In recent years, Japanese consumers have witnessed rapid diversification in electronic instruments for retail payments. And businesses across many different industries, including banking, have started to actively deploy a wide variety of payment services. Recent development in electronic payment (epayment) services in Japan can be categorised into three business models that potentially overlap in some places: mobile phones, computerised money collection and internet privacy protection.
Mobile Phone Uptake
First, the new epayment services extensively use the mobile phone network infrastructure. For example, in 2008, a new bank that specialises in mobile phone banking was established as a joint venture between a major mobile phone carrier and a leading commercial bank. The distinct characteristic of this new bank’s service is that its account holders can send money to someone else’s bank account by merely specifying the mobile phone number. This service allows the account holder to send money without knowledge of the beneficiary’s bank account number. The bank’s customers can also transfer funds from their accounts to their mobile phones as stored electronic money (emoney). In addition, the bank provides payment services for internet shopping at electronic commerce (ecommerce) sites.
To give another example, a leading mobile phone operator launched a new payment service in July 2009, which enables its phone users to send money by specifying the mobile phone number of the payee. Because the mobile phone operator launched this new service before the Funds Settlement Act enabled non-bank firms to engage in funds transfer, it formed a business alliance with a major commercial bank, which handles the funds transfer operations.
Even some local municipal governments take advantage of the mobile phone infrastructure for tax collection. Since May 2009, citizens of a suburban city in the greater Tokyo area can pay light motor vehicle taxes by simply reading two-dimensional bar-codes printed on tax payment notices with their mobile phone cameras.
The advent of such convenient payment services has been driven by fierce competition among mobile phone operators in Japan. The Japanese consumers cannot help but notice that their mobile phones are equipped with a wide variety of functions for retail epayments.
Computerised Money Collection
Second, IT has helped computerise collection of taxes, utilities, fees and accounts receivable (A/R). Computerisation drastically reduces the collector’s operational risk and cost involved in dealing with cash. The invention of smaller mobile instruments with higher capacity, as well as rapid price reduction and innovation in wireless communication infrastructure, have contributed to computerisation of collection services.
For example, in 2007, a large life insurer introduced nearly 20,000 mobile payment terminals for its sales staff in order to enable cashless operations. According to the traditional business practices, the Japanese life insurer previously had received the initial premium in cash, but, in contrast, bank fund transfers are now used to pay the subsequent premiums. The life insurer succeeded in eliminating this tradition and realising cashless collection of premiums by introducing mobile instruments that have functions connected to credit and debit card networks.
To give another example, in August 2009, one local municipal government in northern Japan made it possible to pay ‘Furusato-nouzei’ (Hometown Tax Payment) over the internet. Individuals can now pay the tax to the city from anywhere in the world.
Privacy Protection on the Internet
Third, the use of the internet is widespread. In order to protect customers’ privacy and facilitate the use of retail epayment instruments, some of the payment service providers have put in place measures to restrict the disclosure of personal information, such as credit card numbers and bank account information of the internet retailer. This minimises the risk of exposing the retailer’s personal details over the internet.
For example, a bank, which was established in 2000 and specialises in internet banking, provides services that allow its account holders to pay money into someone else’s bank account by merely specifying the email address of the beneficiary. The bank’s customers can pay money without obtaining information regarding the beneficiary’s bank account, very similar to the mobile phone example above.
To give another example, a payment service provider manages a highly secure payment system that can be applied for various ecommerce websites. Because to this system, consumers using ecommerce websites can securely transmit the payment information, including credit card numbers, to credit card issuers without leaving any traces of personal information on the websites.
Emoney can be used without exposing the personal information of the payer. A major emoney operator, established in 2001, focuses on promoting the use of its emoney at convenience stores. As of January 2010, this emoney brand could be used at about 170,000 retail stores including most of the major franchised convenience stores in Japan. In addition to in-store payment, the emoney operator provides many other payment services including emoney payment services for internet shopping and emoney transfer between individuals.
Cash Bias and the Environment for Epayment Services
While electronic instruments for retail payments have experienced rapid development and diversification in recent years, cash still remains the dominant instrument for Japanese retail payments. In addition, Japanese consumers tend to use different payment instruments depending on the place, timing and amount of the payment. Diversification of payment instruments intensifies competition among epayment service providers, which are generally required to initially invest a considerable amount of capital, thus facing a difficult business environment in a competitive market.
Deregulation Through the Funds Settlement Act
The Funds Settlement Act was enacted on 1 April 2010. This law was designed to achieve three main objectives:
- Regulation and supervision of issuing emoney stored on computer servers. Previously, the Prepaid Card Law (now abolished) regulated electronic money stored on cards only.
- Deregulation of the funds transfer business. The law lifted the ban on non-bank companies to conduct the business of funds transfer, which was previously limited to banks. Under the new law, registered funds transfer operators can provide funds transfer services for small value payments.
- The licensing of organisations operating interbank payment, clearing and settlement systems.
Now that the ban on the funds transfer business is lifted, it is anticipated that non-bank companies will actively enter into this new business market, which will in turn trigger greater competition and innovation for providing even more convenient services for retail epayments. In fact, many companies in Japan and abroad have expressed their intentions to enter into the Japanese funds transfer business market because of this deregulation plan.
Innovation Potential for Epayment Services
It is expected that the Funds Settlement Act will accelerate development of innovative business models for retail epayment services in Japan. The following paragraphs illustrate possible future scenarios of payment services development in the areas of domestic remittance, international remittance and ecommerce.
In domestic remittance, commercial banks and existing payment service providers have already established a strong customer base. Because these existing players attract customers with convenient services and fee discounts, the newcomers may confront cutthroat price competition in niche markets. Even before this deregulation, a large variety of payment services are provided in Japan. Therefore, there is little room for innovation in convenient services.
At present, the fees charged by Japanese banks in international remittance remain at the level as high as about JPY6,000 (US$63). Therefore, in the business of international remittance, the newcomers providing retail epayment services can take advantage of the lower price and more convenient services. It is forecasted that non-bank firms will enter into this market. In particular, foreign workers who send money home to their mother countries where sufficient bank branch service is not necessarily offered to the general public may consider using the services provided by non-bank firms.
Secure payment for ecommerce
The demand for secure payment services for ecommerce at internet shopping websites is extremely high. According to the Ministry of Economy, Trade and Industry, the Japanese ecommerce market in 2008 was approximately JPY6 trillion (US$63bn). And the market continues to grow every year.
The new service providers can differentiate their services from the existing bank services and other operators by providing services that protect customer privacy. If the newcomers can show strong technological capabilities to secure and protect personal information of the payers, then the payers would be able to enjoy the same level of anonymity that they would enjoy in cash payment. Security is the critical factor for attracting customers.
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