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November 13, 2007

Japan’s changing payment patterns

Although cash remains the dominant payment method in Japan, debit and credit card use continues to grow, driven by increasing acceptance and a competitive marketplace Although there are many credit cards in circulation in Japan, they have typically been used as a convenient means of payment rather than a source of credit

By Verdict Staff

Although cash remains the dominant payment method in Japan, debit and credit card use continues to grow, driven by increasing acceptance and a competitive marketplace. Coupled with new e-payment systems, the cards market in this innovative country looks set for change. Sarah Williams reports.

Although there are many credit cards in circulation in Japan, they have typically been used as a convenient means of payment rather than a source of credit. However, various new electronic payment methods are being piloted, including mobile payments and a number of contactless systems. If these are adopted with enthusiasm by Japanese consumers, they offer huge scope for changing payment patterns in the country.

Cash is the dominant payment method: transactions are worth an estimated ¥160 trillion ($1.4 trillion) annually, compared with around ¥38.86 trillion for credit cards and around ¥1 trillion for debit cards. One reason for the continued high use of cash and the correspondingly low use of credit cards is that there is a highly advanced ATM/account transfer system.

Debit cards

Debit card use has been fairly low and the value of spending on debit cards in Japan is significantly lower than that for credit cards: total spending on debit was around ¥900 billion in fiscal year 2006. Despite this, debit cards continue to grow in popularity, albeit from a low base. (See Figure 1.)

According to the Japan Electronic Payment Promotion Organisation, the number of stores accepting debit cards has increased, surpassing 250,000 nationwide as of August 2006, up 150 percent from six years previously. Cardholders can now use debit cards for purchases at major department stores and home appliance retailers, and to pay hospital expenses and taxi fares.

Japanese retailers are offering better benefits to debit cardholders. Some electronics chain stores, for instance, give debit cardholders the same reward points as those who pay by cash, a privilege denied to credit cardholders. This has prompted more consumers to opt for debit cards when buying expensive products such as digital cameras and flat-screen televisions.

Retailers pay commissions to the issuing institutions of 1 to 2 percent on each purchase made using a debit card; these rates are lower than those for credit card purchases. Another advantage for retailers is that they receive payments immediately. Financial institutions, for their part, can secure a stable income from account settlement services via the cards they issue.


Credit cards

According to Japan Consumer Credit Industry Association statistics, by the end of 2006 there were around 273 million credit cards in issue. This was made up of 122 million bank-issued cards, 57 million cards issued by shinpan (consumer finance) companies, 83 million cards issued by retailers and 11 million cards issued by manufacturers.

Although the issuance of credit cards is high, their use is lower than in some other developed countries. Credit card payments as a percentage of total expenditure is around 10 percent – this compares with 20 percent in the US and 55 percent in South Korea.

The total value of retail transactions settled with a credit card in fiscal year 2006 (ie, the 12-month period ending 31 March 2007) was ¥38.86 trillion, marking a 12.5 percent rise on fiscal year 2005. (See Figure 2.) This is being driven by rising credit card acceptance: for example, credit cards can now be used to pay public utility fees and highway tolls. Also, e-money has become more popular, with shoppers using credit cards to make low-value transactions at convenience stores (in addition to using prepaid cards in a similar way).



As a consequence of low card use rates, issuers tend to see scale as necessary to generate a decent profit in the cards business. Moreover, around 90 percent of Japanese credit card accounts are non-revolving, paid in full every month via automatic debit from bank accounts. For this reason, it has been suggested that the potential in Japan is not so much in the number of cards but in the ways cards are used. Earlier this year, Ridha Wirakusumah, Asia-Pacific regional business head for consumer finance group AIG, noted: “In my view, Japan is interesting on the credit card side… There is still some growth – not so much on cards but the change in behaviour from charge cards to credit cards.”

Issuers in Japan are looking for ways to boost profitability. According to Koichi Niwa, an analyst with investment bank Mitsubishi UFJ Securities: “Credit card shopping offers lower margins than other consumer credit businesses. Also, the waiving of annual membership fees is becoming more common.”

Moreover, in an attempt to expand their market share, some credit card companies have started to discount affiliated store commission.

So how profitable is credit card issuing in the country? Under a new business plan announced in September 2007, card issuer Mitsubishi UFJ Nicos aims to earn an operating profit margin of 10 percent for its credit card subsidiary of the same name, up from 4.8 percent for fiscal year 2006. This compares with the operating profit margin of around 4 to 6 percent at the credit card units of consumer credit companies such as Orient and Central Finance. By contrast, the profit margin at card issuers Credit Saison and Aeon Credit Service is more along the lines of 20 percent.

