Big Tech makes a play for the fragmented Japanese payments market

Written by Kapronasia || March 02 2023

Japan’s affinity for cash has made it a relative laggard in adopting digital payments, especially compared to neighbors like Korea and China. Japan only broke the 30% milestone for cashless payments in 2021, partially due to the pandemic. In contrast, Korea was almost 94% cashless in 2020, while China was not far behind at 83%, according to the World Economic Forum.

That said, given Japan’s large market size of 126 million and unhurried adoption of digital payments, there remains ample low-hanging fruit that dozens of payments providers are eager to pluck. The sheer array of e-payment options in Japan – some which have emerged only in the last few years – is staggering, and has led to a fragmented market where it is difficult for any of the competing firms to gain commanding market share.

Under this scenario, deep-pocketed Big Tech firms with wide reach that can afford to heavily subsidize customers could end up dominating the Japanese payments market as they do in China and Korea. These firms include native Japanese payments firms PayPay, Line Pay and Rakuten Pay as well as the U.S.’s Google Pay and Stripe.

The SoftBank factor

Japanese telecoms giant SoftBank has become of one of the biggest e-wallet players in Japan thanks to its ability to persuade merchants to accept PayPay. By mid-2021, PayPay was available at about 3 million merchants in Japan, top among Japanese e-wallets. PayPay also controls 45% of the QR code payments market.

To win merchants over, SoftBank resorted to the very tired but true tactic of massive subsidies, in one case giving away ¥10 billion in 10 days. SoftBank has been and will continue to lose money with this approach, but with tens of billions of dollars in cash on hand, it can afford to play the long game.

Eventually, borrowing a page from Ant Group’s book, SoftBank hopes that PayPay can segue into higher-margin segments of financial services like savings, lending and wealth management. That would require new licenses, which may or may not be forthcoming.

PayPay also benefits from its access to the massive user base of the Line app, made possible by the March 2021 merger of Line with SoftBank's Z Holdings, giving PayPay access to Line's roughly 90 million users, up to half of which use the Line Pay wallet.

The Rakuten ecosystem

As Japan’s largest e-commerce platform and founder of its first digital bank, Rakuten is also a significant player in the country’s growing digital payments segment. As of the end of 2021, Rakuten Pay could be used at 5 million locations nationwide.

Not to be one upped by PayPay, Rakuten Pay rolled out a generous subsidy program of its own in October 2021, claiming that its services would be “effectively free” for new merchants to use for the next 12 months. Of course, not every merchant who signed up would get the services for free, only SMEs with annual sales of ¥1 billion or less.

The idea was to swiftly onboard more SMEs into the Rakuten digital services ecosystem, which has a loyalty points system that is popular with shoppers. The Japanese e-commerce giant reckons that SMEs can attract more business if they allow consumers to use their Rakuten points.

While Rakuten Pay has about 32.5 million users in Japan and almost a 17% share of Japan’s QR code payments, the company as a whole has been struggling financially, which could put a strain on future efforts to subsidize customers. Rakuten Group posted a record net loss of ¥372.8 billion in 2022, far larger than its loss of ¥133.8 billion in 2021. Its cybermall and mobile phone group incurred a net loss for the fourth straight year after spending heavily to construct mobile phone base stations.

U.S. Big Tech eyes Japan’s payments sector

Several large U.S. tech companies are also increasing their presence in the Japanese market. In mid-2021, Google acquired the Japanese payments startup Pring, in which the three largest shareholders were fintech firm Metaps, software company Miroku Jyoho Service and Nippon Gas, for between ¥20 billion and ¥30 billion.

Google was likely interested in Pring for two main reasons. One, the U.S. tech giant wants to provide financial services independently in Japan, rather than in partnership with major credit cards and prepaid card brands. Second, Pring had a large corporate customer base, which included 50 Japanese banks, including the three megabanks, and the 7-Eleven convenience store chain.

U.S. payments sensation Stripe is also deepening its presence in the Japanese market. In April 2022, Stripe began supporting Furikomi and Konbini payments in Japan. Furikomi lets businesses securely transfer funds directly from their bank accounts and is the most popular B2B payments method in Japan. Konbini payments allow consumers without access to cards, or who prefer to use cash, to pay for online purchases at their local convenience stores. Konbini payments make up 18% of the nearly US$167 billion annual online B2C payment volume in Japan. Stripe will support Konbini at 34,000 convenience store outlets in the country.

Steady as she goes

Looking ahead, we expect Japan’s cashless payments market to continue growing steadily on the back of strong government support – though do not hold your breath for the kind of cashless adoption seen in China and Korea, at least not anytime soon. Rather, Japan will likely reach its modest target of 40% cashless payments by 2025, and could gradually increase the ratio in the following years.

Different tech giants will aim to lure merchants and consumers into their respective ecosystems, but the lack of significant differentiation in the user experience could make user growth dependent on subsidies for a long time. In that case, firms struggling financially like Rakuten will have a harder time.

One government move that may help drive faster cashless adoption – and increase opportunities for e-wallets – is the Japanese labor ministry’s decision to permit e-money salary payments. Public and private sector employees who agree to receive a part of their wages virtually will be allowed to hold up to ¥1 million yen in their digital salary wallets.

Many people will probably opt to receive a portion of their salary via their digital wallet for daily purchases and other transactions, while the rest of their wages will be received through a traditional bank account.