1. Questioning sustainability of cashless in Japan
Why coinless is the next step
by Kenta Aratani
Although the global trend towards a cashless economy is widely accepted and favored by many in both the
private and public sectors, Japan faces extremely unique challenges that hinder its progress. According to the
Ministry of Economy, Trade, and Industry (herein METI), Japan’s 2022 cashless ratio of all domestic consumer
spendings measured by both transaction count and size only sat at a mere 36%. A surprisingly low figure when
observed from the outside and when considering how Japan hosts one of the highest ratios of population
banked, smartphones owned, and credit card owned compared to that of countries with MUCH (2X+) higher
It is also worth mentioning at this point that the government has openly announced and published over
multiple occasions, including most recently in March of 2023, that their KPI target of the cashless ratio only
extends to cover 80% of all transactions. Despite there only being a handful of nations with a publicly fixed
goal of an entirely cashless society, this remains ambiguously conservative. While the aging population is often
cited as the primary cause of the curbed penetration rate, this paper seeks to provide a more practical
explanation for those outside of the industry or of the Japanese economy and extends to propose a reasonable
business solution tailored to Japan’s specific circumstances.
Please note that the author is a lesser-cash, not 100% cashless, advocate with experience limited to macro-
trading and is therefore neither an economist nor an individual with decades of experience in the digital (or
cashless, as different economies use different terminology) payments industry.
II. Japan & cashless are a winning combination
Before taking a deep dive into why cashless isn’t working, it is critical to understand what cashless is, what
it offers, and the current economic state of Japan relative to what cashless can do to/for it. Modern cashless is
often referred to as means to promote efficiency in the workspace, reduce cash infrastructure costs, care for the
under-or-un-banked, improve security threats and prevent counterfeit money as well as tax evasions. With
regards to this section, let’s focus on the prevention of tax evasions and what that means for Japan’s public
Japan’s persistent deflationary state since the post-bubble era from the early 1990s has raised concerns
among economists and policymakers. The government and Bank of Japan (herein BoJ) have since then gone
through multiple phases of reform, including the negative interest rate policy implemented in 2016. Despite
progress, the effectiveness and sustainability of such policies are diminishing over the prolonged
2. implementation, and the severity of the government’s fiscal problem continues to rise. A cashless society could
be a well-rounded solution that addresses, to an extent, a number of these concerns, making Japan a
theoretically ideal candidate for mass adoption.
According to the Cabinet Office (herein CAO) and BoJ, as of December 2022, cash accounted for a
whopping 23.3% of Japan’s GDP, nearly all of it held domestically. While cash hoarding is a globally common
behavior during periods of deflation characterized with low interest rates, the clear weight distribution skewed
towards a stronger preference for high-denomination currency (5k JPY & 10k JPY) (Chart 1) suggest that a
significant portion of such balance is reserved for “non-transactional” purposes and potentially the existence of
a sizable underground economy. In other words, money that either does not circulate in the economy, or money
that is used to run businesses that evade taxes. Well known economists and academics, including Kenneth
Rogoff, former Chief Economist at the International Monetary Fund and current professor of Economics and
International Economics at Harvard University, have marked similar comments and estimate the size of the
latter to account for roughly 9.2~10.8% of Japan’s GDP.
In other words, a transition towards a cashless ecosystem should help boost tax revenues to offset the fiscal
debt, thereby improving the effectiveness and longevity of current policies, and ultimately stimulate the
economy all while reducing the size of the underground economy - with limited risk on seigniorage (given how
most of the physical cash can be found domestically, unlike the USD for example).
III. Historical progression of the currency-to-GDP ratio
Despite the theoretical ‘fit’ described in section II, Japan has allowed monetary base or outstanding cash
balances in circulation to continue an upward trend until recently. Furthermore, the country announced plans in
2019, to issue new banknotes by the first half of 2024. Although the banknote renewals are largely motivated by
3. the traditional 20-year renewal cycle, which contributes to counterfeit prevention and handing down of the
world-famous printing techniques, why wouldn’t Japan for instance begin phasing out parts of their currency
like other economies? There are plenty of examples to learn from: the European Union, India, Singapore, and
Canada, over the past decade or two. To speculate, this section delves into the historical development of the
currency in circulation as a ratio to GDP.
