Japan’s Cash Addiction?

25 July 2019 Revision History

The Financial Times has a splashy feature story (paywalled) out about Japan and its heretofore unsuccessful attempt to reduce the use of cash in consumer transactions. Joel Breckinridge Bassett at Ata Distance savaged the article yesterday in a blog post, contending that the piece tries to shoehorn its reporting into the narrative that Japan is backward and out of step with the rest of the world.

Initially, I wanted to leap to the FT’s defence. I’m a paid subscriber and part of the reason that I subscribe is that the newspaper is one of the few foreign media outlets that maintains a team of journalists in Japan whose output is primarily about ‘news’ as opposed to ‘isn’t Japan weird?’ stories.¹ The writers—Leo Lewis and Kana Inagaki—are either long-term residents of Japan or are Japanese. This shouldn’t be a story written from a position of ignorance.

And yet the piece is indeed a mess. Let’s see how.

The story really covers three things, none of which fit together particularly well. First, there’s the failure in Japan of a string of high profile QR code-based payment systems. Second, there’s the failure of Japan to successfully export digital payment technologies. Third, there’s the continued dominance of cash in Japanese consumer commerce.

Let’s begin with QR code-based systems. The article opens with a reference to the recent debacle involving 7-Eleven Japan’s new QR-code based payment system, 7Pay. This leads into a discussion of these systems more broadly and their failure to gain much traction.

The implication is that this is because Japanese people don’t want to switch away from cash but the problem here is the mistaken presumption that if these systems haven’t caught on, that’s the reason. It isn’t. QR code-based systems have failed in Japan because they’re shit. And they’re shit because they’re slow, they’re fiddly and they’re not particularly secure. They’ve failed almost everywhere they’ve been tried. The major market where they’re successful (China) had such low credit card penetration that people were willing to deal with the shittiness of QR codes because they were sufficiently better than cash (in certain situations). Does your society have a plentiful supply of credit cards like Japan does? Congratulations. QR codes will never succeed there.

Next is the failure to capitalise on Japan’s technological innovations. Exhibit A: QR codes which Japan invented. Except what precisely was the opportunity here? By the article’s own admission, these systems have failed in Japan so the opportunity wasn’t to sell into Japan; that wouldn’t have worked anyway. Was it to sell them overseas? Where are the successful deployments? China? Probably a safe bet that the Chinese weren’t going to allow Japanese companies to play a major role in China’s consumer financial system. Don’t believe me? Ask MasterCard and Visa what their market access has been like.

Of course, Japan didn’t just invent QR codes. They also invented FeliCa, the technology behind Japan’s ubiquitous transit cards. Japan isn’t behind in adoption here. Everyone in Japan has one of these cards and everyone uses them. They tend to use them mostly for transit (unsurprisingly) but this does some pretty fundamental damage to your thesis if it’s that Japanese people only want to use cash. But I’m getting ahead of myself, we’re still looking at Japan’s missed export opportunity.

Except, again, what opportunities are we talking about? The article mentions that Hong Kong’s Octupus system uses FeliCa so it’s not a failure to export it there. One could perhaps argue Japan should have been more successful exporting to other countries but how much is this Japan’s fault and how much is it the decision of those transit authorities choosing (worse) alternatives? We don’t know because the article never seriously explores this.

Which brings me to the final part of the piece: the continued dominance of cash in consumer transactions. Here is where I think the piece is correct that Japan is behind. But the implication of the piece that it’s because Japanese people don’t want to use digital money is wrong. They’re behind because the options available aren’t appealing.

As noted earlier, transit cards are stunningly popular and, as Bassett has documented elsewhere on his blog, Tokyo’s dominant transit card, Suica, has a terrific user experience on the latest iPhones. Why isn’t the use of these cards for financial transactions more widespread? You can use these to pay almost everywhere so why don’t people? I’d contend it’s because it’s a stored value card that doesn’t allow auto charging from arbitrary sources. That means you always have to worry about how much you’ve got loaded into it.

Japan’s credit cards have their own problems. They’re divided into two incompatible groups when it comes to contactless payment: iD and QUICPay. Using these cards is an awful experience. My supermarket’s card reader can’t recognise the contactless technology my American Express card uses but my convenience store’s reader can. The card readers in some taxis can read it, but in some taxis they can’t.

I’m a nerd and I want to use these technologies so I persist in trying but the average person won’t. They’ll just stick to cash. That says less about some ‘cash is king’ mentality of the Japanese people than it does about human beings and the path of least resistance.

There is a story here but it’s not a story about QR codes or Japanese people loving cash. It’s about why Japanese transit cards have limited auto charging capability and why Japanese credit card companies have failed to agree on a single standard for contactless payment. Not really feature article material, alas.² ✺

Yes, that’s an oblique reference to you, New York Times. ↩
You could write a feature article about why Japan’s vastly superior transit card technology isn’t used by most of the world. Is it because you need to run a backend infrastructure that’s poorly documented in English? Is it because the relevant companies charge too much for deployment? Is it that American credit card companies are desperate to kill anything that might challenge their dominance? Who knows! Might be a good thing to investigate. ↩