SoftBank’s PayPay Gets Ahead in Digital Payments Race in Japan

TOKYO (Reuters) – For six decades, buyers at Mikawaya, a rice merchant in eastern Tokyo, paid in cash – until sales staff at the PayPay payment app swept the district of low altitude, persuading the store to try their product.

Flyers for the PayPay app are displayed in the Mikawaya rice merchant’s store in Tokyo, Japan on June 7, 2021. REUTERS / Sam Nussey

As customers clamored to use the service and nearby stores signed up, PayPay’s offer of free installation and no management fees was too good to refuse, the employees said. store owners.

“We thought there could be no harm in trying it out,” said Moeko Suzuki, who helps his father run the store, standing among sacks of rice. “The number of young people has really increased.

Owned by SoftBank with deep pockets, PayPay has deployed a sales force of thousands of leather shoes to target restaurants, drugstores and supermarkets, attracting over 3 million merchants, a leading number in a country with around 5.3 million businesses, according to government Data.

“We got rid of the reasons – like being expensive or complicated – not to introduce PayPay,” Hajime Baba, COO of PayPay, said in an interview.

PayPay is emerging as the primary driver of a government-backed consumer transition to cash as Japan grapples with growing labor shortages and the need for social distancing during the COVID pandemic -19.

Late in payments, SoftBank has driven PayPay adoption through refund campaigns. In a prime example, he donated 10 billion yen ($ 90 million) in 10 days.

By burning money on such discounts and – for now – not charging small businesses for its payment service, PayPay is losing money. But the company also wants to channel customers to loans, deposits and shares on the app, which means growing exposure to the highly regulated financial sector.

It has attracted more than 39 million users in the two and a half years since its launch, and SoftBank completed a merger between its internet business and a major competitor of PayPay – the Line chat app – in March. Since then, PayPay has added millions of users.

Merchant processing fees, which are set at zero for small businesses, will increase this year. Baba said PayPay aims to set them as low as possible while covering costs.

Core business rates at this point are critical to the survival of the service. Traders such as rice merchant Mikawaya claim that the benefits of the app outweigh these costs.

“For retailers, not having a lot of cash on hand or having zero of it, which is ideal, has huge benefits in terms of downsizing,” said Michael Causton, analyst at JapanConsuming.

The model follows that of Ant Financial, a subsidiary of SoftBank’s most valuable investment, Alibaba, whose 730 million Alipay users in China can borrow money, check their credit rating, and buy coins. wealth management products via the app.

“We are learning from Ant Financial how we can monetize (PayPay). They launch in the short term and are able to monetize in the short term, ”said Junichi Miyakawa, CEO of SoftBank Corp. last month.

PayPay hopes to avoid the regulatory setback Alipay faces in China, where it is being forced to restructure.

It must also continue to overcome the historical preference for cash or credit card transactions in Japan.

MADE IN JAPAN

Using QR codes, PayPay can process payments via smartphones and without the need for expensive terminals, emulating pioneers in markets without retail infrastructure.

“They used to say ‘Oh, QR codes are technology for underdeveloped or developing countries,'” said Aditya Mhatre, who was the head of the PayPay product team before. to return to Paytm in India. “This myth is gone.”

Japan had many of the building blocks of the world’s most successful payment services early on. QR and Felica codes, the contactless technology that powers East Japan Railway’s payment system, were invented by local businesses.

Competitors to PayPay include Rakuten, which targets SoftBank’s mobile users and has disrupted the credit card industry by simplifying apps.

Felica-based railway company Suica has 9 million mobile users and 80 million smart cards issued. The tap-to-pay system is not used by many small businesses, but is favored by detractors of the QR code who complain that apps like PayPay are tricky.

PayPay is betting on the ladder to help it stand out and survive. Chat app operator Line merged with SoftBank’s Z Holdings in March, giving PayPay access to Line’s 88 million users, of which 39 million use its payment features.

“Integration is the key to unlocking potential revenue for PayPay, and their integration history with SoftBank and Z Holdings has not always been as fast and optimal as it could have been,” said Causton.

Baba said profits from SoftBank’s national units enabled PayPay to expand to burn cash. Executives declined to provide a cost-effective timeline, but pointed to the falling costs of reimbursement campaigns with increased funding from partner companies and the government.

The conglomerate hopes to list PayPay, which recorded a loss of $ 660 million in the fiscal year ended in March. SoftBank plans to consolidate PayPay into its wireless unit after Paytm, which developed some of the technology powering the app, took a small stake in the company.

($ 1 = 108,9500 yen)

Reporting by Sam Nussey; Editing by Gerry Doyle