Cash is king in the land of Samurai. Why Japan is still offline?

Cash is king in the land of Samurai. Why Japan is still offline?

Japan is the world’s third-largest economy known for innovation, but it still lags far behind its peers in cashless transactions. Non-cash ratio (% transactions not done in cash) for Japan is 18%, while US is at 55% and South Korea at 89%. The Japanese government is making huge strides to get to a 40% non-cash ratio by 2025. COVID has also been a big tailwind for the country. While the journey ahead is long, the tides are shifting.

There’s a reason why cash works

The dominance of cash transactions is attributed to a series of government policies starting in the late 1990s.

Benchmark interest rates are negative, and long term yields are also marginal. So, the consumer practically makes no money, if not loses money, in a bank account. While the obvious alternative is equities, the low risk appetite of Japanese retail investors leads them to hoard more cash.

In 2015, Japanese government lowered the inheritance tax threshold. This released billions of dollars languishing in savings accounts into the hands of a younger generation that promoted investments in stocks and increased cash balances. With the abundance of cash at homes, much of consumer transactions in Japan are made with cash.

Culturally also Japanese are skeptic of credit cards. Consumers fear they’ll spend more and small businesses want to avoid paying bank processing fees.

What is government doing now?

In late 2019 ,the government started providing subsidies to SMEs for installing cashless-payment equipment and 5% rebates for consumers making cashless purchases at registered businesses through the end of June 2020.

Under the program, about 2 million small and medium-sized companies can install cashless payment terminals using the government subsidies. Funding consumer rebates finished in mid-2020, but surveys indicate over 86 percent of Japanese consumers plan to continue making cashless purchases even after the rebate system concludes. Overall willingness of consumers to go cashless has also gone up.

COVID-19 has been an enabler

Social distancing to combat the COVID-19 crisis is changing behavior in Japanese society, as everywhere. Shift toward digital healthcare services, digital government ID and payment methods, and telework has made Japan more online.

But one of the key reasons to move cashless is due to sanitary reasons. About 60% of the population wants to transact in a cashless manner to “reduce infection risk due to contact” in addition to “profit”. Based on a recent survey, people who use cashless payments has gone up by 6% since COVID. The most frequent use-cases are shopping for daily necessities at actual stores such as supermarkets, convenience stores, and drug stores, but online sales and use at restaurants are also increasing.

New business opportunities opening up

SMBs contribute $2 trillion of revenues in Japan annually, but ~90% of their transactions are in cash. However, these SMBs are at inflection point and need to digitize their storefront and payment solution. Taking a bet on this trend, I was a part of Paypal’s recent investment in Hey.

An online platform that can enable e-commerce and provide insights on customer outreach, marketing and customer service is important for SMBs. While players like Shopify do this job well globally, Japanese market is very nuanced. Hence, a local player can serve the unique needs of these businesses better. But the reality also is that the economy is still offline. And to truly cover the entire spectrum of cashless transactions, one needs to take care of card payments/QR codes and other payment mechanisms.

Hey not only provides an online e-commerce platform, but also provides an offline payments solution. For every non-cash transaction that an SMB has, Hey has a tailored solution: from accepting online payments, wallets, and QR code for online purchases to offline transactions. And, providing the full stack solution to help SMBs set up their online shop and run their offline presence positions Hey uniquely in the market. This unique omni-channel approach is their secret sauce, and I am super excited to see how their journey pans out!