Japan: The Next Frontier for the Payments Revolution 

The third-largest economy in the world, Japan is a developed country with a high per capita income. For generations, Japan has been recognized for the size of its market, the might of its industry, and the crucial role that it plays as a member of the G8 Summit.

Given its futuristic infrastructure, the quality of its public services, its high standard of living, a North American tourist like myself should be equally at home in Japan. Yet, on my recent trip there, it was actually the experience of the day-to-day that was utterly foreign to me. To the uninitiated, it may come as a surprise that transactions in Japan are almost exclusively made with cash. While I did have prior knowledge of Japan’s heavy reliance on cash, I hadn’t realized just how deeply it affected the nature and pace of day-to-day life there.

A culture of cash

At a busy train station in Tokyo, it dawned on me that I couldn’t buy a ticket with my credit card. Unaccustomed to carrying cash, I followed the multitude of other passengers lining up to use the ATM; an American couple, looking mildly flustered, had to line up a second time after they realized that the ATM had swallowed up over 20 percent of their cash withdrawal, in fees.

At the local Starbucks, I was the only customer who asked to use the card reader, which was gathering dust under the counter. At an antique shop in Kyoto, the proprietor explained to me that neither he nor any of the businesses in the area accepted any form of electronic payment.

Whether you’re eating out, buying tickets, or shopping for groceries, cash is the default method of payment in Japan. Indeed, you are hard-pressed to find a local business with a card reader on the premises.

It isn’t that the Japanese do not have access to credit cards – on the contrary, there are 258 million cards in circulation in Japan, more than twice its population. It’s just that the large majority of businesses do not see the wisdom in coughing up the unreasonably high transaction fees charged by local card issuers every time a customer makes a purchase. Currently, card-processing fees average between 3 to 5 percent in Japan; in comparison, merchants pay between 1.75 to 2 percent in transaction fees in North America and Europe.

According to the Boston Consultancy Group, over 65 percent of payments in Japan are settled in cash – in other developed countries, the figure stands at 32 percent.

This overwhelming reliance on cash expresses itself in curious ways. It’s a common sight to see people carrying wallets and purses stuffed with bundles of notes; even the rules of eCommerce have been bent into shape – the largest online marketplaces in the country allow customers to pay for their online orders in cash at neighborhood konbinis (convenience stores).

Cashless Japan: A new vision

Beyond the peculiar optics of this culture of cash, there are serious concerns about the risks and costs – both real and opportunity costs – associated with it. According to the Nikkei Asian Review, Japan loses over 2 trillion yen or $17.6 billion every year on printing notes, maintaining ATMs, along with other administrative costs associated with handling cash.

The dependency on cash has a detrimental effect on revenue from tourism too. Japan, which will be hosting the Summer Olympics in 2020, expects to host 40 million tourists next year. With the government looking to the tourism sector to boost the country’s GDP, the culture of cash, prevalent at business establishments across the country, would certainly undermine tourist spending.

The widespread use of cash also makes Japan especially vulnerable to money laundering: Japan has been on the Financial Action Task Force’s (FATF) scanner since 2008 for lacking adequate AML controls.

To curb these risks and reduce these unnecessary costs, Japan’s Ministry of Economy, Trade and Industry (METI) announced its “Cashless Vision” a few years ago, setting a target to double the percentage of cashless transactions in the country by 2025; its long-term goal is to take the percentage of cashless payments to 80%.

Studies have already proven that going cashless can be a huge stimulus for economic growth – cashless payments have shown to increase household expenditure by 0.18 percent every year, besides creating 2.6 million jobs annually and increasing GDP.

On the cusp of a payments revolution

Meanwhile, several Japanese companies have taken notice of these developments and have already launched a slew of mobile payment products and devices; in a bid to corner the market, they have begun offering massive discounts and incentives to customers. Likewise, the government has been taking steps to incentivize merchants to adopt cashless payments.

Despite these developments, however, if my recent visit to Japan is anything to go by, progress has been slow and a lot of work needs to be done. Cash will be king so long as the those on the frontlines of the transaction, i.e. merchants, are inclined to think otherwise.

We may be witnessing the first stirrings of a payments revolution in Japan. So far, however, the major international players – the payment companies, which together power both online and offline payments in much of the developed and developing world – have been conspicuously absent from the revolution.

It’s about time they took notice; given their scale, their global experiences in accelerating the pace of merchant adoption both online and offline, Japan represents an enormous and untapped opportunity.

For Trulioo, Japan – with a population of 126 million people and a mobile penetration rate of 85 percent – is a new frontier for growth. Since 2014, Trulioo has helped some of the world’s fastest-growing payment companies accelerate their pace of global expansion and onboard merchants and customers in markets around the world. There is no reason why Japan should be an exception.

Japan’s transformation into a cashless society is a vast and ambitious project; Trulioo is committed to being a part of this story and will make significant investments in Japan in 2019 and beyond. For this revolution to succeed, however, there needs to a concerted effort involving the Japanese government, regulators, and payment companies.