models and perhaps most importantly a light-touch regulatory regime, has helped prepaid e-money become a genuine and powerful alternative to cash. Will Cain reports
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Has the payments industry finally found a way to crack Japan, one of the biggest and most cash-intensive consumer markets in the world?
Credit card usage at higher transaction values and the more recent development of prepaid and post-paid e-money products for smaller purchases are steadily narrowing the huge wedge of cash spending in the economy.
Transaction volumes at Edy, the countrys biggest prepaid e-money issuer, almost doubled in 2010 to JPY1.2 tr ($15bn). The same company estimated in 2007 that cash spending for transactions under JPY3,000 ($39) in Japan stood at JPY60tr.
The striking thing about Japanese prepaid and e-money, particularly in the context of low-value payments, is how differently the foundations of the industry have been built compared to other markets.
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By GlobalDataJapan has found a highly successful formula which is increasingly integrating the worlds of e-commere and traditional retail into a single clicks and mortar e-payments environment. Consumers are increasingly using prepaid and post-paid e-money purses which are integrated into payments cards and mobile phones to make quick and convenient contactless transactions both at the point of sale and online.
Some of the key drivers for this behaviour lie in the areas of technology, business models and regulation, where Japan has pursued a very different path to other markets.
Technology
One of the great puzzles surrounding the successful development of e-money in Japan is that the technology to make it happen existed elsewhere first.
Sony Corporation developed the chip which has provided the platform for much of the e-money usage in Japan and is now ubiquitous across its payment cards and mobile phone devices.
Yet prepaid and stored value payments did not begin life in the tech-savvy high rises of Sonys Tokyo headquarters but on the streets of Swindon, in the UK. In 1996, National Westminster Bank conducted a trial involving around 40,000 people for a system it had developed which could be used to load prepaid e-money onto a chip on a payment card. Its main selling point was its ability to permit smaller value transactions at greater speed because transactions did not require a signature.
The system was called Mondex and subsequently taken over by MasterCard. If the technology existed to develop stored-value payments in the UK, what prevented the industry there and other European countries from developing at the same speed as Japan?
Nobuhiko Sugiura, a professor in e-money law and part of the team which developed Mondex, says the reason Mondex failed highlights why European and US prepaid spending, particularly for low-value transactions, has lagged Japan. The emphasis for Mondex, he says, was purely bank-led. His experience in Japan over the last decade suggests that non-financial companies, particularly retailers, often have more to gain from issuing e-money products. They also are able to provide more convenience for end-users.
Mondex was kind of a disaster from my experience, says Sugiura. Customers had to go to banks to top-up, it was always bank related.
My question is, do you go to the bank everyday? The answer is no. If you look at Octopus in Hong Kong [a contactless e-money transit and payments system], why is it so popular? Because you can charge it in an ATM, at Hang Seng Bank, shops and various other places, including obviously the metro station.
People want to use a product like that. As long as you provide the condition that people want to use it every day, thats kind of a key point in trying to increase usage.
Business models
Sonys stored-value payments system was first put to practical use in Hong Kongs Octopus public transport payments system in 1997, based on the FeliCa contactless chip it developed.
The chip, which is installed onto a payment card, has a radio frequency identification (RFID) capability that enables it to communicate with a reading device and store information securely.
After its introduction in Hong Kong, FeliCa was integrated into payment cards in Japan in 2001, again in a mass transit environment, to improve ticketing and payments efficiency at barriers and sales kiosks. The contactless card enabled the companies to reduce paper ticketing and provided benefits to customers like the ability to top up their travel cards online.
The first rail company to do this was Japan Rail East (JR East), the countrys privately operated metropolitan overground train service serving the eastern suburbs of the capital, Tokyo. Its system is called Suica.
As well as being used for travel costs, JR East developed Suica so it was able to make payments in shops and vending machines within the station. Consumers are able to buy newspapers, confectionary items and other small ticket items at shops where the Suica logo is displayed.
The next key development in Japan was the creation of a company called Edy, an issuer-acquirer e-money business which offered rechargeable contactless smart cards to consumers and card readers to merchants. Edy kick-started the development of the e-money market in Japan and has expanded its merchant base to include a number of major retailers including convenience stores Seven Eleven, Lawson and Family Mart, pharmacy Matsumoto Kiyoshi, electronics store Yodobashi Camera and McDonalds. In total, it is accepted at 255,000 stores across Japan.
There are now several rival e-money services including to Edy including; Nanaco, a proprietary system set up by retailer Seven Eleven; and, Waon, issued by Aeon for use in its shopping malls.
NTT DoCoMo, a mobile phone company, offers a slightly different e-money solution called iD. Its customers receive bills at the end of the month for the transactions they make, meaning their e-money purchases are made on credit and charged through their telephone bill.
In practical terms, there is little difference between prepaid and post-paid products in the eyes of consumers, according to Masayuki Takezawa, head of marketing and communications for Sonys FeliCa chip. They are all viewed as a convenient means of making small transactions, he says. Many of the prepaid e-money products are charged up using credit cards, further blurring the distinction.