According to a 2008 BoJ report titled the Background to the High Level of Banknotes in Circulation and Demand
Deposits, cash hoarding began as a response to the partial removal of the blanket deposit insurance of bank
accounts in 2002. The government first introduced the insurance initiative back in 1996, as an effort to stabilize
the weakened financial system in the aftermath of the bubble burst from the early 1990s and subsequent growth
in bad debt within various parts of the private sector. The policy essentially granted insurance over the total
amount deposited at any domestic financial institution in case they defaulted. However, in 2002, the insured
amount was capped to 10 million JPY (~77k USD).
According to the report, although it was already on its way up, this is what triggered the first statistically
significant spike in currency-to-GDP ratio (Chart 2). Understandably, the same dataset reveals that since
January of 2002, the average monthly growth in outstanding balance of higher-denomination banknotes has
outpaced that of others by 172.5%.
Considering such historical background and continued upward progression since, the likelihood of the same
ratio returning to pre-1996 levels, or around 6~7%, is highly unlikely – unless of course, enforced. A natural
reset of mindset from the so-called “generation change” is still one to two decades away and is therefore not
considered an essential part of this discussion, not to mention credit cards have been around for a long enough
time to ignore the argument of the senior generations not being used to cashless in general.
4. IV. Comparing interest rates and consumer behavior
Chart 3 shows the historical price action on the 10-year Japanese Government Bond yield since 1990.
Although one can reasonably argue that volatility is not high enough to measure accurate R-value (or
correlation), a cross-reference between chart 2 reveals that the sensitivity of hoarding activity or its reversal to
spontaneous rises in interest rate has essentially been non-existent since 2002. For this reason, it is also
unreasonable to assume that all will be well should the BoJ decide to actually hike interest rates.
One might wonder the effects the recent development in the macro-markets is having on this behavior. The
simple answer here, as can be confirmed from the below chart representing the development of the same yield
over the past 2 years (left) and an August 2023 snapshot of the interest rates paid out by banks (right), is that
rises in interest rates are simply not being transferred over as most banks, small or large, have retained their rate
of 0.001% with some who have improved it to 0.002%. (DESPITE interest rates on real estate loans having
risen by over 1% now over the past year)
5. V. Sticking to conservative realistic expectations
Therefore, if the government were to enforce a cashless or lesser-cash economy, they must first ensure the
financial system’s strength to maintain stability in stress scenarios or risk further strain on their debt. This tricky
discussion would involve several topics, including but not limited to inflation outlook, real interest rates, cost to
buy back currency, and a clear repayment plan or restructuring of outstanding debt. Given recent macro-
economic uncertainty, obvious struggles involving real wages, questionable strength in regional banks, and the
over-abundance of domestic financial institutions make Japan’s push towards a cashless society one that is
unlikely to happen anytime soon and will be a gradual progression at best.
To conclude, the government’s 80% KPI can be considered rather reasonable, if not slightly aggressive,
depending on their intended timeframe, which according to the March METI report will take at least another
decade. Nevertheless, this discussion is meaningless if cashless payment services are not suited for practical,
everyday use by the private sector.
VI. A solution looking for a problem
So far, we’ve established that Japan could be a great fit for mass adoption of cashless from the public
sector’s perspective, but also that the preference for cash is deeply engrained for historical reasons and the path
to get there involves an incredible number of challenges. Now let’s assess cashless from the private sector’s
perspective. As described in section II, cashless is often touted as a solution to existing problems related to
convenience, cash handling costs, security, and improved record keeping. However, Japan’s unique economic
landscape renders most of these concerns significantly less critical than in other countries given that the nation
natively hosts the world’s best cash infrastructure.
The BoJ and Ministry of Finance (herein MoF) describes Japan as the world’s most “over-banked” country.
