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Contactless payment, though showing progress in both North America and Asia, has yet to win over the allegiance of consumers for low-value payments. Consumers often cannot find a place to use their cards or devices, and they have little incentive to tap to pay.

It may be instructive then just how a year-old prepaid electronic purse issued by a retailer has managed to poke its head above Japan's crowded field of contactless   e-money schemes.

That purse, nanaco, from 7-Eleven, Japan's largest convenience-store chain, vaulted past other contactless brands in transactions within three months of its launch in April 2007, according to Japanese financial publisher Nikkei Inc. Consumers do nanaco transactions about 1 million times per day, a representative of the card-issuing arm of Seven & i Holdings Co., owner of Seven-Eleven Japan Co., tells  Cards&Payments.

Though transaction volume appears to have plateaued, it still surpasses such longer-standing contact- less brands as Edy from bitWallet Inc. and the Suica e-money service run by East Japan Railway Co. These two schemes, however, have issued more cards. Postpaid contactless-payment systems run by mobile-network operator NTT DoCoMo Inc. and major Japanese credit card company JCB Co. also have fewer transactions than nanaco does, sources say.

The retailer-run e-purse accounts for 10% of sales in 7-Eleven's nearly 12,000 stores throughout Japan. Customers of 7-Eleven and some of the smaller merchant chains in the Seven & i group spend about 10% more when they tap their nanaco-enabled cards or contactless-wallet phones to pay than when they use cash, according to Seven & i. The company had signed up 5.5 million cardholders or phone users as of March, and consumers use nanaco a respectable six times per month on average.

Nanaco has made progress in capturing a significant percentage of cash transactions, taking off faster than other contactless-payment schemes, both in Japan and abroad, and observers believe the reasons are two-fold.

"You know where you can use it; that is one of the most important things for the customer," says consultant Masayuki Yamamoto, former head of emerging technologies for Visa Inc.'s Japan office. "[And] for the ordinary customer, they like incentives rather than technology."

That incentive, a loyalty program that provides just less than 1% of the purchase amount back in nanaco value, offers cash-toting Japanese consumers a reason to pay with  nanaco on cards or mobile phones, Yamamoto and other observers say.

Seven & i also offers loyalty points as part of special promotions, such as extra points for consumers who buy Valentine's Day-related merchandise with nanaco. The company charges customers an extra yen as a service charge for every 100 yen (US97 cents, 67 euro cents) worth of points they cash in.

And Seven & i, one of Japan's two largest retailers in terms of revenue, is seeking to expand the points program. It reportedly has approached 50 financial institutions, including such giants as the Bank of Tokyo-Mitsubishi UFJ and Mizuho Bank, to join. The financial institutions, most of them regional banks and credit unions, award points to customers who open new accounts or take out mortgages. These points could be exchanged for nanaco money, and they could generate new customers for 7-Eleven.

Banks and payment card organizations in the United States and the United Kingdom are pitching contactless payment to consumers mainly on the promise of faster checkout times or the ability to avoid handling coins. They could benefit from more concrete financial incentives, say some observers.

In-House Scheme
But while observers point to the loyalty-point program as key to nanaco's success, Toshihiro Isobe, chief of the business development group at IY Card Service Co., the subsidiary of Seven & i that runs nanaco, does not agree.

Instead, Isobe tells Cards&Payments he believes nanaco has met its targets so far for consumer spending and transactions, in part, because it is easy for consumers to find acceptance points and places to charge the e-purse. Seven & i runs its own ATM network with terminals in each 7-Eleven store. Cardholders can reload nanaco at an increasing number of these ATMs.

Just as important is the fact 7-Eleven employees promote the e-purse to customers, says Isobe.

"Many card operators don't have this option," he says. "They have the card, and they ask the store to promote their card."

But merchants, especially in places such as Japan where cash is so dominant, see little incentive to promote electronic-payment brands that charge them transaction fees.

Avoiding merchant fees was the main reason Seven & i decided to launch its own contactless scheme instead of accepting Edy or Suica, for which it would have had to pay fees of 2% to 3% of the transaction amount, says Isobe. The 7-Eleven subsidiary pays no fees to the parent's card services arm, IY.

