Mega-mergers in Japan have produced
banking giants that are turning their attention from the corporate
to the retail sector in search of profit from cards and consumer
finance. However, there are various obstacles to quick wins in
Japan’s cash-based society, as Titien Ahmad

 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.”

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Cash dominates

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

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.

Confusing contactless

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

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.

Future growth

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

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.

Japan: Top 10 credit card issuers


Japan: Top 10 credit card isuuers