Ueda

Marunouchi Kitaguchi Building, 1-6-5 Marunouchi, Chiyoda-ku, Tokyo 100-0005

e-Money Today and the Evolution of Electronic Payment Systems in Japan

July 24, 2008

July 24, 2008

Consulting Services DivisionFinancial Business Consulting Dept.NOMUA RESEARCH INSTITUTE, Ltd.Etona UEDA ([email protected])

Copyright（C） 2008 Nomura Research Institute, Ltd. All rights reserved. 1

1. Overview of the market in Japan.1. Overview of the market in Japan.

2. Spread of contactless payment services in Japan.2. Spread of contactless payment services in Japan.

3. Legal issues to be solved.3. Legal issues to be solved.

Agenda


(1) Overview of the market in Japan

87 million e-Money cards are in circulation.Many businesses issue e-money, but there is no dominant player.

2519753474Number of participating stores (1,000)

N/A23.20.11.35.814.4Estimate amount per month (Million dollars)

N/A82336Estimated amount per payment (Dollars)

N/A29.00.74.419.424.0Number of payments (Million per month)

N/A0.8nonenone1.07.7Of which mobile media (Million)

4.25.83.78.724.739.6Number of users (Million)

WAONnanacoICOCAPasmoSuicaEdy

Main e-money cards in Japan

Source: Compiled by NRI from press figures and other sources.

(as of end April 2008)


50.949.1

0% 20% 40% 60% 80% 100%

Use Do not use


Use of e-money is spreading in major cities.

(as of May 2007)

Source: NRI questionnaire

Percentage of e-money users in four major cities

Survey in four major cities；Tokyo, Osaka, Nagoya, and Fukuoka



Pre Dominance of Prepaid e- Money ｖ. post-paid services.Two Electronic payments systems; prepaid and postpaidThe prepaid type is what is referred to here as “e-money” in Japan.

EdybitWallet(in partnership with All Nippon Airways)

Independent

waonAeon

nanaco7&iRetailers

PasmoPrivate railway operators in Kanto region

IcocaJR West

SuicaJR East

Railways

Service nameOperatorCategory

Main prepaid e-money services Main post-paid electronic payment services

pitapaPrivate railways operators in Kansai region

Railways

QuickPayJCB

Visa Touch(Smart Plus)UFJ Nicos

iDNTT DoCoMo, Sumitomo Mitsui Card, and others

Credit cards

Service nameOperatorCategory

87 million cards 12 million cards>>


(2) Spread of contactless payment services in Japan.To derive benefits, core business functionality needs to be bundled.

Credit card

Cash

Cash

E-money

High

Medium

Low

Approx. \5000

Approx. \1000

Amount of payment average spend per use is about \600.Incomes are limited, but operational costs are huge.

E-money as a means of small payments e-money Services Alone Tends Not to be Profitable

Advantages of Bundling Core Business Functionality

All businesses: Access to detailed data on customer behavior

Railways: Reduced cost of maintenance of ticket gates

Retailers: Reduced time at checkout due to not having to handle cash

Airlines: Raise profile of own brand in consumers’ everyday lives


(2) Spread of contactless payment services in Japan.The e-money payment market is likely to continue to grow rapidly.

E-money ；$6 billion in 2007 to $22 trillion in 20122007 being dubbed the first year of the e-money age by the media.Although postpaid electronic payments are also growing, they are not expected to exceed e-money.

Source: Nomura Research Institute, “IT Market Navigator 2008:What Next for the Information and Communications Markets?”

Electronic payments market(contactless smart media only)

Contactless e-moneyContactless smart credit cards

5,8309,099

13,52917,233

20,34222,160

2,615

4,684

7,033

9,097

10,44710,535

1,754

8,444

13,783

20,563

26,330

30,78932,695

760 1,42240 332

799

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2005 2006 2007 2008 2009 2010 2011 2012Fiscal year

\100 million


(2) Spread of contactless payment services in Japan.

FeliCa Standard made Japan “Galapagos”

FeliCa Standard includes not only IC chips but also OS and Applications.Efficient but isolated.

Card

Mobile

IC Chip

Terminal

OS

Application

Mobile Phone

FeliCa Chip ISO14443 Type A/B

FeliCa OS MULTOSJava Card OS

Osaifu Keitai NFC Mobile(ISO18092)

various(FeliCa Standard)

EMV Contactless(Based on ISO7816)

Japan Global

Encryption Triple-DES AES / RSA / T-DES


(3) Legal issues to be solved

The insufficient legislative framework makes it necessary to revise consumer protection and establish a new financial services law.

Although Japan is at the forefront of the spread of e-money, development of the legal framework lags.

○Exists

△Exists but

dated

×No legislation

State of Legislation

General legislation protecting personal data exists.Legal framework following the OECD’s eight principles.

Protection of consumers’personal data

Although e-money is treated the same as prepaid cards, a legal amendment is being considered due to the absence of consumer protection.

Protection of consumers’ monetary value from business bankruptciesConsumer

protection

A financial services law clarifying the relationship between payments and “exchange transactions” is under consideration.

Necessity of financial license to provide e-money payment service

Financial services law

Reason of Law



Payment and Exchange

Payment can be included in exchange, but e-Money issuers are not banks.The Banking Law designates “banking deposit,” “loan,” and “exchange” transactions as the business of banks.Payment is regarded as the discharging of a monetary liability, and the agency of payment resembles “exchange.”

Payment Exchange

Non-Bank businesses offer services already.



FSA Position on SettlementThere are three positions on legal arrangements for legitimizing payments using e-money, and discussions are ongoing.The FSA is investigating legislation targeting various payment services, and the debate on the scope of coverage continues. There are three main positions on the issue:

Payment

Exchange

Strong View

Narrow Bank Law : Creation of new financial licensing system for Exchange onlyMost of payments are controlled as strictly as banks

Payment

Exchange

Intermediate View

Payment Service Law : Creation of new licensing system for PaymentMost payments are controlled by minimum standards

Revision of present Prepaid Card Law to address only e-money issuesE-Money and some other payments are controlled by minimum standards

Weak View

Payment



The Prepaid Card Law protects consumers from the risk of business bankruptcies.

Critics have noted the illogicality of treating e-money differently according to whether it depends on a physical medium.

Card

e-Money on a medium

Prepaid Card Certificates

e-Money not on a medium

server

(Prepaid Card Law)NOT Prepaid Card Certificates

(Prepaid Card Law)

Consumers are protected from the risk of bankruptcy of the issuerThe issuing corporation is required to be registered.Half the amount of the balance outstanding must be deposited by the issuer.

There is NO protecting scheme for consumers from the risk of bankruptcy of issuer.

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