According to the World Bank, while other high-income countries average 17.4 commercial bank branches and
62.7 ATMs per 100,000 adults, Japan boasts nearly double in both categories, respectively at 33.9 and 116.9.
Furthermore, a joint report by the Ministry of Internal Affairs and Communications, BoJ, and National Police
Agency reveals that the ratio of counterfeit JPY in circulation to that of real currency is less than 1% that of the
EUR, USD, and GBP.
Such figures indicate that the common sales pitch by a cashless payment provider is heavily dependent on
convenience and the potential reduction in cash handling costs. However, we have established that cash is not as
inconvenient for Japan as it may be elsewhere. Naturally, most surveys consistently mark the “lack of need” to
replace cash and the “lack of benefits” that cashless offers as the two top reasons as to why consumers and
merchants still have not conformed to the idea of going cashless.
Moreover, the convenience of being over-banked often comes at the price of over-customization or an
increased difficulty in deviating from it. To clarify, there are reportedly over 1,000 financial institutions in
6. Japan, excluding security and insurance companies, that can accept money from consumers in the form of
deposits - and no single standard for API development to allow non-banks to execute or trigger an inter-bank
settlement. An application programming interface (API) is a way for two or more computer programs to
communicate with each other, and therefore a mandatory part of the infrastructure required to facilitate cashless
transactions given their current schema. Most regionals do not even provide their own gateways and depend on
a costly, bottleneck legacy system. While open banking API is a working progress and mandated by some
nations to streamline innovation outside of traditional banking, Japan is not quite there yet nor is it expected to
arrive there anytime soon. Moreover, such costs will ultimately trickle down to the merchants in the form of
processing fees. Therefore, the reduction of cash handling costs is one that must be closely analyzed against the
cost of adopting cashless.
VII. Side note - is cashless truly positive for the economy?
Contrary to common belief, not all evidence suggests that cashless is positive for the economy. Taking India
as an example, a joint report published by tenants at Harvard University, Goldman Sachs, and the Reserve Bank
of India in 2019, Cash and the Economy: Evidence from India’s Demonetization, concludes that the withdrawal or
deviation away from high-value banknotes in 2016 led to a decline in GDP growth, industrial production, and
Other studies suggest that depending on the type of cashless payment method adopted, the economy could
observe adverse effects on lending and investments made by financial institutions, as such moves can lead to
reduced bank profitability and hence a prolonged period of low interest rates which is counter-intuitive
considering the phenomenon occurring in Japan.
VIII. Don’t blame the seniors
Contrary to popular belief, the bottleneck for cashless is NOT the senior generation struggling to keep up
with modern technology, particularly given the existence of credit cards for nearly a century now, and the over-
abundance of different payment methods that come in all shapes and forms.
Many consumer-based surveys, the most recent of which was shared by the METI in March 2023, presents
strong evidence for this. (Chart 4) A closer breakdown further indicates that the youngest generations, aged up
to 29, is the greatest users of cash by total transaction count.
7. IX. Everyone gets it
Cashless is convenient, it’s obvious and nearly everyone gets it. The ratio of population in Japan who has
used cashless at least once in their lifetime is well over 90%, as transit e-money has become such a convenient
part of modern-day transport infrastructure. Note that this number indicates that cash-only business owners are
cashless users when doing personal spendings.
X. Cashless = Dematerialization + Digitalization
𝐶𝑎𝑠ℎ𝑙𝑒𝑠𝑠 = 𝐷𝑒𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 + 𝐷𝑖𝑔𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
𝐷𝑒𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 ≠ 𝐷𝑖𝑔𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
To abbreviate wordiness of ‘cash handling costs’ and ‘cashless adoption costs’, this paper breaks down
the process of cashless into two-steps. Dematerialization is the transition away from physical currency, which is
then followed by its digitalization, or providing a substitute of material cash.