Contactless cards, m-payments a familiarity
The more important point is that after heavy retailer and telco involvement consumers are now familiar with making transactions on both contactless cards and mobile phones.
People are very familiar with using contactless cards, says Takezawa. In Japan, the contactless card was introduced around 2001. Then, almost all transportation companies introduced this type of contactless ticket. At the same time, there was a new prepaid type e-money service which was launched in 2001 called Edy. It is from this background that people have become educated in using contactless IC cards.
The other thing is that in Japan, internet services on mobile phones were started in 1999 by NTT DoCoMo, a service called iMode. People are have become familiar with using their mobile phones to connect to the internet and connecting to the user interface. Its a combination of these two environments people are already familiar with both mobile and contactless payments.
One of the benefits which has comes from non-bank involvement in e-money is it enables businesses to offer a service to consumers that is complementary to their core business and helps them raise revenues. Retailers are able to use promotions and loyalty schemes attached to e-money services which allow them to collect information on customer preferences, in turn producing more tailored marketing strategies. E-money and mobile payments are essentially a by-product of this consumers have the convenience of making low-value payments and earning rewards points; retailers can use the service to collect spending data.
Seven Elevens Nanaco system and Aeons Waon prepaid e-money systems are examples of this. McDonalds, which accepts e-money payments from both Edy and iD, the NTT DoCoMo brand, offers an m-commerce application which enables customers to gain discounts by placing orders using their mobile phone.
The McDonalds m-commerce site provides a list of discounted menu options which can be viewed on a mobile phone. The customer enters their selection on the phone, then places it on the Sony chip reader at the counter. The reader then automatically communicates with the ordering system and places the order. Another tap of the phone completes payment.
Regulation
One of the issues raised when non-bank businesses start to play a bigger role in the payments industry is the question of regulation.
E-money laws in Europe in particular were drawn up because of concerns over the impact issuance of e-money might have on monetary policy and also its potential impact on consumer confidence in payment systems. Banks have been traditional custodians of the payments system, either through the issuance of cash through ATMs, payment cards or internet banking.
One of the main concerns of central banks when e-money became a hot topic in the late 1990s was the lack of ability to track e-money purchases and potential use for money laundering and fraud. Some of these concerns have been now been overcome, and the implementation in April 2011 of Europes second E-Money Directive has been designed to create more access to non-financial businesses like retailers and telecommunications companies.
It is still more restrictive than regulation in Japan, which has been laissez faire throughout the industrys development. Any company is allowed to issue e-money as long as it registers itself and holds 50% of the deposited funds as capital. This has opened the door for businesses to enter the e-money market, including retailer Seven & I, mobile operator NTT DoCoMo and Edy, the e-money payments system owned by a consortium of Japanese businesses.
Sugiura says the regulations as they currently apply in Japan would allow a stall owner selling vegetables to offer e-money if they had sufficient documentation of their financial history and could prove stability within their business.
The ability for a multitude of e-money issuers is important in fostering greater usage of e-money. But is it safe? Sugiura says Japanese regulators may have been more willing to permit a non-bank-led approach because many of the corporates involved in issuing e-money have better credit ratings than the countrys leading banks a hangover from Japans financial crisis in the late 1990s.
In Europe regulators find it hard to believe that these kinds of companies should be involved with financial operations and regulation for them should be like regulation for banks, he says.
If you look at Japanese companies these days, and this is a different answer, Japanese financial company ratings as rated by credit agencies like Moodys are not that high. If you look at companies like JR East, Toyota, Nissan, their ratings are higher. In these cases, why dont we let them start small payments businesses?
There have been examples of small Japanese e-money issuers going out of business, according to Sugiura, who is also an academic panel member of the International Centre for Financial Regulation. Japans Financial Services Agency keeps close track of the accounting records of e-money issuers and if there are any signs of stress, it intervenes in the business.
In some cases, this has meant orchestrating the sale of a small e-money business to another issuer. In others cases, small businesses have been allowed to go bankrupt. Sugiura estimates there are two or three e-money issuer bankruptcies each year. The companies are usually small and the recovery rate for consumer funds runs at about 85%. He says this has meant that so far consumers have not lost large sums of money through the failures and there have not been any complaints from organisations like the countrys Consumer Association.
This light-touch regulation is perhaps the most important contributor to Japans development as an m-payments and e-money centre of excellence. It was a brave approach and, as the bankruptcies show, has not been without its mishaps. But it provided the platform for Japan to develop a dynamic e-payments system with a diverse set of payments providers, while avoiding competing technology platforms from creating a large number of non-compatible systems.
The recent relaxation of some of the rules for smaller e-money issuers in Europe suggests that regulators there have come to accept this. This, coupled with the standardisation of the technological and security frameworks, should ensure Europe and possibly the US can follow Japans impressive lead even if it could have been achieved a little more quickly.
