The mega-mergers that have taken place in Japan have produced three banking giants – Mizuho, Mitsubishi UFJ and Sumitomo Mitsui – with close to 500 branches each in the metropolitan Tokyo area alone. Previously largely focused on corporate lending, these mega-banks are now warming to the potential for profit in the retail banking market and are busy refurbishing branches and launching credit cards. They are also looking to acquire skill-sets in the credit card and consumer finance businesses.
Sumitomo Mitsui Financial Group recently acquired a 31 percent stake in OMC Card and its 9 million cardholders for ¥80 billion ($645 million). Earlier in April, Sumitomo Mitsui wrested control of Central Finance from its competitor Mitsubishi UFJ by agreeing to invest ¥19 billion in the consumer finance company. This means that Sumitomo Mitsui will have a total of 43 million cardholders, inching closer to JCB, the largest issuer in Japan, which has 58 million cardholders.
Mizuho Bank and Credit Saison merged their credit card operations to jointly establish a third-party credit card processing company. Mizuho’s UC Card will focus on the acquiring business; Credit Saison will target the card issuance side while leveraging Mizuho’s card marketing and distribution network. Mizuho has also tied up with retailing giant Aeon and railway company JR East for credit card processing.
In a statement, the issuers said: “The challenges that Japan’s credit card industry faces are increasing, including the emergence of new competitors, business reorganisations, the growth of new types of payment services and problems associated with so-called ‘grey-zone’ [see below] interest rates.
“To survive and succeed in this environment, the companies have agreed to pool their respective strengths and resources in an optimum manner for the purpose of quickly establishing a new third-party credit card processing platform that can perform tasks for other credit card issuers.”
Japan is still a largely cash-based society – credit card payments as a percentage of total expenditure is 10 percent compared to 55 percent in neighbouring South Korea. Issuers therefore see scale as necessary to generate a decent profit in the cards business.
According to Koichi Niwa, an analyst with Mitsubishi UFJ Securities: “Compared with other countries, in Japan: 1) high denomination bank notes are in circulation; 2) the main mode of payment is by cash rather than cheque; 3) credit cards are only really used as a method of payment, and instalment sales have become widespread, fulfilling the need to borrow money; and 4) traditionally, banks have been excluded from the credit card market, and there is a highly advanced ATM/account transfer system.”
Even though credit card usage is on the rise compared to ten years ago, Niwa is not totally optimistic that card issuers have seen much benefit yet.
“Credit card shopping offers lower margins than other consumer credit businesses. The main factors acting as a drag on operating revenue are the low rate of commission receivable from affiliated stores on card usage, and the constant pressure for further cuts due to growing competition. Also, the waiving of annual membership fees is becoming more common,” Niwa said.
“If the total value of credit card shopping is ¥27 trillion, taking affiliated store commission to be 3 percent, then the operating revenue of the credit card industry works out at no more than around ¥800 billion. Moreover, in order to expand their market share, competition to discount affiliated store commission is becoming fiercer among credit card companies.
“There are already examples where card companies with a close relationship with mega-banks that rank highly in terms of transaction value are increasing the volume of transactions handled and dividing up the various functions of the credit card business. In addition, developments such as the restructuring of regional banks, Japan Post’s participation in the card business, moves to strengthen regulation governing the money-lending industry and increasingly heavy investment in IT are all factors which are likely to speed up this process.”
The ‘grey zone’
Increased scrutiny by regulators also means that reducing costs across a larger base of cardholders is critical, and weaker issuers will be seeking outside help. The new regulatory framework has dissolved the profitable ‘grey zone’ of interest rates charged by consumer finance companies in Japan. The previous regulations allowed consumer finance companies to switch between two sets of legislation charging 15 percent to 20 percent under the Interest Rate Regulation Law and up to 29.2 percent under the Contributions Law pending borrower’s agreement for the latter.