XI. Benefits of dematerialization
As mentioned, the universal benefit to a cashless society is dematerialization, or the reduction in costs to
support the current cash infrastructure and the ‘implied’ benefits of digitalization, such as the recycling of
electronic transaction data to improve targeted marketing. Below is a diagram originally created by Nomura
Research Institute (herein NRI) that outlines the numerical benefits of dematerialization, by market participant
and type of cost saved.
8. *Figures in billion yen, except for the total and “Register, cash cycle…” under “Dist & Services” which are in
• Total annual cost is 21bn USD
• Greatest beneficiaries are financial institutions and merchants
• Largest savings are ATM and manual labor related
On paper, everyone wins. Yet reality clearly disagrees. The reason is simple – as implied in section VI, the
benefits of dematerialization do not outweigh the drawbacks of digitalization.
XII. Drawbacks of digitalization
So, what are the costs of digitalization and who pays for them?
In a cashless transaction, there are three market participants from the private sector: consumers, banks, and
merchants. Consumers pay little to no cost, as payment methods are often provided free of charge if not with
financial incentives (which we will go into later) in the form of loyalties and rewards. Banks do not pay a cost
unless offering a service of their own but must sacrifice a segment of their retail business should cash be
replaced. Merchants are not only required to go through the grueling procedure of selecting the appropriate
payment provider out of the twenty or thirty different services that currently exist but must also cover any
hardware and/or software installation costs, maintenance costs, processing fees, and any additional fees incurred
from cash liquidity (flow) management.
9. While the cost-benefit analysis for banks may seem complicated, it is a rather straightforward headline.
Non-interest income of Japanese retail banking is simply irrelevant in terms of overall revenue. Given capital
requirements, revenue in banking is often observed as a ratio to assets owned. This ratio for the non-interest
(non-loans) portion within retail banking, which cashless replaces, is estimated to have been 0.7~0.9% on
average of the total from 2010 to 2020 for the top three mega banks according to a 2022 report by a professor at
Seikei University. (DX Strategy for Retail Finance) Foreign players in this space, such as HSBC and Standard
Chartered Bank, withdrew from this market in the early 2010s given lack of appeal.
Moreover, considering how centralized the current business model is for many of the existing cashless
services, banks have secured their seats as mandated intermediaries who can generate income from intermediary
fees charged to facilitate inter-bank transactions on the non-banks’ behalf, such as charging a pre-paid card
from the same user’s bank account before actual use within the new services ecosystem. Therefore, one can
reasonably assume that the drawbacks of digitalization do not necessarily outweigh the benefits of
Recall the cash infrastructure breakdown chart from section IX. From left to right, observe a close-up of the
‘merchant’ (Dist & Services) section, a list of major cost categories for the current cash infrastructure, and the
same for a cashless infrastructure.
The costs that merchants must consider upon cashless adoption is broken down into the following.
• Upfront cost
• Running cost
• Liquidity cost
• Retention rate of cash cost
Depending on the payment method and desired result, merchants could be required to cover an upfront
investment well over 10k USD, running costs between 1~10% of revenue as fees to the service providers,
10. additional hours of work and fees per transaction to manage cash flow (i.e. a sushi chef requires cash to buy
fresh fish from the fisherman every morning), while simultaneously retaining a portion of cash-related costs.
Based on a personal survey targeting merchants in Tokyo, Kanagawa, and Nagano regions, nearly all
respondents who currently manage accounting books manually mentioned that the over-abundance of different
cashless payment methods often ends up leading to an increased strain on accounting as they have different
requirements and schedules, which ultimately negates one of the obvious benefits of cashless which is
Surveys by the METI supports this, as nearly 50% of all merchants claim that they do not feel that the
intended or pitched benefits of cashless had been realized since adoption. Subsequent reports have suggested
that for such merchants to realize the implied benefits, two additional conditions must first be met. First, the
payment method(s) must be installed together with a point-of-sales (POS) or automated inventory and
accounting system that relays information required for automated book management. Second, the cashless ratio
for their business must reach at least 30%.
