US payment services target Japan as more Japanese buy from overseas

Paypal and Square are gaining traction in the Japanese market, potentially disrupting the cozy world of credit card processing with its fat fees and oligopolistic practices – even though Square itself is backed by one of Japan’s biggest card processors. Already Square’s entry into the market has forced Paypal to lower its fees. Paypal is proving popular not just for sales in Japan but also for the growing enthusiasm for buying direct from overseas.

Paypal and Square are investing in expansion of their payment systems in the Japanese market. PayPal set up an office in Tokyo in 2010 and expanded its Japanese call centre, and last year signed a joint venture with Softbank. Square, the payments service launched by Twitter founder Jack Dorsey, began sales in Japan in May last year. It partnered with Gurunavi, an online restaurant directory with 137,000 members and others to promote the service. Its biggest coup was in signing Fast Retailing in October which announced the use of Square at its Uniqlo stores to accept payments in the aisles rather than just tills, helping to reduce queues. In addition, Lawson has started selling Square readers at its convenience stores.

Since Square launched, Paypal has lowered its fees from 5% to 3.24% – Square charges 3.25%. These fees are less than half what the smallest merchants normally have to pay the likes of Sumitomo Mitsui, which charges around 5-8% for smaller merchants. Square’s payments are actually handled by Sumitomo Mitsui, but the latter sees a synergy with Square because its own small merchant business was making a loss. A feature of Square is its tiny, coin-sized card reader that attaches to iPads and iPhones making it simple and easy for small merchants to accept transactions both on and offline. Paypal also now has its own phone linked card reader called Paypal Here, which is sold through Softbank stores.

The lower fees could encourage greater use of credit cards in Japan. Credit Saison estimates that just 12% of purchases were made using credit cards in 2012, and 56% in cash. A principle barrier has been the high commissions charged by payment processors, encouraging merchants to demand cash at many stores.

It is not just domestic payments that may change. There is a growing desire among younger consumers to buy directly from overseas. Confidence and levels of trust are increasing but any service that helps offset concerns is welcome, and Paypal’s inbuilt protection of credit card numbers and other personal data, and a refunding system when things go wrong, is proving popular. In a recent survey by the US firm of 200 women in their 20s and 30s, it found that more than half were interested in buying direct from overseas or had already bought from overseas. However, 70% were concerned about actually receiving delivery or receiving faulty goods. Paypal’s parent firm Ebay is looking to encourage direct overseas purchases, launching a winter campaign called Sekaimon offering cash back on shipments to Japan and 10% discounts.

Rakuten to bring payment systems in-house

Rakuten is to require its 40,000 merchants using the Rakuten Ichiba online portal to process payments entirely through Rakuten from February. About a third of the ¥1.5 trillion in orders Rakuten took last year were paid for indirectly by personal bank transfers or other means such as cash on delivery.

Following a spate of problems and complaints of undelivered goods from customers, Rakuten has decided to take full control – and replicate the ease of service at key rival Amazon. The new system means individual merchants need not bother with additional payment options, but equally will need to work within any restrictions decided by Rakuten. The new payment system will unify payments across all of Rakuten’s services.

Future plans include selling the same payment systems to rivals such as Yahoo, and use of the system to promote Rakuten Bank and e-wallet Rakuten Edy. The same payment systems will be rolled out across other Rakuten subsidiaries overseas too.