Square's Jack Dorsey sparked a price war over Japanese credit-card transactions with SoftBank Corp.’s Masayoshi Son. Entrepreneurs like Yukiko Kurano are the biggest winners so far.

Kurano said she began using Son’s venture with PayPal Inc. to process credit-card payments at her Otogi Designs studio in Tokyo eight months ago, saving on the 200,000 yen ($2,000) it would cost to set up a conventional service. When Dorsey introduced Square Inc.’s lower-priced smartphone-based option, Kurano switched, only to change sides again when Son hit back with even cheaper levies on each transaction.

Japan’s second-richest man cut charges by 35% to defend his turf in the world’s No. 3 economy, where fat fees and neglect by big financial firms deter small businesses from taking cards and mean a growth opportunity for low-cost, easy- to-use services. Japan’s consumers shelled out $1.5 trillion in cash for their purchases in the year through March 2012, using plastic at about half the rate of American shoppers.

“Smaller merchants in aggregate will drive substantial payment volume once they see the benefit of accepting card payments,” said Sandy Shen, a research director who covers trends in Asian consumer services at Gartner Inc. in Shanghai.

After Otogi Designs began accepting credit cards for its 4,000 yen shoes, chic houseware and antique accessories, customers using plastic spent twice as much on average as cash shoppers, said Kurano, 40.

A few kilometers across town, Fumiko Yajima, 37, says sales of $30 organic olive oil and other premium items at her hole-in- the-wall outlet in Shinjuku district have also gained. She signed up to Square’s service two months after the San Francisco-based company entered the Japanese market in May.

Yajima pays about 3.25% to process transactions using Square’s free, coin-sized card reader, which plugs into her iPad and also works on smartphones. Yajima said she was able to start taking payments the same day she registered by e-mail and downloaded an app. Square’s fees are half what credit-card providers typically charge small companies.

“Japan’s credit-card market still has significant potential to grow,” said Azuma Ohno, a Tokyo-based analyst at Barclays Plc. That said, “large merchants have already built settlement systems and it’s not easy to grow sales to a significant volume by targeting small retailers.”

Card fees are based on sales, said Kazuhiro Noizumi, a general manager at Sumitomo Mitsui Card Co. Bigger merchants often pay less than 3.25%, while smaller retailers face levies between 5% and 8%, he said.

Consumers in Japan paid cash for about 56% of their 279 trillion yen of purchases last fiscal year, while 12% was paid with plastic, Tokyo-based card company Credit Saison Co. estimates. That compares with 26% by card and 20% in cash for the $8.3 trillion U.S. consumers spent in 2011, according to Saison.

Four years after Square began offering a flat 2.75% fee to cab drivers, food trucks and other small proprietors in the U.S., it handles more than $15 billion in transactions a year, according to Shino Tokimatsu, a Tokyo-based spokeswoman. Square has held talks with banks including Morgan Stanley and Goldman Sachs Group Inc. about a share sale next year, the Wall Street Journal reported last month, citing a person familiar.

Dorsey’s $2 billion fortune, according to the Bloomberg Billionaires Index, stems from stakes in Square and Twitter Inc., the microblogging service he co-founded in 2006. Dorsey owns 4% of Twitter, which debuted on the New York Stock Exchange last month, data compiled by Bloomberg show.

“Our mission is to make it easy and possible for businesses of every size to participate in commerce,” Dorsey said in an e-mail. “We offer next day settlement so businesses can get paid quickly, and a clear simple price so that businesses know exactly what they’re paying.”

The 37-year-old chose Japan for his first expansion outside North America in part for its high-speed network, said Tokimatsu. Square has gained customers in each of Japan’s 47 prefectures, she said, declining to give further details.

Square processes payments through Sumitomo Mitsui Card. The affiliate of Japan’s second-largest bank by value says it wasn’t able to turn a profit on its own providing services to what it estimates are 1.9 million individually owned businesses.

“That’s why we teamed up with Square,” said President Hideo Shimada. “We don’t think potential customers will overlap with ours.”

Without a sales force in Japan, Square relies on partners. It teamed up with Gurunavi Inc., an online restaurant directory with 137,000 member eateries; Fast Retailing Co., Asia’s biggest clothing chain, said in October its flagship Ginza store will use the system so customers needn’t queue to pay; Lawson Inc. is selling Square readers at its convenience stores.

SoftBank’s response: 3.24% fees, from 5% before.

For Son, it’s familiar ground. In October, he touched off a price war with Rakuten Inc., Japan’s biggest Internet mall, by cutting fees for merchants to use his Yahoo Japan Corp. online shopping portal. SoftBank, Japan’s third-largest mobile- phone carrier, has added users faster than bigger rivals after pledging in 2006 to keep its charges lower.

Son’s net worth is calculated at $16 billion, mostly from his almost 22% holding in SoftBank, which also has stakes in about 1,000 Internet businesses. SoftBank has declined repeated requests to interview Son.

SoftBank sells the PayPal-brand smartphone-based card reader through 2,700 mobile-phone retailers the company owns nationwide. Son agreed with EBay Inc.’s PayPal last year to jointly promote the PayPal Here service in Japan.

PayPal Here’s takeoff has been slow partly because merchants are taking time to get used to digital payments, said Hisao Nishizawa, a manager in the Business Planning & Promotion Section at SoftBank’s mobile-phone unit. He declined to say how many readers the venture has sold or how much revenue it makes.

“We see a huge potential,” Nishizawa said.

In a country where about a quarter of the 128 million people are 65 or older, unlocking that potential may be an uphill slog. Of 16 outlets surveyed in the Tokyo shopping district of Senzoku, only four accepted cards.

“We considered it once but it was too expensive,” said Tadanobu Nakayama, 77, who runs a fruit and cigarette stall with his wife. “I don’t have a smartphone, just a normal mobile and I can’t use a computer — I tried one once, but it’s much too complicated.”

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