XIII. B-to-B adoption rates, an indication that cash flow is a bottleneck
A 2023 whitepaper report by American Express reveals that the adoption ratio of cashless payments for B-
to-B transactions sits at 12.5%. This renders cash flow a critical component of business in Japan and creates a
mandatory requirement for cash or improved revenue to take out small loans to make ends meet. Given how
merchant processing fees cannot be transferred to the consumer-side due to service level agreements between
the providers, merchants have become creative in coming up with different ways to alleviate their situation. For
instance, by accepting cash-only during lunch times or implementing their own campaigns of custom rewards
and discounts should the customer pay in cash. An example of this can be observed by OK Corporation, a 120+
year old large-scale discount supermarket, that takes 3% off its prices if the user is a member of their loyalty
program and pays in cash.
Consequently, the same consumer surveys and METI reports mentioned earlier reveal that up to 17% of
consumers - regardless of how pro-cash or cashless they prefer to be - opt for cash payments on purpose to reap
the financial incentives or to intentionally help alleviate the burden on merchants. In fact, paying sushi
restaurants in cash was taught to be the respectful (and “correct”) way to pay when credit cards were first
introduced to the economy about 70 or so years ago.
XIV. Infrastructure costs
The NRI chart from section XI revealed that the current cash infrastructure costs 21bn USD per year to
support. This figure is often referred to as a social issue and the literal upside of transitioning to a cashless
11. society. There are two problems to this, particularly evident in an implied scenario where the 80% KPI target is
First, the METI estimates the actual cost saved in such a scenario to only be 5.8bn. In other words, 15.2bn
USD of the total cash costs will be retained. Second, a joint September 2022 report by the METI and JCCA
estimates 10.6bn to be the cost of the cashless infrastructure, including but not limited to card issuance/printing,
hardware and software development, system maintenance, etc. Further downside risk must also be taken into
consideration in an increasingly cashless society, where security and capital reserve costs are only expected to
rise. As an example, credit card frauds have outpaced the year-on-year growth rate of cashless ratio over the
past decade, essentially tripling in value from 86.5mm to 250.6mm USD according to JCCA. (Unrelated, but
this reality can also be considered what prompted the newer BNPL schemes to take off, to avoid regulatory
XV. Overseas market
The above was put together by the METI using data from the World Bank and Bank for International
Settlements (herein BIS). The average cashless ratio of developed economies is around 60%, and three of the
top five economies are in East Asia - Japan not being one of them. Chart 5 makes a comparison of the basic
demographics and market landscape of the top five vs Japan.
Aside from the slightly higher median age and noticeably low debit card penetration rate, nothing suggests
the existence of any obvious bottlenecks.
12. XVI. Comparing merchant processing fees
The comparative growth of QR code (+3,262% YoY) and debit card transactions (+91% YoY) to the
currently dominant credit card (+22% YoY) from 2020 to 2021 indicate that processing fees are in fact a
headwind for the industry.
Chart 6 is an extension of chart 5. It defines the most popular cashless payment method by market share in
each economy and compares the differences in average processing fee they each charge.
• Note the actual range of processing fees for credit cards in Japan is much wider, from 1~10%, but has
been normalized with reason, to keep noise to a minimum
• METI claims that the overall industry average processing fee to be 2.4%
Despite having the lowest average ROE and the same credit card brands, merchants in Japan are charged the
highest fees. A closer look to examine the cause leads to an extensive list of historical reasons, the oldest of
which dates to 1927.
XVII. A history of inefficiency
Old banking regulations prohibited banks from offering services outside of their primary business. This
meant banks were required to establish new companies or subsidiaries subject to its own set of laws and
regulations which led to overlaps in customer management, screening procedures, and other manually intensive
operations. Unfortunately, this is just the tip of the iceberg.
Chart 7 displays the historical regulatory reforms that outlines how the first form of cashless payment has
progressed over time. There are two takeaways. First, it wasn’t until 22 years after the introduction of Japan’s
first credit card, that bank entities were allowed to issue cards of their own. Most modern players had already
entered the market by this time. Second, installment payments were prohibited until 1992.