One way in which credit card companies are trying to boost profitability is to remove inactive cardholders from their membership ranks. Other steps include scaling down unprofitable card operations with other firms and introducing annual fees. Similarly, of its 11 million cardholders under review, Orient aims to cut 2 million infrequent users from its ranks over the next three years. As the company’s president, Yoshimasa Nishida, has commented: “It is important to increase the number of cards in use, and we don’t mind if the total number of issued cards falls as a result.”

Credit Saison has reduced the number of companies with which it jointly runs card operations to around 200 from 220 at the time of its merger with card issuer UC Card last year. The company continues to renegotiate business terms with 30 percent of the companies with which it has joint operations. In a similar vein, card issuer Sony Finance has started charging its cardholders a ¥2,100 annual fee. If customers have used their cards at least once in the previous year, they do not have to pay the annual fee, and Sony Finance is hoping to reduce the number of people who do not use their cards while simultaneously boosting card use rates.


Loyalty schemes

One way in which credit card issuers in Japan have sought to compete with each other is by making their loyalty schemes more generous and convenient to cardholders. These loyalty schemes are often part of wider schemes tied to bank accounts, mortgages and other financial products.

In October 2007, for example, Japan NetBank announced that in future points earned by customers from shopping and other activities at Yahoo Japan websites would be converted into cash and deposited into accounts at the online bank. Another example is that of Mizuho Bank, which has recently relaxed rules governing points earned from purchases made with its cash card, which also functions as a credit card. From this fiscal year, customers can earn one point for every ¥1,000 spent (up from one point per ¥2,000). Customers who earn 100 points can have interest rates on time deposits of ¥1 million increased by 0.1 point, or have rates on mortgages trimmed by 0.1 point.

Future growth

In terms of future use of credit cards, further growth seems likely as the Japanese government is actively encouraging credit card payments for services. For example, credit cardholders can now pay their utility bills, medical fees and even taxes in this way. By 2008, cardholders will also be able to pay their national pension premiums through a 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 increased card use. Currently, one-third of the people required to contribute to the national pension plan are not making any payments.


In the 12-month period ending 30 September 2007, the number of people using electronic money rose 89 percent to reach 75.3 million. Two types of e-money are currently available in the country. The first (and by far the most prevalent) is prepaid services that require initial deposits; the second is credit card-like services in which the purchase amounts are withdrawn directly from users’ bank accounts.

One reason why use of e-money has grown so quickly is that non-financial companies have been entering the market. The cash settlement market in Japan is estimated at around ¥160 trillion and there are many players keen to get a share. While credit card and debit card transactions are controlled by the banks, in the case of electronic money it is the industries that control social infrastructure such as transit systems that are taking a lead. As of March 2007, for example, customers have been able to interchangeably use the Suica prepaid electronic money card of East Japan Railway (JR East) and the Kanto regional Pasmo transit card for private railways and buses. Cardholders can use their Pasmo transit cards at stores that are partnered with Suica. As of early 2007, some 18.5 million Suica cards had been issued and it is predicted predict that more than 30 million will be in use within five years when combined with Pasmo. The number of Pasmo cardholders rose to 5 million by October 2007.

Mobile payments are also growing rapidly in popularity as a direct rival to credit cards. An increasing number of people are paying for purchases by using mobile phones like credit cards. In the 12 months ending 30 June 2007, the number of subscribers using this kind of electronic settlement service rose 12-fold to reach 5.9 million.

Competitive environment

One reason for the strong level of competition in the credit card market in Japan is that many domestic banks have been hit fairly hard by problematic corporate loans. As a result, many of the largest banks have been shifting their focus to retail banking in general and credit cards in particular.

In the past few years there has been considerable M&A activity. Mitsubishi UFJ Financial Group, for example, is in discussion to acquire a 20 percent stake in consumer credit company Jaccs, largely to expand its retail banking business. Jaccs is primarily a credit card issuer, with 9 million credit cards issued. A few months ago, Sumitomo Mitsui, a major rival to Mitsubishi, acquired a stake in credit card issuer OMC Card, which has 9 million cardholders.

At the end of August 2007, Japan Airlines (JAL) announced that it was planning to sell a 49 percent stake in JALCard, its wholly owned credit card division, to repay ¥1.7 trillion in interest-bearing debt. JALCard is the sixth-largest credit card company by transaction volume in Japan. Major players such as Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Credit Saison are participating in the sale through tender offer. JAL intends to keep majority control.

Post Bank rattles status quo

Another development that is shaking up the credit market has been the recent establishment of Japan Post Bank, which intends to issue its own credit cards. This means other card companies that have been previously allied to the Japanese post office will be winding down their involvement. Japan Post Bank is in talks with Sumitomo Mitsui Card and JCB to manage the risk management and customer service functions for its new cards. More than 9 million postal savings cash cards with credit functions have been issued. The credit card companies earn interest on cashing services and fees from stores accepting the joint cards. But Japan Post Bank, launched in October as part of the postal privatisation process, intends to issue its own cards, targeting fee and interest income.


