How e-commerce is disrupting Japan's love of cash

March 31, 2021 11:08 AM

Despite Japan being a heavily cash-based economy, e-commerce has created significant opportunities for banks and mobile wallet providers.

COVID-19 has fueled the nation’s internet shopping demand and, Japanese consumers have demonstrated a preference to pay with credit cards and other digital payment forms.

Based on data from a Frost & Sullivan blog, about 75% of Japan’s payment transactions were still being settled in cash just before the COVID-19 pandemic struck. However, that’s not necessarily the case for online shoppers, which is an important segment of the retail landscape — Japan is the world’s fourth-largest e-commerce market, based on United Nations data, after China, the U.S. and U.K.

The Japanese e-commerce market received a strong boost in 2020 as a result of COVID-19, as did many Western countries, driving the payments volume above predicted levels — about a 10% growth vs. a pre-COVID-19 forecast of 7.2%.

Japan’s e-commerce market was estimated to have reached over $197 billion in total payment volume in 2020, according to Global Data’s Banking and Intelligence Payments Center. Japanese e-commerce payments volume is expected to rise to roughly $263.5 billion in 2024, a 34% increase from 2020 volume.

The percentage of households shopping online grew to 50.5% in 2020, up from 42.3% in 2019, representing a 19% increase in online shopping adoption.

Japan is likely to continue pandemic-related shopping behaviors in the months ahead. CBS Sports reported that the Tokyo Olympics will still take place in July, but no foreign visitors will be allowed in the country for fear of spreading the virus. Additionally, the country lags far behind in vaccinating its own population against the virus, with roughly 65,000 people vaccinated in the whole nation, or about 0.05% of its population, based on the Johns Hopkins Coronavirus Resource Center.

Examining data from cross-border payment solutions provider PPRO’s Payments Almanac, the Japanese market more closely resembles the U.S. and U.K in terms of credit card ownership, banking levels and internet access than it does other Asian countries like China and India.

For example, credit cards are owned by 68% of Japanese adults, slightly above U.S. and U.K. ownership rates of 66% and 65%, respectively. In contrast, only 21% of Chinese adults own a credit card and just 3% of Indian adults own one. This has led developing countries such as India and China to lean on adoption of mobile wallets, such as Alipay and Paytm, for e-commerce transactions.

Low credit cards ownership means that future e-commerce growth is limited to the amount of consumer deposits held in bank accounts or mobile wallets. In other words, since China’s Alipay and India’s Paytm are funded using existing bank deposits, there is a cap on how large China’s and India’s e-commerce markets can grow without greater access to credit.

Japanese adults own on average 2.8 credit cards, with approximately 293 million credit cards in circulation as of March 2020, according to the non-profit Japan Consumer Credit Association.

Payment cards control roughly two thirds of Japan’s e-commerce payments volume, making them the dominant payment method for internet shoppers, based on PPRO’s Payments Almanac. While cash plays a major role for in-store payments, this has not translated into e-commerce spending.

In countries such as Brazil and Mexico, where cash payments are similarly high for in-store transactions, there is a strong preference for using cash online. Across Latin America multiple cash acceptance networks have sprung up; in Brazil, cash represents about 18% of all e-commerce transactions.

Japan does, however, allow consumers to make cash payments for internet purchases when leveraging one of the major cash acceptance networks, such as the cash acceptance brand Konbini payments. Konbini acceptance points include 7-Eleven, Family Mart and Lawson, covering a total of 52,000 stores across the country.

E-wallets and other payment methods are also growing in popularity and beginning to challenge the position held by cards. In June 2020, U.K.-based Bango added SoftBank to its list of Japanese mobile phone carriers whose customers can now make purchases in their Amazon accounts and charge the cost to their phone bill. Bango now powers carrier billing for Amazon across Japan's three largest mobile operators, including KDDI and NTT Docomo.

The strong preference for using payment cards for shopping online doesn’t necessarily translate into an easy victory for Visa, Mastercard and American Express. PPRO data found that local credit card schemes, such as JCB, control roughly half of the credit card market in Japan.

Visa had roughly more than a one quarter (27%) share position, while Mastercard had about one fifth (19%) and American Express commanded just 2%. Other networks include China’s UnionPay network and Diners Club, which is owned by Sumitomo Mitsui Trust Group.

The growth in mobile wallet use represents an opportunity for foreign card networks. The expansion of wallets such as Apple Pay in Japan can act to expand market share positions of the U.S.-based card networks when they are used as a funding mechanism.

Cross-border e-commerce represented roughly 10% of Japan’s e-commerce volume, based on data from JPMorgan’s 2020 E-commerce Payment Trends – Global Insights Report; this is relatively low compared to a 50% level it saw across the wider Asia Pacific region using Edgar, Dunn & Company data. JPMorgan attributed the lower level of cross-border commerce to Japan’s single-language culture, which may have discouraged foreign companies from setting up websites to cater to Japanese consumers.

China and the U.S. control a combined 62% of Japan’s cross-border e-commerce trade through merchant offerings that emphasize a wide array of choices, value and an advanced delivery infrastructure that can enable fast deliveries.

South Korea comes in third place, in terms of market share, at 11% and this popularity is believed to be as a result of its close proximity to Japan.