Amid the 'buy now, pay later' boom, Japan takes a different path

Internet shopping has received an extra push over the past few years, with the pandemic forcing many consumers around the world to buy what they want online.

Traditionally, credit cards have been an essential tool when purchasing products on the internet, but an increasing number of shoppers are turning to an alternative payment method known as "buy now, pay later" (BNPL), which has been sweeping the fintech industry.

On the back of this booming e-commerce trend, BNPL businesses, especially those in the U.S. and Europe, are growing rapidly and drawing investors’ attention. In addition, they are increasingly seen as a threat to traditional credit card companies.

But the situation is a bit different in Japan, with industry players and experts saying that the growth of BNPL will likely be more modest compared with other nations.

Major foreign BNPL services allow consumers to divide their purchases into multiple installments, similar to credit cards, but typically no interest is charged if customers pay for their purchases on time.

Credit card users usually deal with revolving debt that comes with a complex interest rate system, which makes it difficult for them to grasp exactly how much they are paying for things.

“Since interest fees (for credit cards) are expensive, BNPL can be less costly for users,” said Toshio Taki, who heads a fintech research division at Money Forward Inc.

While the business model for credit cards is to basically keep users in this revolving debt cycle in order to charge interest, BNPL’s business model is to make sure that users fully pay each installment to avoid building up troublesome debt, said Taki.

In that sense, “BNPL appears to be more of a user-focused service,” which is one of the reasons why BNPL has gained traction overseas, he added.

Also, BNPL operators often do not require a hard credit check, which is normally necessary to acquire a traditional credit card. As a result, those who are not qualified for credit cards can still buy products with pay-after options.

BNPL operators usually charge interest when customers miss payments, and some also charge late fees. Their main source of revenue is merchant fees from shops.

Overseas, BNPL platforms have gained popularity with Gen Z and millennial consumers in particular, with these younger people tending to prefer simpler and cheaper BNPL options over credit cards.

Consequently, BNPL is often portrayed as something that might disrupt the credit card business model.

Yet such services are growing in a different manner in Japan.

“The Japanese market is quite unique in terms of the credit card business. Most credit card users make monthly lump sum payments, so it’s almost like using a debit card,” said Eiji Taniguchi, a researcher at the Japan Research Institute.

“Japanese people don’t really like to be in debt, so credit card business practices are a bit different from other countries.”

Indeed, very few credit card users purchase products using revolving payments in Japan. Instead, 92.2% of the total credit offered for shopping in 2020 was for lump-sum payments, statistics from the Japan Consumer Credit Association show.

Since many Japanese credit card users do not make purchases involving multiple installments and interest, it’s tough for BNPL firms to lure users through an interest-free feature as they do overseas.

Taniguchi said BNPL is still expected to catch on to a certain degree, but “I don’t think it will be a mainstream payment option” in Japan, adding it will be tough for it to pose a threat to credit cards.

Even some Japanese BNPL players acknowledge that the domestic market will likely take a different path.

“It’s obvious that the Japanese BNPL market will not see the growth that has been seen in the U.S., Europe and Australia,” said Shin Shibata, CEO of Net Protections Holdings Inc., which is Japan’s largest BNPL provider, during a news conference last month.

In those markets, “BNPL has grown by taking a share of the multiple-payment options offered by credit cards, but that share is really small in Japan.”

Net Protections, which made its debut on the Tokyo Stock Exchange’s First Section last month, only accepts lump-sum payments and does not offer multiple installment options in Japan.

Considering the unique nature of the local market, what is it that motivates Japanese consumers to use BNPL?

Net Protections says that some consumers are reluctant to use credit cards because of concerns over fraud.

Also, some Japanese BNPL users say that they want to stay away from credit cards because they are given credit limits that are much higher than they can actually afford, said Shinichi Takatori, chief of Kyash Inc., a Tokyo-based startup that provides BNPL services.

Such a large amount of credit could tempt them to buy more, so “some users say that they want to only be charged an amount that they are sure to repay. ... This is a fresh finding for us in terms of how BNPL is different from credit cards,” Takatori said during an event to discuss the service in Japan last month.

In other countries, authorities have moved to supervise businesses more strictly in the wake of reports on consumer debt risks stemming from BNPL.

Last month, the Consumer Financial Protection Bureau in the U.S ordered five BNPL firms — Affirm, Afterpay, Klarna, PayPal and Zip — to collect information on the risks and benefits of these kinds of loans. The bureau expressed concerns about consumers amassing unmanageable debts as a result of BNPL's ease of use and softer credit checks.

Shibata said sources of growth for the service in Japan include offering BNPL for payments between businesses as a digital transformation tool, as well as to services, such as housekeeping and auto repairs, that still rely on analog payment methods.

In the meantime, global competition among BNPL operators is expected to intensify in the coming years, with major players benefiting from investors’ growing appetite for the sector.

Sweden’s Klarna Bank AB was valued at $45.6 billion last June when it received about $639 million in funding from investors including the SoftBank Vision Fund. Klarna, known as a BNPL pioneer, has entered more than a dozen countries.

Block Inc., formerly known as Square, a U.S.-based payment firm led by former Twitter chief Jack Dorsey, has been working to acquire Australia-based Afterpay for $29 billion (¥3.3 trillion).

Fellow U.S. fintech giant PayPal announced last September that it would acquire Tokyo-based Paidy Inc. for ¥300 billion, an unprecedented price for a Japanese startup, with the purchase going through last month.

Although BNPL has been around for some time — Klarna started its services in 2005, while Net Protections did so in 2002 — it’s only recently that the spotlight has shifted toward the service, due to the pandemic making people more dependent on online shopping after they were forced to stay at home.

According to a survey targeting 3,500 people in the United States, Britain and Australia last July, 51% of respondents said they have used BNPL services.

The survey, conducted by U.S. credit card infrastructure provider Marqeta Inc., also showed that 33% of those who had used BNPL started using it after the start of the pandemic, while 71% said they had used such services more in the past year.

As foreign players have demonstrated robust growth in recent years, it’s possible that they will make a foray into Japan. But Net Protections’ Shibata said it won’t be a walk in the park for them considering the uniqueness of the market.

“A main strength of those top foreign players is providing interest-free multiple installment options, but such a need is really low in Japan," he said. "So I don’t think they will be able to take advantage of their strengths in the Japanese market.”