Japanese news service Nikkei estimates that in fiscal year 2006, Sumitomo Mitsui Card passed JCB to become the largest credit card issuer in terms of transaction value. In addition to the top five players indicated in Figure 3, other major card issuers include Aeon Card Service, JALCard, Orient, Toyota Finance and Jaccs.

Store cards are taking market share from financial services card issuers. Credit cards are most likely to be used in department stores and supermarkets, and these venues account for more than 27 percent of total credit card payments.

Some foreign players are trying to win a share of the market. In August 2007, for example, Bank of America announced that it intends to expand its credit card business in Asia and that its first project will be a credit card joint venture in Japan in 2008.

Global consumer finance company GE Money is also planning an expansion of its current Japanese operations. GE already offers credit cards, housing loans, consumer finance and insurance services through its Tokyo-based GE Money Japan unit. However, in May 2007 GE acquired a 97 percent stake in Sanyo Electric Credit for $1.05 billion and plans to turn the Sanyo acquisition into a subsidiary to expand its consumer finance and credit card businesses.  


Sumitomo Mitsui Card

Nikkei estimates Sumitomo Mitsui Card’s market share to be 11.7 percent by transaction value, putting it on equal footing with JCB on this basis. Its transaction volume has grown across a range of areas, including at major department stores (Sumitomo has formed a number of tie-ups) and the processing of public utility payments. The growing popularity of its iD credit payment system via mobile phone handsets, offered in co-operation with NTT DoCoMo, is also contributing to increased transaction volume. In July 2007, consumer finance company Central Finance became an affiliate of the group, and Quoq, another consumer finance company, became a consolidated subsidiary.

Sumitomo Mitsui Financial Group is buying a 31 percent stake in credit card issuer OMC Card for ¥80 billion from retailer Daiei. (Daiei is selling a part of its stake in OMC to reduce its debt levels, but will still own 20 percent of OMC.) This is scheduled to be formalised in February 2008. OMC has 9 million cardholders. When all of Sumitomo Mitsui Financial Group’s credit card operations are combined, it will have a total of 43 million cardholders.


The main card scheme in Japan is offered by JCB. Nikkei estimated that in fiscal year 2006, JCB had an 11.7 percent market share in terms of value of transactions handled via the credit cards issued by JCB independently as well as in co-operation with tie-up retailers. JCB has 58 million cardholders in Japan, making it the largest issuer on this basis.

JCB recently indicated that it is intent on achieving growth in international markets. Its new areas of focus will be Asian countries, particularly China, and expansion into the Middle East through a new joint venture.

Mitsubishi UFJ Nicos

UFJ Nicos was established in October 2005 through a merger of Nippon Shinpan and UFJ Card. In April 2007, UFJ Nicos merged with fifth-ranked DC Card to become Mitsubishi UFJ Nicos. Mitsubishi UFJ Nicos has a 10.1 percent market share while DC Card has a 5.6 percent market share (giving total group market share of 15.7 percent). Jaccs is scheduled to become an affiliate in future. UFJ Nicos managed to increase the handling value of transactions in fiscal year 2006, due to increases in transactions made at supermarkets, petrol stations and medical institutions.

In the spring of 2007, Central Finance ended its alliance with Mitsubishi UFJ Financial Group and joined Sumitomo Mitsui Financial Group.

Credit Saison

Consumer finance group Credit Saison has entered into a number of business alliances and issues affinity cards with about 200 companies. The company views its sales network one of its greatest strengths, centred on 12 branches and 174 Credit Saison counters across the country.

In January 2006, the company merged its card operations with UC Card’s (Mizuho – see below) credit card issuance business, expanding its scale by becoming a credit card issuer with two major brands: Saison and UC. As a result, the total number of cards issued reached 24.91 million at fiscal year 2006 year-end. In October 2007, Credit Saison, Mizuho Bank and UC Card established Qubitous, a joint credit card processing company. Qubitous is owned 51 percent by Credit Saison and 49 percent by Mizuho Bank.

Mizuho Financial Group

Mizuho Financial Group is a major player through its UC Card business, which has a strategic alliance with Credit Saison. In January 2006, Mizuho Bank merged its credit card operations with those of Credit Saison to jointly establish a third-party credit card processing company. Mizuho’s UC Card focuses on the acquiring business; Credit Saison targets the card issuance side while leveraging Mizuho’s card marketing and distribution network. In October 2006, UC Card transferred part of its business to Credit Saison.

Mizuho has also linked with retailing giant Aeon and railway company JR East for credit card processing.

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