13. Those living abroad should be familiar with the concept of revolving/installment payments due to the
importance of monitoring and building one’s credit score. (Which is not a thing in Japan) Consequently, the
lack of interest income related to these types of payment schemes in Japan placed a greater dependency on other
streams of income. Furthermore, the limited functionalities that early credit cards offered meant that the only
consumers who benefitted from owning one were those who made expensive cash transactions frequently, or
those who often carried around hordes of cash.
Naturally, this led to a biased adoption pattern. This meant that the original generations of tech integration,
such as the development of the POS system, was the rich and large corporation tailored and often a costly
choice for subsequent adopters of smaller size and financial power.
XVIII. Structural bottlenecks
One might wonder why processing fees have remained so high, even after 1992. The short answer is
because 1) interest income from installment/revolving payments have been insufficient, and 2) there are
structural headwinds that have effectively set a floor on further fee revisions.
According to data from the Japan Consumer Credit Association (JCA) and J-Credit, the share of transactions
repaid in installment periods longer than two months only accounted for 6.5% of the total in 2022. (Chart 8)
Comparatively, data from the Japan Credit Card Association (JCCA), 2022 Economic Report of the President,
and a September 2022 Fed note on Credit Card Profitability reveal that the interest income from such types of
payments can make up ~80% of a credit cards gross profitability in the United States.
The second point goes back to the issues regarding over-customization. Chart 9 outlines an example of how
fees and electronic information is relayed to process QR code transactions, which currently offer the lowest
range of processing fees in Japan.
14. An in-depth analysis by the METI has revealed that the payment processing networks, which provides a
gateway to connect the end-user, service provider, and banks, and the bank payment clearing network, which is
an inter-bank settlement facilitation platform, are currently acting as bottlenecks for further fee revisions.
Specifically, both legacy systems are mandatory to make this model work but charge a fee per transaction
and direct access is either costly or limited to licensed institutions, who then charge their own intermediary fee.
As a result, it is estimated that about 48% of the total processing fee goes to the cost required to charge the
user’s account from their bank account, or step 1 in chart 9. Another 20~25% is said to be allocated for
marketing, or the incentivizing via cash-back or rewards. Any residual goes to system development, transfer
fees to make revenue deposits, etc.
This makes the current structure unfit for micropayments and smaller sized merchants with a low unit price
per customer. Evidently, reports by the METI and banks suggest that a minimum of 49% of all <1k JPY
transactions is in cash. It is also worth mentioning that this is one of the reasons why one can only charge
balance to their pre-paid services in increments of 500 or 1k JPY, and that given the limitations on the number
of revenue streams, fee revisions must carefully be assessed between the need for re-investments into other
requirements such as cyber security.
The irony and central risk behind this model, is that while these new cashless service providers are trying to
compete against traditional financial institutions, by essentially taking over a share of retail banking, they are
also structurally at their mercy. Theoretically, if banks decided to offer a new service targeting the same
15. audience as one of their non-bank competitors, they could easily raise the intermediary fees and indirectly force
the providers to raise processing fees.
XIX. Profitability in question
Without going into too many details on a single company, this section will share some recent news articles
to highlight the general trend on profitability of existing cashless services in Japan.
• https://www.nc-card.co.jp/media/credit/e-money/paypay_service/ (Japanese)
While these are simply just spotty highlights of the wider industry with some successful players, several of
the major ones seem to be having trouble marking sustainable profits. Market penetration and user downloads
are off the charts, but a turn to improve revenue is not characterized by increases in fees, but rather on cost cuts.
The most recent example of which happened for PayPay, a joint venture between Yahoo Japan and Softbank.
After announcing plans to only begin accepting PayPay credit cards to charge users’ balances, they were
brashly critiqued in social media and were ultimately forced to delay such plans.
