© Reuters. Brochures from the PayPay application are displayed in the store of rice distributor Mikawaya in Tokyo, Japan on June 7, 2021. REUTERS / Sam Nussey
By Sam Nussey
TOKYO (Reuters) – For six decades, shoppers at Mikawaya, a rice merchant in eastern Tokyo, paid cash, until sales staff from the PayPay payment app toured the low-lying district, persuading the shop to test your product.
With customers clamoring to use the service and nearby stores signing up, PayPay’s offer of free setup and no handling fees was too good to turn down, store owners say.
“We thought it wouldn’t hurt to try it,” said Moeko Suzuki, who helps her father run the store, standing amid sacks of rice. “The number of young people has really increased.”
PayPay, which is owned by SoftBank, has deployed a shoe sales force of thousands to target restaurants, pharmacies and supermarkets, attracting more than 3 million merchants, an industry leading number in a country with around 5.3 million businesses, according to government data.
“We got rid of the reasons, like it’s expensive or a hassle, not to introduce PayPay,” Hajime Baba, PayPay’s chief operating officer, said in an interview.
PayPay is emerging as a key driver of a government-backed consumer shift away from cash as Japan grapples with growing labor shortages and the need for social distancing during the COVID-19 pandemic.
Late in payments, SoftBank boosted the acceptance of PayPay through cash-back campaigns. In one prominent example, he gave away 10 billion yen ($ 90 million) in 10 days.
PayPay is losing money, spending cash on such refunds, and for now not charging smaller businesses for its payment service. But the company also wants to funnel clients into loans, deposits and equity transactions in the app, which means more exposure to the highly regulated financial industry.
It has attracted more than 39 million users in the two and a half years since its launch, and SoftBank completed a merger between its Internet business and a major competitor to PayPay, the chat app Line, in March. Since then, PayPay has added millions of users.
Merchant management fees, which are set to zero for smaller businesses, will increase this year. Baba said PayPay aims to set them as low as possible while covering costs.
How the core business is doing at the time is crucial to the survival of the service. Traders like rice merchant Mikawaya say the benefits of the app outweigh those costs.
“For retailers, not having a lot of cash on hand or having none at all, which is ideal, has huge benefits in terms of reduced administration,” said Michael Causton, analyst at Japan Consuming.
The model follows that of Ant Financial, an affiliate of SoftBank’s most valuable investment, Alibaba (NYSE :), whose 730 million Alipay users in China can borrow money, check their credit scores, and purchase wealth management products through the app.
“We are learning from Ant Financial how we can monetize (PayPay). They launch in the short term and they can basically monetize in the short term,” Junichi Miyakawa, CEO of SoftBank Corp, said last month.
PayPay will hope to avoid the regulatory pushback facing Alipay in China, where it is forced to restructure.
It should also continue to exceed the historical preference for cash or credit card transactions in Japan.
MADE IN JAPAN
Through the use of QR codes, PayPay can process payments via smartphones and without the need for expensive terminals, emulating the pioneers of markets that lack retail infrastructure.
“They used to say ‘Oh, QR codes, it’s a technology for underdeveloped or developing countries,'” said Aditya Mhatre, who was head of PayPay’s product team before returning to Paytm from India. “That myth is gone.”
Japan had many of the building blocks of the world’s leading payment services from the very beginning. Both QR codes and Felica, the contactless technology that powers East Japan Railway’s payment system, were invented by local companies.
PayPay’s rivals include Rakuten, which targets SoftBank’s mobile users and has disrupted the credit card industry by simplifying applications.
Suica, based in Felica del Railroad, has 9 million users on mobile devices and 80 million smart cards issued. Many small businesses don’t use the tap to pay system, but QR code naysayers favor it and complain that apps like PayPay are complicated.
PayPay is betting on scale to help you excel and survive. The chat app operator Line merged with SoftBank’s Z Holdings in March, giving PayPay access to Line’s 88 million users, some 39 million of whom use its payment features.
“Integration is the key to unlocking PayPay’s potential revenue, and their integration history at SoftBank and Z Holdings has not always been as fast and optimal as it could have been,” said Causton.
Baba said the earnings from SoftBank’s domestic units enabled the expansion of PayPay’s cash burn. Executives declined to provide a timeline for profitability, but point to falling costs for cash-back campaigns with more funding from corporate partners and the government.
The conglomerate expects to include PayPay, which posted a loss of $ 660 million in the year ending March. SoftBank plans to consolidate PayPay into its wireless unit after Paytm, which developed some of the technology that powers the application, takes a small stake in the business.
($ 1 = 108.9500 yen)