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Amid the “buy now, pay later” boom, Japan is taking a different path

By on January 25, 2022 0

Internet shopping has received an additional boost in recent 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 over the Internet, but a growing number of shoppers are turning to an alternative form of payment known as “buy now, pay later” ( BNPL), which swept the fintech industry.

In the wake of this flourishing trend of e-commerce, BNPL’s business, especially those in the United States and Europe, is growing rapidly and attracting the attention of investors. Additionally, 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 BNPL’s growth is likely to be more modest compared to other countries.

BNPL’s main overseas services allow consumers to split their purchases into installments, such as credit cards, but generally no interest is charged if customers pay for their purchases on time.

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

“Because interest charges (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 of credit cards is basically to keep users in this cycle of revolving debt in order to charge interest, BNPL’s business model is to ensure that users pay every installment in full to avoid going into debt. awkward, Taki said.

In that sense, “BNPL seems to be more of a user-oriented service,” which is one of the reasons BNPL has been gaining traction overseas, he added.

Additionally, BNPL operators often do not require a credit check, which is normally required to acquire a traditional credit card. Therefore, those who are not eligible for credit cards can still purchase products with pay later options.

BNPL operators typically charge interest when customers miss payments, and some also charge late fees. Their main source of income comes from commissions from merchants in stores.

PayPal completed its 300 billion yen acquisition of Tokyo-based startup Paidy Inc. in December | Reuters

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

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

However, these services are developing in a different way in Japan.

“The Japanese market is quite unique in terms of 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 being in debt, so credit card business practices are a bit different from other countries.”

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

Since many Japanese credit card users do not make purchases involving multiple installments and interest, it is difficult for BNPL companies to attract users through an interest-free feature as they do overseas.

Taniguchi said the BNPL should still prevail to some extent, but “I don’t think it will be a common payment option” in Japan, adding that it will be difficult for it to pose a threat to credit cards. credit.

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

“It is obvious that the Japanese BNPL market will not see the growth seen in the United States, Europe and Australia,” said Shin Shibata, CEO of Net Protections Holdings Inc., which is the largest provider of BNPL. in Japan, at a press conference last month.

In these 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 debuted on the first section of the Tokyo Stock Exchange last month, only accepts lump sum payments and does not offer multiple payment options in Japan.

An Afterpay sign in Sydney in November 2020. The firm was one of five companies commissioned last month by the US Consumer Financial Protection Bureau to collect information on the risks and benefits of BNPL loans.  |  KYODO
An Afterpay sign in Sydney in November 2020. The firm was one of five companies commissioned last month by the US Consumer Financial Protection Bureau to collect information on the risks and benefits of BNPL loans. | KYODO

Given the unique nature of the local market, what motivates Japanese consumers to use BNPL?

Net Protections says some consumers are hesitant to use credit cards due to concerns about fraud.

Additionally, some Japanese BNPL users say they want to stay away from credit cards because they are being granted credit limits far beyond what they can actually afford, Shinichi Takatori said. , head of Kyash Inc., a Tokyo-based startup that provides BNPL services.

Such a large amount of credit could encourage them to buy more, so “some users say they only want to be charged for an amount they are sure to repay. … This is a new discovery for us in terms of the difference between BNPL and credit cards,” Takatori said at an event to discuss the service in Japan last month.

In other countries, authorities have decided to monitor companies more strictly following reports on consumer debt risks from BNPL.

Last month, the Consumer Financial Protection Bureau in the United States ordered five BNPL companies – Affirm, Afterpay, Klarna, PayPal and Zip – to collect information on the risks and rewards of these types of loans. The bureau expressed concern that consumers are racking up unmanageable debt due to BNPL’s ease of use and looser credit checks.

Shibata said sources of service growth in Japan include BNPL’s offering for business-to-business payments as a tool for digital transformation, as well as services, such as housekeeping and auto repairs, which still rely on analog payment methods.

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

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

Block Inc., formerly known as Square, a US-based payments company led by former Twitter chief Jack Dorsey, is working to acquire Australian company Afterpay for $29 billion (3, 3 trillion yen).

US fintech giant PayPal announced last September that it would acquire Tokyo-based Paidy Inc. for 300 billion yen, an unprecedented price for a Japanese startup, with the purchase completed last month .

Although BNPL has been around for a while – Klarna started its services in 2005, while Net Protections did so in 2002 – it was only recently that the spotlight shifted to the service, due to the pandemic which makes people more dependent on online shopping after being forced to stay at home.

According to a survey targeting 3,500 people in the US, Britain and Australia last July, 51% of respondents said they had used BNPL’s services.

The survey, conducted by US credit card infrastructure provider Marqeta Inc., also showed that 33% of those who had used BNPL started using it after the pandemic began, while 71% reported using these services more in the past year.

As overseas players have shown robust growth in recent years, there is a possibility that they will make inroads into Japan. But Net Protections’ Shibata said it wouldn’t be a walk in the park for them given the uniqueness of the market.

“One of the main strengths of these top overseas players is to provide 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 capitalize on their strengths in the Japanese market.”

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