In Japan, COVID-19 Puts a Brake on Merchant Cashless Payments Adoption

In Japan, COVID-19 Puts a Brake on Merchant Cashless Payments Adoption

by June 3, 2020

The COVID-19 pandemic and the resulting economic turmoil have put a brake on merchant adoption of cashless payments, according to a new report by S&P Global Market Intelligence.

The Japanese government launched a cashless incentive program last year to sustain spending levels following a consumption tax hike as well as to encourage electronic payment acceptance leading up to the Tokyo 2020 Summer Olympics.

The program, which runs from October 2019 to June 2020, offers consumers rebates of between 2% and 5% for purchases made via credit cards, debit cards or e-money. For small and medium-sized enterprises (SMEs), the program provides subsidies for installing cashless-payment equipment.

Since the start of the program, 1.1 million SMEs have come on board, but since the beginning of 2020, adoption has slowed down significantly in the wake of the COVID-19 pandemic, with retailers joining the scheme between January 11 and May 1 only accounting for 15% of that number.

Behind this, the S&P Global Market Intelligence report notes the lengthy receivables cycles and the high fee charges Japanese merchants must bear in order to accept cashless payments.

While mobile wallets in other countries would typically offer lower transaction fees than traditional card networks, the settlement cycle and fee structure of most of the leading e-wallets in Japan closely resemble those of card schemes.

This is because Japan’s top e-wallets are actually operated by credit card companies and used as a means to promote in-house credit cards. Hence, there is little incentives for these companies to offer lower merchant fees of e-wallets since that could cannibalize their card fee revenue, the report says.

Cashless Japan: E-wallets merchant discount rates and payment cycles, Source: S&P Global Market Intelligence, April 2020

E-wallets merchant discount rates and payment cycles, Source: S&P Global Market Intelligence, April 2020

According to the Cashless Vision report, released by Japan’s Ministry of Economy, Trade and Industry, or METI, in 2018, the average rate charged to a merchant in Japan for payment processing services, also known as the merchant discount rate, is 3.09%, while the disbursement of sales proceeds can take between two weeks and a month.

As a comparison, in China, Ant Financial’s Alipay and Tencent’s WeChat Pay charge 0.55% and 0.6% respectively, and funds are disbursed to a merchant’s account within three working days after the settlement date.

For Japanese merchants to be willing to bear the costs and drawbacks of current cashless payments solutions, they must be confident that adopting such services would lead to an increase in sales that justifies the additional costs.

But with the COVID-19 pandemic, the resulting economic slowdown and the postponement of the Tokyo Olympics, merchants’ earnings have and will continue to take a hit. Adopting digital payments would further erode their already diminishing revenue, the report says.

Despite Japan’s reputation as a futuristic and innovative nation, Japanese consumers still lag far behind their international counterparts in using cashless methods, with four out of five purchases in Japan still being made with cash.

96% of transactions in South Korea are digital, and 66% in China are cashless. Meanwhile, Sweden aims to become a cashless society as early as 2023.

But while S&P Global Market Intelligence argues that the COVID-19 pandemic will likely slow Japan’s cashless chase, other industry observers and experts believe that the health crisis will actually accelerate cashless payments adoption.

Data and analytics company GlobalData forecasts that the number of card payments in Japan will grow by 2.6% in 2020 while ATM withdrawals will shrink by 5.5% as the COVID-19 pandemic continues to drive customers away from cash transactions.


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