Japan as a country is ripe for change when it comes to how its population makes payments. Despite being technologically advanced, dependence on cash had remained strong over the years. Approximately 75% of payment transactions are still settled in cash and this is costing the Japanese economy more than US$ 70 billion or 7.7 trillion yen each year.
The lack of need to embrace digital payments had long been the bottleneck. The country has a low theft rate, recording only 356.2 cases per 100,000 people in 2016. Vending machines are readily available in most streets offering various products and services in exchange for cash and coins. Increased ATM sharing amongst banks is addressing the need for a constant supply of cash. These conditions maintain cash as king and at the same time make it difficult for digital payment service providers to compete if they do not meet needs and offer added value.
Reluctance to adopt digital payments is especially prevalent amongst the elderly and SMEs. Elderly people in Japan accounted for approximately 30% of the population. They hold more than half of their assets in cash and deposits, and some use cash as their primary budgeting tools. Meanwhile, many SMEs are relying on their daily cash income to run their operations. Most SMEs are concerned about the impact of processing fees imposed by digital payment service providers on profit margins.
The lack of need and reluctance to use are now being revisited and change is on the horizon.
More importantly, change is increasingly being driven by underlying factors that will eventually make it an imperative for the Japanese to adopt digital payments. With youth driving technological advancements within a population that is aging and whose numbers are shrinking, adoption of digital payments will become a critical necessity to address the need within industries faced by labour shortages. It is time tested that where there is need, there will be growth.
With Japan’s economy facing gloomy forecasts from economists that expect the global slowdown and the recent increase in consumption tax to slow growth, the upcoming Tokyo Olympics in 2020 does not only represent an opportunity for local businesses to capitalize on foreign tourist spend.
The Olympics has a proven track record as a large scale trial run and promotional venue for digital payment systems. For example, the UK contactless payments transaction value rose from £2.32 billion in 2014 to £25 billion in 2016 after the London Olympics in 2012 and the Brazilian banks closed down 1,200 ATM machines after the Brazil Olympics in 2016 because of a surge in use of digital channels.
Once an efficient and ubiquitous payment infrastructure is in place, the Tokyo Olympics has potential to leave a lasting impression and the necessary tools to drive digital payments adoption in Japan. The follow on impact on local economic growth will also be a much welcomed plus. The government’s 2025 target to raise digital payments in Japan to 40% of all payment transactions might not be a farfetched idea. All that will be needed will be payment application side development to meet the needs, preferences and behaviour of the Japanese (especially the elderly) as this will be the catalyst for change that will send Japan on its way towards becoming a cashless society.
Written by Quah Mei Lee, Associate Director at Frost & Sullivan