Softbank bets on credit card tieup

PayPal Here system aims to cut use of hard cash in favor of plastic

by Kazuaki Nagata

Staff Writer

In an attempt to change the deep-rooted cash culture in Japan, Softbank Corp. is hoping to create a business opportunity here by teaming up with U.S.-based PayPal Inc.

The country’s third-largest cellphone company and the world’s leading online settlement service provider plan to soon set up a joint venture, PayPal Japan Inc., and launch a credit card payment service called PayPal Here, which they hope will significantly increase the use of credit cards in Japan.

PayPal Here is a massively discounted credit card reader that can be plugged into a smartphone. The smartphone sends the person’s credit card data to PayPal Japan over a 3G cellphone network or Wi-Fi Internet connection, with all the transaction processes settled over the phone, including the signature.

The reader system will be sold for around ¥1,200, a give-away compared to conventional credit card readers, which usually cost around ¥100,000 each, Softbank said.

The low cost of PayPal Here will allow numerous shops to offer credit payment services because many businesses, especially small and midsize shops, have not purchased expensive conventional credit readers, Softbank executives say.

“We will change Japan’s settlement system market, and that’s the mission of PayPal Japan,” said Softbank CEO Masayoshi Son during a press event to announce the partnership with PayPal in May.

According to Softbank, about 3.35 million shops across the country don’t accept credit cards and only 950,000 do. This is one reason for the low rate of credit card use in Japan, Softbank said.

In 2010, credit or debit cards accounted only for 12 percent of the ¥290 trillion spent by private-sector consumers, compared with over 50 percent in the United States and South Korea.

While conventional card readers are quite expensive, shops also have to pay commissions of up to 8 percent to the card companies and it takes 15 to 30 days before a shop can receive payment, according to Softbank.

PayPal Here is much cheaper, quicker and easier to use than conventional credit card systems, Softbank said. The system will charge a fixed commission of 5 percent per transaction and PayPal Japan Inc. will transfer the payment to the shop the same day.

Introducing these conditions will make it easier for small and midsize shops to get card readers. It is the owners of these shops who are being targeted for PayPal Here, said Hiroaki Kitano, senior vice president at Softbank Mobile Corp., who will become CEO of PayPal Japan, which is equally funded at ¥1 billion each by both parties.

Softbank said PayPal Japan will not be making much money by selling the card readers for only ¥1,200, so its main source of profit will be the 5 percent commission.

Shop owners will be able to set up the system simply by plugging the PayPal Here reader into their smartphones’ earphone jack. It also works with smartphones powered by Apple’s iOS or Google’s Android.

Kitano said PayPal Japan will aim to sell PayPal Here to more than 100,000 stores in three years and over 1 million in the long term.

Tatsuhisa Hosokawa, an official at Japan Consumer Credit Association, said PayPal Here is likely to help increase the number of shops where credit cards can be used and thus increase their use in the long run. But he is not sure whether the increase will be on an “explosive” scale, as Softbank desires.

In Japan, people love using cash to purchase items and use credit cards far less frequently than in other advanced countries.

This is partly the reason why Japanese in general have had a negative image about credit cards, because they tend to consider credit card payment as a form of financial debt, which has gained a negative image in light of debt hangovers and other financial crises linked to unprincipled use of credit, as well as numerous leaks of customer data.

But Hosokawa pointed out that this image has been gradually fading in Japan in recent years, saying that the use of credit cards has been rising over the past decade.

Kitano also appeared confident about the future during an interview with The Japan Times last month.

“As smartphones have been spreading widely, we think we can provide a payment service that will improve convenience for consumers and shop owners by combining this card reader (with smartphones),” he said.

Kitano also said as the PayPal Here system does not operate like a conventional credit card system, it will likely prove even more useful to consumers who already have a PayPal account, as PayPal offers online settlement services for registered credit card users over the Internet.

A PayPal account holder can register his or her facial image in advance on their personal profile and then settle a payment at a shop that has a PayPal Here system in operation without even physically using their card, Kitano said.

Also, by using a smartphone app, a shopper can search for a vendor who is using the PayPal Here system and notify them that they have a PayPal account.

The vendor, using their own smartphone connected to the PayPal Here system, can confirm the identity of the shopper visually on the screen with the client’s face and name and accept the payment there and then without checking their credit card.

This way, people can use their credit cards even for just buying something like a single cup of coffee, said Kitano.

“Paying by cash has of course some merits, but it can be quite inconvenient in some cases because cash is bulky,” Kitano said.

He said changing Japan’s cash-settlement culture will not be an easy task, but pointed out how many people living in urban areas have switched from paying cash to prepaid electronic money in the form of cards or in their cellphones to buy such items as train tickets, lunches or purchases at convenience stores.

“In the past, everyone purchased tickets with cash, but many people don’t do that anymore. People won’t go back to that old custom (of using cash) because they now find it too inconvenient,” he said.

Asked whether such electronic money services like Japan Railway Co.’s Suica and Rakuten’s Edy will be powerful rivals to PayPal Here, Kitano said it is unclear how the electronic money market will change over the next several years, but he thinks they can coexist with each other. Plus, Softbank sells cellphones with an electronic money function, too, so the company will be able to adjust both electronic money and credit cards, he added.

Kitano added that PayPal Here has more merits such as enabling the shop owner to manage their business more efficiently and strategically, as customers’ shopping records can be organized with the smartphone’s software.

Kitano added that in the future, PayPal Here users will be able to organize their expenses, either business or personal, through the PayPal account in much the same way as housewives have traditionally kept records of household expenditures in a notebook.

Softbank said it will still take several weeks to organize PayPal Japan and launch the PayPal Here service.

During the first month, Kitano said PayPal Japan plans to distribute PayPal Here card readers to all Softbank shops nationwide so that owners of commercial enterprises can purchase them, he said.

Kitano also said the company will aim to be listed on the Tokyo Stock Exchange in a few years.