The new Money Lending Law passed in December 2006 reduces the interest rate limit from 29.2 percent to 20 percent over the next three years and limits the loan amount to one-third of the borrower’s annual income. It also bars persistent debt-collection measures such as visits and calls to the borrowers’ homes, workplaces and relatives. Moneylenders are also barred from taking out suicide insurance coverage on Japanese borrowers, some of whom would rather commit suicide than declare bankruptcy when faced with mounting debts.
The recent regulatory changes, coupled with a flood of legal claims by borrowers demanding repayments on high interest charges, has forced many consumer finance operations to restructure.
In April this year, retail-focused Shinsei Bank declared a goodwill and intangible assets impairment of ¥101 billion in its consumer finance subsidiary, Aplus, to address the impact of these regulations. Shinsei acquired a 68.9 percent stake in Aplus in 2004 at a high premium, resulting in the transfer of 4 million cardholders to the bank. This move caused a hefty revision of Shinsei’s consolidated net income forecast for the fiscal year ended 31 March 2007 from ¥40 billion net income to a ¥58 billion net loss.
In a previous interview shortly after the impairment announcement, Rahul Gupta, chief operating officer of Shinsei Bank, said: “We need to take advantage of the synergies that exist between Shinsei Bank and Aplus. Shinsei is liabilities-rich, asset-poor, while Aplus is asset-rich, liabilities-poor. Clearly there are synergies between the two – the first element of the synergy is to launch a Shinsei Visa credit card powered by Aplus. The back office is Aplus. We originate the customer and brand as Shinsei Bank.”
Buying into skill-sets is one thing, but are Japanese banks in tune with the Japanese consumer mindset? The latest technology and a dizzying array of choice may only serve to confuse the salaryman in the street when what he needs is a practical card that can be used when and where he wants to.
One area where the large variety of product offerings has affected customer adoption in Japan is contactless cards. Although Japanese consumers pride themselves on being early adopters of technology, this very ability has been a cause of confusion in the cards and payments technology space. There are currently six contactless cards schemes from various issuers, all offering different functionalities on different platforms.
NTT Docomo, which is the largest of Japan’s telecommunications companies and has a market share of 60 percent, has been promoting its platform but banks are wary of its motives as the company has itself become a card issuer in its haste to ensure customer adoption. Japan’s largest card issuer, JCB, has already cosied up to NTT rival KDDI, which preloads JCB’s contactless QuicPay service into its phones.
East Japan Railway’s Suica Card is carried by 19 million commuters but only 350,000 customers have signed up for its mobile wallet functionality 13 months after the launch.
Retailer 7-Eleven is in the midst of rolling out its contactless cards but the proposition for credit card payment, though contactless, for small amounts is still unclear and adoption has been weak so far.
These multiple offerings in the marketplace have also affected the adoption rate of smart cards among consumers who are wary of carrying a thick wallet of cards or are confused as to whether they should be paying with their mobile phone or their contactless card.
The different issuers are expected to band together to offer a unified merchant acceptance platform that will allow a single card to be used in different merchants. However, it is no mean feat to get these behemoths together, especially as they used to competing with one another.
The good news is the Japanese government is actively encouraging credit card payments for their services. A Japanese credit cardholder can now pay his utility bills, medical fees and even taxes through his card.
By 2008, a cardholder will also be able to pay his national pension premiums by credit card. The ministry of health, labour and welfare believes that allowing card-based payments for national pension premiums will improve the payment rate as young workers seek reward points from card usage. One-third of those required to contribute to the national pension plan are not making any payments and the ministry had to revise its target payment rate of 74.5 percent when only 64.2 percent of the workforce made payments in fiscal year 2006.
The new system is said to benefit the government, as card companies will have to bear collection responsibility. The companies hope this will help to popularise payments on plastic.
However, it will be a while before the mergers and acquisitions of Japanese mega-banks will have any impact on their cards portfolio earnings. The market shares of the top five card issuers have decreased compared to the next five because of the initiatives rolled out by store card issuers that have a captive customer base. Cards are used most in department stores and supermarkets, accounting for 27.3 percent share of total credit card payments in the industry. Acquiring cardholders is never an end in itself: the winner will still be the issuer with the lowest cost or the most loyal cardholder base.