Is Japan finally catching up on digital payments?

On the Monday after the closing ceremony of the Tokyo 2020 Games, selfies flooded social media showing the Japanese capital’s two main airports crammed with departing Olympians, their teams and thousands of officials and media.

Most left in haste without seeing much of the city, and without spending much money in it — by any payment method.

With competitors kept separated from the general population and no foreign spectators allowed, the world’s biggest metropolis and the other tourist spots that might otherwise have benefited from the Games never experienced the great global arrival they had invested in and braced for.

Just as China is hoping next year’s Winter Olympics will help the adoption of its central bank digital currency, the Tokyo Games were supposed to help wean Japan’s restaurants and retailers onto new payment technologies in time for the unprecedented wave of visitors. 

While the compromises of the “Covid Games” dulled some of the pressure on retailers to modernise, an extensive new survey on Japanese internet and smartphone usage by brokerage CLSA suggests that in other ways, the pandemic has significantly accelerated adoption.

Japan has long been a laggard when it comes to digital payments, with cash and bank transfers still accounting for about 70 per cent of transactions. The Japanese government’s relationship with the shift away from cash has always been nuanced: it is concerned about raising the traceability of its income but has also been at pains to acknowledge the difficulty of imposing technology on the country’s extensive elderly population.

It has aimed to increase the proportion of cashless transactions from 30 per cent to 40 per cent by 2025. One of the likely changes that makes that target plausible would be allowing people to pay their income and other national taxes through apps like PayPay, Line Pay and other smartphone payment systems.

According to CLSA, however, the real inflection has come as a result of the pandemic and the fact that 50 per cent of Japanese households now shop on the internet. The brokerage now estimates that ecommerce accounted for more than 11 per cent of the retail market in 2020, from 9 per cent in 2019. It is on track to be 18 per cent of retail by 2025 — or roughly the level China was at in 2018. Similarly, it found the pandemic has encouraged a much more rapid adoption of food delivery services.

Oliver Matthew, CLSA analyst, says the implications for payment services and fintech are profound, as the shifting shopping habits drive greater adoption of digital payments.

“Our survey indicates a drop in daily cash usage. Instead, users are turning to cashless payment methods. Consumers have meaningfully increased their daily usage of Rakuten Pay, Edy and PayPay.”

Z Holdings, which is partly owned by SoftBank’s mobile arm and which owns Yahoo Japan and Line, said last week that transactions through its PayPay smartphone service (Japan’s most popular), rose to ¥1.2tn in the three months to June — a 65 per cent increase compared with the same period a year earlier.

Matthew said cash and credit cards may remain the dominant payment method in stores for some time, but there has been sustained growth in alternatives as the pandemic rolled into 2021.

The largest issuers of electronic money were previously prepaid payment cards issued by Japan’s various public transport operators, but PayPay has already overtaken them. It is now accepted in 26 per cent of bricks and mortar stores, followed by Line Pay at 10 per cent and Rakuten at 8 per cent.

“With Z Holdings buying Line, the payment game looks to now have a clear winner,” Matthew added.

Fintech fascination

More stories from the industry that caught our eye this week

Thiam’s Spac spies a deal in Mexico Special purpose acquisition companies may have lost some of their sheen in recent months but there are still plenty of them on the prowl — several of which have explicitly said they are hunting for fintechs. Spacs, or blank cheque companies, raise money from investors before searching for a private company to take public. This week the FT reported that one such company — led by former Credit Suisse chief executive Tidjane Thiam — is close to striking a deal with not one but two start-ups. The company hopes to combine Mexican online lender Credijusto with corporate data specialist CIAL Dun & Bradstreet. A successful acquisition would mark Thiam’s return to dealmaking after he was ousted from Credit Suisse in a corporate spying scandal last year.

South Korea’s $32bn digital bank Kakaobank, a five-year-old online lender, this week became Korea’s most valuable retail bank — fintech or otherwise. The company’s share price surged almost 80 per cent on its first day of trading after completing a $2.3bn IPO on Friday, and climbed further on Monday to give it a market cap of Won37tn ($32bn). That’s more than 50 per cent higher than established banks like KB Financial Group and Shinhan Financial Group. As with many highly-valued digital banks in Europe, however, some analysts and observers — including the FT’s Lex columnist — are still sceptical that Kakao is worth the price given its balance sheet is only a fraction of the size of rivals like KB.

Opinion: FT weighs in on BNPL and central bank digital currencies Last week’s newsletter highlighted China’s hopes for its central bank digital currency, and Square’s $29bn acquisition of Australian buy now, pay later specialist Afterpay. This week, the FT followed up with fintech-focused comment pieces on each topic. First up, the editorial board joined the chorus of voices calling for stricter regulation of the BNPL space. It argued that, while the likes of Afterpay are bringing welcome disruption to “too-comfy incumbents”, the industry is “moving faster than its would-be overseers” and regulators should “tap the brakes”. Next up, Jonathan Guthrie — the normally anonymous head of the Lex column — explains why commercial bankers should be keeping a wary eye on the growth of CBDCs.

Quick Fire Q&A

Stay up to date with up-and-coming disrupters. Each week we ask a fast-growing fintech to introduce themselves and explain what makes them stand out in a crowded industry. The rapid growth of “buy now pay later” has led to growing calls for regulation (as highlighted above). This week, we spoke to Philip Belamant, chief executive and founder of Zilch — a BNPL provider that has already secured a consumer credit licence with the UK’s FCA, and says its approach is safer for consumers than firms that earn most of their money from contracts with individual retailers.

When were you founded? 2018

Where are you based? London

Who are the founders? I founded it with my father Serge — he sits as chair of the board — and then we brought in a team of people we worked with at previous companies.

What do you sell, and who do you sell it to? We’re trying to bring BNPL services to customers anywhere they like . . . We make fees through a combination of revenue streams, including a deal with Mastercard, commissions from retailers, advertising revenues and data . . . but we charge no late fees of any kind. 

How did you get started? My previous business did something similar almost 14 years ago in Africa, with a “pay in instalments” product based on a physical card. When I moved to the UK seven years ago I saw companies like Afterpay or Klarna trying to modernise the space here, and having already built a company with 22m customers in Africa, thought it was an area I could use my experience.

How much money have you raised so far? Just over $300m total in debt and equity, around half of that is equity.

What’s your most recent valuation? Currently just over $600m

Who are the major shareholders? Gauss Ventures, DST, Goldman Sachs, plus founders and some ultra-high net worth individuals and angel investors.

There are lots of fintechs out there — what makes you so special? Our customer is the end consumer, whereas for other BNPLs their customer is the retailer . . . that can cause a divergence of interests with consumers. We also have experience, we already knew a lot of great people and convinced them to join us again, which allowed us to attract really top talent from the get-go.