SoftBank's PayPay surges ahead in Japan's digital payments race
11/06/2021 03:17
By Sam Nussey
TOKYO, June 11 (Reuters) - For six decades, shoppers at
Mikawaya, a rice dealer in eastern Tokyo, paid in cash - until
sales staff from payments app PayPay swept through the low-lying
district, persuading the store to give their product a try.
With customers clamouring to use the service and nearby
stores signing up, PayPay's offer of free installation and no
handling fees was too good to refuse, the store's owners say.
"We thought there could be no harm in trying it out," said
Moeko Suzuki, who helps her father run the store, standing amid
sacks of rice. "The number of young people has really
increased."
Owned by deep-pocketed SoftBank 9984.T , PayPay has
deployed a shoe-leather sales force of thousands to target
restaurants, drugstores and supermarkets, attracting more than 3
million merchants, an industry-leading number in a country with
about 5.3 million businesses, according to government data.
"We got rid of the reasons - like it being expensive or a
hassle - to not introduce PayPay," Hajime Baba, PayPay's chief
operating officer, said in an interview.
PayPay is emerging as key driver of a government-supported
consumer shift away from cash as Japan grapples with deepening
labour shortages and the need for social distancing during the
COVID-19 pandemic.
Late to payments, SoftBank drove uptake of PayPay through
cash-back campaigns. In one prominent example, it gave away 10
billion yen ($90 million) in 10 days.
Burning cash on such rebates and - for now - not charging
smaller businesses for its payment service, PayPay is losing
money. But the company also wants to funnel customers to loans,
deposits and shares trading on the app, entailing increasing
exposure to the highly regulated finance industry.
It has attracted more than 39 million users in the two and a
half years since launch, and SoftBank completed a merger between
its internet business and a major PayPay competitor - chat app
Line - in March. Since then, PayPay has added millions of users.
Merchant handling fees, which are set at zero for smaller
firms, will rise this year. Baba said PayPay aims to set them as
low as possible while covering costs.
How the core business fares at that point is crucial to the
service's survival. Merchants such as rice dealer Mikawaya say
the benefits of the app outweigh those costs.
"For retailers, not having a lot of cash on hand or having
zero, which is the ideal, has huge benefits in terms of reducing
administration," said Michael Causton, an analyst at
JapanConsuming.
The model follows that of Ant Financial, an affiliate of
SoftBank's most valuable investment, Alibaba 9988.HK , whose
730 million Alipay users in China can borrow money, check their
credit score and buy wealth-management products through the app.
"We're learning from Ant Financial how we can monetize
(PayPay). They launch short term and basically they're able to
monetize short term," Junichi Miyakawa, CEO of SoftBank Corp,
said last month.
PayPay will hope to avoid the regulatory pushback Alipay
faces in China, where it is being forced to restructure.
It also must continue to overcome the historic preference
for cash or credit card transactions in Japan.
MADE IN JAPAN
By using QR codes, PayPay can process payments via
smartphones and without the need for costly terminals, emulating
frontrunners from markets lacking retail infrastructure.
"They used to say 'Oh, QR codes, it's a technology for
underdeveloped or developing countries,'" said Aditya Mhatre,
who was head of PayPay's product team before returning to
India's Paytm. "That myth is gone."
Japan had many of the building blocks of world-beating
payments services early on. Both QR codes and Felica, the
contactless technology powering East Japan Railway's 9020.T
payments system, were invented by local firms.
PayPay's rivals include Rakuten 4755.T , which is targeting
SoftBank's mobile users and has disrupted the credit card
industry by simplifying applications.
The railway's Felica-based Suica has 9 million users on
mobile and 80 million smartcards issued. The tap-to-pay system
is not used by many small businesses, but is favoured by QR code
detractors who complain apps like PayPay are fiddly.
PayPay is betting on scale to help it stand out and survive.
Chat app operator Line merged with SoftBank's Z Holdings
4689.T in March, giving PayPay access to Line's 88 million
users, some 39 million of which use its payment features.
urn:newsml:reuters.com:*:nL2N2L10TD
"Integration is the key to unlocking potential revenues for
PayPay, and their history of integration at SoftBank and Z
Holdings hasn't always been as fast and optimal as it could have
been," Causton said.
Baba said the profit from SoftBank's domestic units enabled
PayPay's cash-burning expansion. Executives declined to provide
a timeline for profitability but point to falling costs from
cash-back campaigns with more funding from corporate partners
and the government.
The conglomerate hopes to list PayPay, which booked a $660
million loss in the year ended March. SoftBank plans to
consolidate PayPay into its wireless unit after Paytm, which
developed some of the technology powering the app, takes a small
stake in the business.
($1 = 108.9500 yen)
(Reporting by Sam Nussey; Editing by Gerry Doyle)
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