Breaking Japan’s cash habit by nudging wage earners

Two-thirds of all transactions last year involved currency, which is costly for Japan’s banks and a drag on its economy. PHOTO: AFP
A shopper holds a Japanese 1,000 yen banknote at a store in the Sugamo Jizo-dori shopping area of Tokyo, Japan, on Tuesday, Jan. 13, 2015. Japan plans a record budget for next fiscal year to support an economy that fell into recession after Prime Minister Shinzo Abe's government increased the sales tax. Photographer: Tomohiro Ohsumi/BloombergOhsumi/Bloomberg Bloomberg
This photo taken on July 25, 2019 shows a notice for payment via PayPay -- a tie-up between Softbank and Yahoo -- displayed at a Koguma restaurant in Tokyo. - Once a pioneer in cashless transactions, Japan is lagging behind as the world's biggest economies increasingly embrace electronic payments because its ageing population still prefers physical money. (Photo by Toshifumi KITAMURA / AFP) / TO GO WITH Japan-technology-retail-cash-social,FOCUS by Anne BEADE AFP

TOKYO – If supply of alternative payment options could whip up its own demand, Japan would be near-cashless by now. Since that is far from reality, the government is giving people a helpful nudge, prompting them to use their mobile wallets more often than their physical ones.

The Japanese preference for cash is well known. The surprise is that it refuses to die despite an abundance of other choices. In addition to credit and debit cards – and their digital versions – most large retailers now accept at least half a dozen QR code-based services. For small-value purchases at the corner store, transport providers’ stored value cards and their mobile app avatars are a popular substitute for yen banknotes.

Yet, two-thirds of all transactions last year involved currency, which is costly for Japan’s banks and a drag on its economy. A country where the working-age population has shrunk 14 per cent over the past quarter-century is loath to deploy labour in low-productivity activities such as filling up ATMs and collecting notes and coins from businesses. 

This is why the Labour Ministry is lifting its ban on e-money salary payments. The 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 (S$9,600) in their digital salary wallets. If an online operator goes bankrupt, this balance will be refunded to the consumer. With that guarantee, which mimics the 10 million yen public deposit insurance in the event of a bank failure, labour unions have given their backing to the plan, ending a debate that began in 2020.

It is a major win for the government as well as for the likes of PayPay and Line Pay, both backed by SoftBank Group, and Rakuten Pay, promoted by local e-commerce giant Rakuten Group. And it could be just what Japan needs to get into the habit of spending virtually. 

In the space of just a few years, the array of cashless payment options has exploded. QR code is the fastest-growing non-cash system, thanks to near-zero set-up costs for merchants and heavy promotion by firms such as SoftBank. 

SoftBank spent heavily on PayPay, signing up customers with generous discounts, and making it free for merchants to accept payments for the first several years. This investment has paid off, with PayPay controlling 45 per cent of the QR code payment market, according to market researcher MMD Labo. It boasts 51 million registered users – or around half the adult population.

E-commerce and telecommunications players are also looking to keep users spending within their expanding networks. Rakuten, which already offers more than 70 services, recently added investments with e-money to the menu. It has around 17 per cent of the QR code payment market, with mobile operator Docomo and rival KDDI holding similar shares. Mercari, a flea-market app operator that is one of the few Japanese start-ups to make a dent in the United States, has 3 per cent. 

In terms of penetration and ease of use, contactless mobile transit cards issued by rail networks are second to none. The arrival of East Japan Railway’s Suica on Apple iPhones in 2016 was an inflection point. But in truth, the rail firms should have pounced on their first-mover advantage much earlier. Despite launching mobile options before smartphones, they put in little effort to build up payment networks. Initial standards lacked interoperability between regions, and the point-of-service technology was expensive for merchants. 

Still, Suica and other rail cards remain the best alternative for foreigners as prepaid charge options that can be added to any smartphone. The contactless credit cards that visitors might be familiar with elsewhere have yet to reach true penetration, with the waters muddied by near-field communication standards such as the Quicpay and iD that exist alongside choices like Visa Touch. 

It is all a bit of a mess. The bewildering array of payment methods may also be resulting in decision paralysis for less tech-savvy users – cash is accepted everywhere, after all. Many merchants, especially smaller eateries, would see their minuscule profit margin swallowed by the charge for cashless payments. Others want to keep their transactions off the books, in case the taxman arrives. 

That is one reason the government is betting on digital salaries, the first big change in decades in the mode of worker remuneration. Japan’s Labour Standards Act directs employers to pay all wages in cash. An exception was made in 1975, when bank transfers were permitted, and again in 1998, when employers were allowed to credit employees’ brokerage accounts.

Now, a new set of challengers will get a foot in the door. Fund transfer apps will soak up some of the excess deposits at Japanese lenders, which have billions of dollars parked with the Bank of Japan at negative interest rates. The policy goal of raising cashless payments to 40 per cent by 2025 – and 80 per cent in the long run – will have a shot if purchasing power lands up on a phone by default. E-wallets will be closer to spending avenues than deposits that have to be first withdrawn at ATMs.

“Many people will likely choose to receive a portion of their wages via their digital wallet for daily purchases and other transactions, while the rest of their salary will be received through a more traditional bank account,” a Rakuten spokesman said.

With e-money providers already offering savings products, even the securities business may witness a digital tilt. BLOOMBERG

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