Japan’s history of mobile payments progress is one of the more curious stories in the field.
The country was home to one of the world’s first mobile commerce innovations with the DotCoMo mobile wallet all the way back in 2004. And yet Japan remains a heavily cash-based economy, Darren Abrahamson, managing director of Bain Capital Tech Opportunities told Karen Webster.
He said Japanese consumers have a well-established preference for managing transactions in cash, but Bain sees that coming to an “inflection point” where things could soon change for three reasons.
First, Japan’s younger generation is becoming a larger part of the consumer economy and demanding a change to digital to match their tech-friendly habits. Second, massive political efforts have started to “bend the curve a little bit on this” by giving consumers rewards and cash rebates backed by the government for making cashless payments.
Abrahamson said the government is also giving merchants incentives to buy contactless terminals. He said some of those efforts stemmed from the now-postponed 2020 Tokyo Olympics, “where they just wanted to have the ability to accept all forms of payments from all the tourists that were expected. And even though that has been shifted out a year, much of the push has been to catch up, frankly, with the rest of the developed world and certainly the other Asian economies in particular.”
Lastly, the third main driver for Japan’s potential move to electronic payments has, of course, been the pandemic and the resulting loss of consumer appetite worldwide for handling cash.
Abrahamson said those factors have created a strong incentive for Bain to invest in a player like hey, which seems ideally positioned in an economy that looks primed to delve deeply into a digital future.
The Shifting Japanese Market
Abrahamson admitted that there’s likely a subset of Japanese consumers who will simply never go digital.
After all, Japan has a population demographic that’s older on average than that of many countries, and many of those consumers have a strong preference for cash. But he said a generational change among the consumer base should gradually overcome that.
The country is also overcoming a possibly larger if less well-known challenge on the payments relationship’s merchant side. Until recently, retailers had to deal with an incredibly complicated legacy payments network system that was hard to break into.
“It has been fairly complex for merchants to actually accept even just multiple credit cards,” Abrahamson said. “You need to have multiple different networks. And so, the issuers and the acquirers really only focused on the larger merchants to even just have credit card acceptance. There has always been a long tail of your small businesses — the mom-and-pop shops, the convenience stores — which are a huge part of the economy in Japan that frankly just never adopted any form of non-cash payments at all until fairly recently.”
But he said new technology players like hey, Rakuten and others have successfully started to open up that underdeveloped market with easier-to-implement payment terminals and infrastructure. That’s allowed small merchants to start accepting things like different card brands and new digital options like mobile wallets.
“It is always a chicken-and-egg issue, but we see the consumer preferences are changing as the technology on the merchant side has evolved,” Abrahamson said. “And so, I think that is starting to shift the market.”
The Bigger Digital Commerce Picture
Abrahamson said payments and their digital modernization are critical, but what really attracted Bain to hey is its bigger vision.
The startup is aiming to take all of the information that payments generate and plug it into things like rewards programs, consumer retention and marketing efforts. It also wants to integrate the experiences of customers’ online and in-store shopping and tie all of that into merchants’ back-end fulfillment and logistics.
“The vision is moving beyond just providing the bookings to integrating reservations through to payments online and offline,” he said.
Abrahamson added that hey wants to “go to a merchant who may be more of a services company or a retail company who may be offline [and offer them] a more omnichannel approach via [a] single integrated platform where you can do bookings, payments, purchases, inventory — all those kinds of things.”
The Pandemic Has Opened Up New Investment Opportunities
Abrahamson said that even in these incredibly unusual times, Bain has continued to see interesting investment opportunities around the world as digitization moves from a gradually escalating trend to an exploding one.
“There are a set of fundamental macro trends that were probably going happen but might've taken five or 10 or 15 years to play out, [but] have been just massively accelerated by all of this,” he said. “When we look at eCommerce and cashless payments, we see them becoming more durable once merchants adopt these forms of payments [and] consumers get used to the convenience of not carrying cash around and having things delivered. We don't think that's going to go backwards any time soon.”