"It's all about the cost or charge," he says. "It's a free e-money."

Well, not exactly free. It cost Seven & i the equivalent of tens of millions of dollars to build the nanaco back-end infrastructure, Isobe says. That does not count costs for cards and readers, which likely added another US$25 million. And the investment includes acceptance at more than 500 Denny's Japan restaurants the group owns and at its roughly 200-store Ito-Yokado Co. supermarket chain.

To accelerate the return on investment, Seven & i has tried to expand nanaco acceptance at stores outside of the group. But it has had little success, largely because it is going up against more-established contactless-payment brands. Merchants, which want to avoid paying transaction fees, also have resisted.

Letting Outsiders In
That, of course, is the same reason Seven & i chose to launch its own scheme a year ago. But with competing convenience-store chains, including Lawson Inc. and FamilyMart Co., the second- and third-largest chains respectively in Japan, accepting multiple contactless-payment brands, Seven & i realizes it no longer can avoid taking other contactless brands. In all, Japan has nearly 50,000 convenience stores, or "konbini."

7-Eleven will start accepting QUICPay from JCB this month. The company has a working relationship with JCB, which processes nanaco transactions. The additional infrastructure the credit card company has laid also will enable 7-Eleven stores to accept conventional credit cards, says a source. Seven & i also has talked to bitWallet and JR East about accepting Suica and Edy, says Isobe.

"7-Eleven is basically a retail shop," he says. "Our goal is to help our customers spend as much as possible. That means we promote other e-money if the customer wants to use it."

Whether this stunts the further growth of nanaco remains to be seen. While getting off to a quick start, nanaco transaction volume has stagnated at about 30 million per month, sometimes less, for at least the past eight months. And the company only has been able to persuade about 13% of its nanaco users to tap wallet phones instead of cards when they check out.

Getting more customers to use nanaco from their phones would save on card costs, which run about US$4 to $5 apiece. The company recoups part of this cost from cardholders.

Only the third-largest mobile-network operator in Japan, Softbank Mobile, preloads nanaco on its wallet phones. Customers have to download the application over the air to phones sold by the two other major telcos, DoCoMo and No. 2 KDDI. This has proved to be a  hassle, Isobe admits.

Growing Competition
Moreover, Seven & i appears to be facing a stiffer challenge from rival e-money  schemes as they fight fiercely for a growing e-money  pie. Estimates vary on the size of that market, but one, from Japan-based Yano Research Institute Ltd., shows retail sales volume for prepaid contactless brands in Japan totaled more than 1.2 trillion yen (US$11.8 billion) in the fiscal year ended in March–up more than 50% from the previous fiscal year, according to Nikkei. Prepaid schemes include nanaco, Edy and Suica, but not contactless credit services.

Both Edy and Suica can boast many more merchant locations than nanaco can. For example, as of March, nearly 30,000 merchant outlets accepted Suica, which JR East issues mainly as a fare-collection service. They logged more than 22 million retail transactions in February, Akio Shiibashi, Suica deputy director general, tells Cards&Payments.

The rail operator introduced its own retail-loyalty scheme last June in response to the nanaco challenge. BitWallet, issuer of Edy, launched  a loyalty program at about the same time. In addition, Japan's largest domestic airline, All Nippon Airways Co., enables members of its frequent-flyer club to exchange miles for either Edy or Suica points. Moreover, the only other retailer that offers a contactless-payment service, Aeon Co.–with Seven & i one of Japan's two largest retailers–gives customers one point for every 200 yen they spend with its own prepaid contactless purse, called Waon.

But the real challenge to the growth of nanaco and other e-money schemes is the Japanese consumer's penchant for paying with cash. It still accounts for about 90% of retail purchases, and consumers have resisted paying with conventional credit cards.

So with six other contactless payment schemes vying for business and nearly all of them offering loyalty programs, Seven & i will have to wean a lot more of its customers off of cash if it hopes to stay on top of Japan's contactless payment wars.  CP

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