Fintech in Japan: How App Payments Are Changing Cash Culture

Many visitors to Japan are always surprised by one thing. Despite its East Asian neighbours moving rapidly towards a cashless future, Japan is a cash society. Tokyo’s neon lights and sleek and high-tech public transport system often give the impression that Japan is a place where the future happens. Hop off the train at the newly opened Takanawa Gateway Station and you’ll find a station that has its cleaning and security handled by robots.

However, delve a little deeper and you’ll find a society that still buys CDs and prefers books over e-books. Whilst there is a lot to be said for upholding older traditions, in regards to payments its beginning to make Japan look a little dated. Moreover, it economically doesn’t make sense with ATM running costs totalling a bill of up to $17 billion a year. It is also a detriment to public health in a world where cash could easily be spreading the virus.

In times like this, change can be accelerated and there is evidence to suggest that this happening in Japan too where not only cashless payments but also teleworking was virtually unheard of until now. For example, a cashless rebate system where consumers were refunded up to 5% of the cost of an item if paid with QR code payment or has seen wide societal acceptance with a million businesses joining the system. Moreover, many consumers also plan to continue with cashless payments after the rebate program ends in June. Moreover, digital wallet provider Kyash recently gained $45 million in funding to help Japan convert to cashless payments amid the coronavirus outbreak.

Economies such as the UK and Singapore have seen digital-only banks entering the market challenging legacy players. Aside from a recent innovation from newbie Sony Bank that allows customers to open a bank account in-app, the vast majority rely on the so-called megabanks. However, with their net margins dropping, companies such as Line, Softbank and Yahoo have stepped into the digital payment playground utilising already existing communities.

Line Pay, a QR code payment solution embedded within the widely used Line messenger app, is one such player. Whilst not a licensed bank, Line Pay resembles much of what European customers of app-only banks are used to and more. Although a traditional current account is needed to top up the app, Line Pay primary payment solution is via QR code. Moreover, available in-app is the ability to invest and even buy insurance. The app also houses the loyalty cards of retailers such as Starbucks and Muji. You can also access a report of your spending habits.

You can even borrow money with the Line Pocket Money feature, which serves to hide the idea of credit behind an innocent-sounding name much like Klarna’s Slice-It feature. In China, this has resulted in many young people finding themselves in digital debt. Much like Line’s Pocket Money feature, Chinese app Ali Pay has an added credit function to their QR code payments. This has meant that some have fallen into the trap of borrowing from one online service to pay back another. Due to their relative novelty, millennials like myself lack any kind of financial literacy concerning these apps.

Pay Pay, a joint venture form Yahoo Japan and Softbank offers similar services. However, what is most notably about both of these apps is their encouragement of consumer culture. This is done by utilisation of the idea of membership paired with a cashback system. For example, both offer up to 3% in cashback with this increasing the more you spend. The more payments you make also increase your status with Line Pay offering you a platinum status with access to coupons and the ability to register for a credit card.

Using these apps gamify the idea of spending allowing the customer to level up the more that they consume. Such concepts can easily take away the negative aspects of spending as they effectively reward you for parting with your hard-earned (digital) cash. Being a platinum status member of Line Pay may help to psychologically cushion a customer whose current account figures are dwindling. Although they may create an incentive for digital payment solution adoption helping Japan reach its digital payment goal, such apps could encourage dangerous spending habits. This is especially palpable for Japan’s already financially vulnerable youth who are the main demographics of such apps.

Moreover, there are questions of privacy hanging over Line in particular. When making payments through the Line app you are automatically signed up for newsletter adverts. The more serious privacy implications, however, come from the main messenger app which lack of well designed end-to-end encryption means that deleted messages could be theoretically retrieved by a third party with access to Line’s servers. This causes us to question how much we can truly trust an app for our financial needs which does not even adequately ensure privacy over our conversations.

With Japan’s aims to increase cashless payments to 40% of all transactions by 2025, questions need to be asked. Will this transformation of the payment system plunge Japan’s youth into digital debt as it has done in China? How safely are such digital transactions handled in a world where hacking has become the norm? These questions are ones that appear to be commonalities surrounding app payments in every territory. The answers, however, will become clearer when the dust finally settles on this new frontier of fintech.