Jul 16, 2020

My experience in Japan: Excited to see the momentum towards the cashless transformation

I stopped carrying cash in 2010. As an American living in Los Angeles, it wasn’t hard. All my transactions were paid using my credit and debit cards. To manage my finances, I used Mint to track my spending and plan my budget. When I needed to pay someone back for meals or services, Venmo became a great way to transfer money. Before moving to cashless, I had problems with keeping track of my cash in general. On several occasions, money simply fell out of my pockets. And once I broke a $20, somehow the change simply disappeared. I finally stopped carrying cash altogether when $225 fell out after a Cirque du Soleil show at MGM in Las Vegas. After moving to a cashless lifestyle, I found life got much easier.

In 2016, I moved to Tokyo, Japan. Many people unfamiliar with the country imagine some sort of techno-inspired metropolis. For many years, Japan has been at the forefront of innovation in telecommunications, high-speed trains, and precision manufacturing. However, on the digital banking transformation side, Japan is just starting. The country remains a predominantly cash-based society outside of major establishments. Carrying cash is a necessity. As you might imagine, returning to my cash-carrying days wasn’t something I was excited about nor prepared for.

When you go out with a group of people, you need to carry cash to settle up. Don’t be the person who never has cash. Playing the foreigner card only gets you a pass initially. Eventually, you’ll be seen as a hassle to go out with. Want to get a gym membership? Great! You just can’t pay with a credit card. You need a Japanese bank account for direct withdrawals to occur. In fact, you need a Japanese bank account to sign up for just about anything including a cell phone. Unless you’re ok with living on the fringes of society.

So why isn’t Japan a more digital transaction-based society? According to a 2018 report, most people are skeptical about using credit cards. The rationale implies that people won’t spend money they don’t have if they don’t use credit cards. Most small businesses have refused to adopt credit and debit payment methods to avoid payment processing fees. When you consider that small and medium-sized enterprises (SMEs) account for about 99.7% of all businesses in Japan, this becomes a significant source of inertia.

Cashless payments are more efficient and safer

Moving away from cash transactions makes it more efficient for businesses to operate. When businesses can operate more efficiently, they can offer goods and services at lower prices. This increases their overall competitiveness in the market making them more attractive to customers.

Moreover, carrying lots of cash on hand increases security risk to a business. While Japan is a relatively safe country, there are stories where merchants have been robbed of cash. In 2019, a precious metals dealer was robbed of ¥80M (~$750K USD) in cash while traveling to meet a customer for a transaction. Had the merchant used a cashless payment method to conduct the transaction, the funds would have settled electronically without him getting assaulted in the streets. Perhaps there’s more to this story than the news reports, but the point is digital payments offer the potential to quickly and safely conduct transactions that improve the business experience. And Japan sees the benefits of moving towards a cashless society and wants to move in that direction.

Studying what other countries have done to reduce cash reliance

In 2018, the Japan Ministry of Economy, Trade, and Industry released a white-paper describing their cashless vision. In the paper, they explored the cashless settlement ratio by country. According to the study’s findings, South Korea is leading the push for a cashless lifestyle. Smartphone and credit card companies have invested heavily in infrastructure to increase cashless payments. In 2015, Samsung released Samsung Pay as a user-friendly platform that now handles approximately 80% of all mobile payments in Korea. A major feature of the platform is its use of near field communications (NFC) technology to allow users to quickly process payments on the move. To capitalize on the trend, Korean retailers are moving towards stores that only process cashless payments.

Cashless Payments by Country in 2018
Figure 1: Cashless Payments by Country in 2015
Source: Japan – Ministry of Economy, Trade, and Industry (Report published in 2018)

So how does Japan stack up in the race for cashless society transformation?

Japan has outlined a plan to increase cashless settlements by 2025 from 20% to 40%. As a way to increase labor productivity in an aging society, the country has set a future goal of 80%. Last year, the Japanese government initiated a cashless point rewards program to offset rising consumption taxes from October 2019 to June 2020. The program provided a rebate to customers who paid with cashless methods. Customers received a 5% rebate when shopping at small and medium-sized stores and a 2% rebate when shopping at major chains including convenience stores.

Earlier this month, the Ministry of Industry released the latest cashless payments figures for 2019. According to the report, Japan successfully increased cashless payments by 2.7% from 2018 to 2019. While this is good progress, Japan will have to increase the year over year (YOY) growth rate to an average of 6.3% from 2020-2025 to reach its goal of 40%. Figure 2 below shows my rough forecast of what a steady YOY growth might look like for Japan to reach a successful outcome. This growth rate is quite aggressive considering the 2019 increase of 2.7% was the highest in history.

Calculation of Cashless Payments Forecast Required YOY Growth
Figure 2: Calculation of Cashless Payments Forecast Required YOY Growth

While aggressive Japan may have inadvertently fallen into a strong position for achieving this goal, COVID-19 seems to have a positive impact on digital payments as a means of supporting the overall spending. Since people are reluctant to go out, online product ordering has increased. Between the 1st and 14th of April 2020, Sumitomo Mitsui Card Co. examined the transaction data of a total of about ten million customers’ cards. According to the report, online shopping by customers in their 70s had increased by 9.5% compared to the same period in 2019. When looking at the differences between the same period of 2018 and 2019, there was no noticeable difference. This is a significant data point considering that the elderly in Japan are historically one of the most cash reliant demographics.

An additional report highlights that Japanese household spending is down on average 7.5% from 2019 to 2020. While we don’t have the estimated increase in cashless payments yet, we can anticipate that the ratio of cashless payments compared to cash payments has received a fairly significant boost in 2020.

Household Spending Decline, 2019-2020, Japan
Figure 3: Household Spending Decline, 2019-2020, Japan

From data to my real life observations: Japan’s progress towards digital payments

While these different reports show that Japan is willing to shift to a more cashless society, and people are slowly changing their behaviors, recently, two things have grabbed my attention. For example, last week I went to a Summit grocery store. During the checkout process, I noticed something I haven’t previously encountered. At the counter, there was a sign promoting QR payments. I’ve seen indications of this at 7-Eleven, but this was the first time noticing QR payments at a grocery store. The QR payment system being used is called CloudPay which currently supports PayPayLine PayMerpayAlipayWechat Payau-PAY, and others.

My second observation is the development of SonyBank’s products and services. They are making a push to promote its banking services to English speaking customers in Japan. Their new account opening service makes digital access more convenient as you no longer have to visit a branch to open an account. According to the app, it only takes around 20 minutes to open an account. While 20 minutes may seem like a long time compared to some applications, it beats going back and forth to the branch multiple times because you may not have documents you didn’t know you needed in the first place.

Japan is a great country to live in. Making progress in digital banking transformation will only make it better. While it may not be as far along the curve as other countries regarding this aspect, we can look forward to an increase in momentum in the coming months.