You check the date on your smartphone. It's the 25th — payday. It's the perfect day to get that new item you've been saving up for, or perhaps it's date night for you and your significant other.
There's only one problem: It's everyone else's payday, too. You pop out to the bank at lunchtime to withdraw some cash and are met with a long lineup stretching out the door. You could come back later and in the meantime pay for any items via credit card, but having yen on hand is usually a good idea in cash-loving Japan. You also have bills to pay, transfers to make and would rather avoid the withdrawal fees at the convenience store machines. So you wait.
For decades, people have grumbled through this monthly ritual because bank accounts are pretty much the only way to receive their salaries.
But some may soon be set free from the long lines, as the government is looking to introduce digital payroll delivery options that will allow people to have their salaries transferred to smartphone virtual wallets and accounts with nonbanking financial service providers.
Through the new policy, the government aims to boost Japan’s digitalization efforts and make it more convenient for people who regularly use cashless payment systems and foreign nationals who may have difficulty opening bank accounts or obtaining credit cards.
Below are some questions and answers about proposed regulatory changes related to the rollout of a digital money payroll.
Is a digital money payroll allowed under the current law?
No, because the Labor Standards Act states that salaries must be paid in cash. Directly depositing funds into bank accounts is permitted as an exception along with transaction accounts of certain securities firms.
A labor ministry policy panel has been discussing the topic, and if the panel gives reforms the green light, the ministry is expected to amend its ordinance to formally allow for a digital payroll.
Why is the government considering a digital money payroll and how will the change make it more convenient for users?
The move partly stems from the country’s push to facilitate digitalization efforts and the use of cashless payments to adapt to the so-called new normal resulting from the COVID-19 pandemic.
Although Japan is known for its love of cash, digital money has been gradually gaining ground in recent years. This is partly because of a government-sponsored promotion after the 2019 consumption tax hike that gave consumers a 5% reward for purchases made via cashless payments.
The ongoing health crisis has also accelerated the use of digital payments, as some people want to avoid touching banknotes and coins for sanitation reasons.
Thus, the government thinks that there’s a need among consumers to receive their salary in the form of digital money.
In a survey of 4,000 people conducted by the Japan Fair Trade Commission in December 2019, about 40% said they would consider having part of their salaries deposited into their digital wallets if they had the option.
Some frequent cashless payment users may withdraw money from their main bank accounts to top up digital wallets by manually transferring the cash at other designated ATMs. But if the government changes are implemented it will save time and money, as they'll be able to top up their digital wallets automatically via their salaries.
The new rule is also expected to provide more options for foreign nationals as well.
For instance, non-Japanese who often send cash overseas through money transfer operators may be able to have their salary directly deposited into accounts with such firms.
Moreover, the policy change will likely prompt banks and money transfer operators to launch prepaid payroll cards that will come in handy for non-Japanese residents who have difficulty creating bank accounts and credit cards.
According to a 2019 survey by TIS Inc. of 200 foreign residents from Southeast or South Asia, 98% said they had bank accounts but nearly 40% said they needed support from their colleagues or acquaintances. Another TIS poll also from 2019 showed that 56% of 207 foreign nationals surveyed did not own credit cards
While prepaid payroll cards, which are like reloadable debit cards that allow people to withdraw cash at ATMs and make payments online, have been growing in the U.S. to replace traditional paper checks, Japan has not introduced them due to regulatory barriers.
Since payroll cards don’t require bank accounts, they would give foreign residents easier access to financial services vital to their daily lives.
“Online shopping can be quite inconvenient without credit cards. That’s why payroll cards will likely enhance convenience for them,” said Takane Hori, a lawyer and managing director at the Fintech Association of Japan.
Japan is working to improve financial inclusion for non-Japanese, as once the health crisis ends the country will resume accepting more foreign workers due to its severe labor shortage.
What are some other merits of a digital payroll?
Some experts say that providing more payment options can be an advantage for companies looking to attract talent amid a changing work culture.
With more people taking on side jobs in Japan, such workers may prefer to receive a smaller amount of their wages via digital wallets rather than having money sent to their main bank accounts, Hori said.
“Companies that employ people working side jobs or foreign nationals may be able to boost employee engagement if they can provide a variety of salary payment options,” Hori said.
She added that the digital payroll could facilitate companies’ digitalization efforts as well, saying that a raft of firms still handle employee reimbursement by cash.
What kinds of digital salary payment options will actually be available?
Money transfer companies registered with the government will be able to launch digital payroll services. As of Jan. 31, that list included 80 money transfer firms including PayPay Corp. and NTT Docomo Inc., as well as foreign players such as PayPal Holdings Inc. and Western Union Holdings Inc.
But a labor ministry official said that not all of those firms will be eligible for digital payroll services, as the government will set standards for operators to meet.
How would this affect banks?
Banks may lose some revenue from commission fees if a lot of customers make the switch to digital payrolls.
But Hori believes that the impact on banks’ business will not be that big, since digital payrolls are still a niche need. Some frequent cashless payment users might have part of their salaries transferred to their digital wallets, but banks will still likely be their main hub for managing their money.
“I don’t think they will cannibalize (the banks' business) a lot. If they do, people will choose those providing better services, so it will facilitate innovation,” Hori said.
What about security? What happens if money transfer operators go bankrupt?
Transfer firms are required to prepare deposits that are more than the total amount of money their customers are pooling roughly on a weekly basis. The deposited money will be used to protect users’ money in case companies go under, but the deposit could be short of the latest amount of users' pooled money due to daily fluctuations. Also, it can take up to six months for users to get their money back under the current system.
Therefore, the government has said a plan that would ensure that users can swiftly access their money in such a situation must be crafted before digital payrolls can be launched.
Hori said people in the financial industry are considering having guarantor companies act as go-betweens in order to provide money to users quickly if such an incident occurs.
A number of security breaches targeting digital payment services including those run by NTT Docomo and Seven & I Holdings Co. over the past few years may also cause some workers to hesitate before pooling their money in digital wallets.
While a cashless payment industry group drafted security guidelines last November, the banking industry has voiced concerns over security issues in relation to digital payrolls.
“Operators that handle people’s hard-earned salaries are required to have very high levels of user protection measures. Based on this idea, our industry has spent a lot of time building a safe and secure banking system,” said Kanetsugu Mike, who chairs the Japanese Bankers Association.
“We think that this matter should be thoroughly discussed in a sincere manner.”
When might digital payrolls begin?
The timing remains unclear, although the Nikkei business daily has reported that they are expected to launch sometime soon.
The growth strategy compiled by the government states that it plans to prepare rules within this fiscal year that will realize the safe and smooth transfer of salaries and protect users’ cash in the event money transfer operators go under.
But a labor ministry official said that progress is a bit behind schedule, as some issues remain unsolved, including getting major unions in the country on board with the plan.
The Japanese Trade Union Confederation, the nation's largest labor union and also known as Rengo, said in January that the union was against the proposed digital payroll at that point because consumer protection measures were lacking compared with banks.
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