Mobile Payments in Japan Leading The Way

November has been a big month for mobile payments in Europe with announcements from Royal Bank of Scotland about mobile debit payments using MasterCard PayPass, from DnB Nor about trialing mobile contactless payments in Norway from 2008 and from Barclaycard with O2 and TfL.

However, while these developments may help to bring the vision of mobile contactless payments that little bit closer in Europe, they are insignificant compared to the use of mobile contactless in Japan. There, over 40 million mobile handsets with contactless functionality have been sold by the mobile operators in the past three years and there are over 30 million subscribers currently, out of a total market size of approximately 100 million.

Yet questions remain about how well used and liked the system actually is. The three biggest operators are NTT DoCoMo with 25 million ‘Osaifu Keitai' phones in issue. KDDI's ‘au' service and Softbank (previously Vodafone) share the remainder. There are more than 310,000 acceptance points, with DoCoMo investing in both retailers and in card companies, such as Tower Records Japan, FamilyMart and Mitsui Sumitomo Card to encourage growth in the number of acceptance points.

NTT DoCoMo launched the Osaifu Keitai service in 2004. “NTT DoCoMo assumed that promoting the Osaifu Keitai could prevent churn,” says Naohiro Yoshikawa, general manager, IT and finance strategy, Nomura Research Institute. “But Softbank's pricing strategy worked better.”

The reasons according to company spokesman Kiyota Nagata, vice president, NTT DoCoMo were to enhance the image of the company, to promote phones as lifestyle tools and to create new business areas, for example credit payments. Japan is an intensely cash focused society and credit services tend to be offered by companies other than banks so this was a natural potential area for a telco.

NTT DoCoMo offers the ‘iD' credit payment service to its phone owners who can charge low value purchases to credit of up to $80 a month. There are now more than 4.3 million iD subscribers since its launch in December 2005 and more than 210,000 iD enabled terminals in retailers, which include petrol stations, taxis and convenience stores. NTT's target for March 2008 is 250,000 locations and 4 million users. “Over 70% of phones shipped [in Japan] in 2007 will have mobile FeliCa,” comments Keiichi Kurakazu, vice president of FeliCa Networks.

Phone users can choose from a wide range of services for their phones - over 70 different applications, according to Kurakazu. Most of these applications were available on cards previously and many users have been happy to switch. “I had no concern about switching from cards to the phone. Before I had over 20 cards in my wallet but now they are on my phone,” says Takeshi Marui, department manager, Renesas Technology Corporation. “It stores a lot of applications - electronic money, railway pass, plane ticketing. So most Japanese were not frustrated at switching from card to phone.”

“As people are familiar with using contactless IC card for riding trains, payment by e-money is not a very special thing to the Japanese people. The variety of handsets equipped with Osaifu-Keitai function in the market, the easy to use application and the expansion of the point of sale terminals which accept contactless payment has driven people to use mobile contactless payment,” states a NTT corporate spokesperson.

Apart from iD, other applications available include Edy, one of the longest standing prepaid payments services. As of July 2007, Edy has 6.1 million mobile subscribers. Edy can also be used online for internet shopping - many Japanese portable computers, including Sony's Viao range have built in FeliCa readers.

One of the latest services to be introduced is ToruCa, which is a voucher download service and will form the basis of a joint venture between McDonalds and NTT DoCoMo. Convenience store chain 7-11 has also introduced its own prepaid mobile application, which it calls Nanaco. “They [7-11] prefer to use their own money,” says Hiromasa Otsuka, SVP, FeliCa business division, Sony. “But they take Edy too. If they focus on only one, they'll be limited as to the number of customers.” Nanaco has 0.55 million (as of October 2007).

Other applications include credit card applications: JCB's mobile credit card system, QUICPay, UFJ Nicos' smartplus using Visa International's Visa Touch (which is FeliCa based), eLio credit from Sony, airline ticketing applications from ANA and JAL, cMode, which is electronic money from Coca Cola, event ticketing applications and membership card applications.

One of the most widely used applications is transit payments system Suica, operated by East Japan Railways. It offers stored fare payment, e-cash, a commuter rail pass and access to first class local rail. It was originally launched in November 2001 and there are now 21 million cards in issue (with 10,000 more being issued a day) and, since January 2006, 700,000 mobile phones carrying the Suica application. Over 1 million phone based users are expected by the end of 2007.

October 2007 figures show Edy experiencing 22.5 million transactions a month, Suica 18.73 million and Nanaco 32 million.

Despite these seemingly impressive figures there are accusations that the mobile wallet may be widely owned but not widely used. Yoshikawa says that mobile wallets are popular in part with Japanese citizens. “To hold electronic money and to pay with it at CVS and railway stations is becoming popular,” he says. “But one thing I would like to emphasise is that Japanese people want IC cards, not Osaifu Keitai. Downloading electronic money applications has not yet been as popular as we expected.” He cites his personal experience. “When I use the mobile wallet, my concern is that I will lose it and everything stored on it. It's easy to leave a phone in a taxi.”

That perspective seems to be reflected in the figures. NTT's Nagata says that over 30% of handset owners actively use the services. Hideharu Takebe, managing director of Renesas Technology says that 30% of users use their handset at least once a month. However Marui says, “My understanding is that of those who have these mobile handsets, half of them have not installed the payment system. It is not surprising that older Japanese don't use it.”

Otsuka says usage depends on the application. Suica users are likely to use the service every day for their commute and to buy a newspaper. Edy may be used a couple of times a week, Nanaco maybe every two days. “Transport applications are making people more used to using mobile rather than having cards in your wallet,” says Hiramoto. “The trend is there - it's growing, especially for transportation or convenience stores.”

Research carried out in Japan in January 2007 by InfoPLANT, a Japanese research company, found that an average of 66.4% of Osaifu Keitai owners had not used any of the wallet functions on their phones. An average of 41.8% did not see any merit in using mobile phones for payment. Loyalty or membership applications created most interest.

Despite these issues, can Europe learn from the FeliCa based mobile contactless experience in Japan or are the differences between the systems too great? For a start, the ecosystem is clearly very different. In Europe, the question is how banks and mobile operators can co-operate to make mobile payments happen, with an emphasis on what and how much banks should pay operators. In Japan, the service is simply provided by 95% of mobile operators. “It's a unique situation in Japan,” says Marui. “It's a difficult question but my personal view is that the same ecosystem will not work outside Japan.”

“The three telcos are very dominant and they are able to set the tone in creating the ecosystem as opposed to the other way of doing it which is everyone co-operating,” says Harimoto. “If you have a very dominant player they might be able to make the market, so in that sense it was easier for Japan to do this.”

For the time being then, the Japanese system remains technically and commercially distinct. Nonetheless, there are lessons to learn. “Changing consumer attitudes towards technology is difficult,” says Yoshikawa. “People believe in tangible goods like cards.”