XX. Cashless = Convenience + Financial Incentives
Our second cashless equation is in reference to what it offers to the private sector, or primarily the
consumers in this case. Since we’ve already established that the benefits around cost reduction, counterfeit, etc.
are ignorable, what’s left is the simple convenience of not having to carry around physical cash and any rewards
the service providers grant to the user. A closer look at the amount of rewards and points issued offer an
interesting perspective on how critical this could be to consumers here.
Let’s compare the ratio of the total amount of rewards issued vs the size of the cashless market per country.
As I don’t have an apples-to-apples comparison on the total face value of cashless transactions, due to differing
definitions, cleared in Japan and elsewhere, we refer to the “total volume of cashless payments” by country
provided by the BIS. In this public table, we can observe that the U.S. clears just short of 15X the number of
cashless transactions than that of Japan. Next, we look at the total rewards or loyalty points issued for each
respective nation. For Japan, we refer to a 2023 report by the NRI and for the U.S. (as an example), Statista and
MaCorr Research. Japan issues roughly a fifth of that of the U.S. in terms of outstanding points issued annually.
So, the size of the entire cashless market in the U.S. is roughly 15 times that of Japan, but only issues 5 times
16. This can be interpreted as – convenience alone is NOT enough to convince consumers in Japan. As a matter
of fact, without such financial incentives, the convenience of cashless can be considered significantly less than
that of cash (upcoming section XXIV).
XXI. Credit card fraud is a rapidly growing business
The Japan Consumer Credit Association (J-Credit) published a report on March 31, 2023, that outlined the
historical fraud use of domestically issued credit cards. Statistics reveal that the year-on-year growth of gross
fraud between 2021 and 2022 was 32.3%, far outpacing the estimated growth of the cashless payment ratio for
the same period. It is also worth mentioning that most of such growth has occurred domestically, and the impact
of the October 11th
border opening is yet to be seen.
XXII. ‘Maybe’ things will get better
Over the past few years, the government led several initiatives to alleviate the situation. Here are some
• Reassessment of fee structure by Zengin System, or inter-bank payment clearing network
• Non-banks are now allowed to connect directly to the Zengin
• New fee structure by CAFIS, or one of the most popular payment processing networks
• Government backed loans to merchants experiencing liquidity issues due to the mismatch between
cash needs and pending revenue deposit
• Digital payroll from Spring 2023, allowing direct deposit of payroll to cashless providers, which
eliminate the need for banks as intermediaries
While these changes are undoubtedly steps in the right direction, they unfortunately do not guarantee
improvement. For example, one of the more critical changes, the opening of Zengin to a wider audience,
requires an upfront investment of around 600k USD, a 14-month lead time, and additional requirements on
capital reserves. Similarly, the inception of digital payroll requires companies to assess the internal demands of
their employees and the development of new systems to facilitate the process.
Moreover, the balance held by any consumer at any given time for a large segment of service providers, is
capped at 1,000,000 JPY (7.6k USD). If balance is breached, excess cash will need to be sent somewhere else,
most likely to the user’s bank account, essentially unwinding the intended optimization. In any case, the impact
assessment of such measures is one that will require several years.
My personal risk scenario focuses on the diversification of fund-holders coupled with the increasing
likelihood of a large-scale cyber-attack. While Japan is a front-runner of financial precaution and enforces
sufficient liquidity to do business in this space, the story may not be so simple. For example, as service
providers begin to partner up and API gateways are bridged between different applications, a cross-platform
17. attack in the magnitude of 9 digits or more (in USD) could be in scope, and while the providers will likely
ensure the full amount, it may easily take longer than most users expect for funds to be back in their ownership.
The standard investigation procedure that credit card issuers perform an assessment on a fraudulent transaction
is said to take 30~90 days. Imagine a scenario where thousands or even millions of users lose access to their
funds, let’s say up to the 1mm JPY limit mentioned earlier, for a span of 6 months. In such a radical scenario,
we are sure to see a flight back to cash.
XXIII. Government support and COVID
Despite the abundance of headwinds, change did start to take effect in late 2019. The government
announced measures to indirectly mitigate the impact of the 2% consumption tax hike by providing support for
cashless adoption over a 9-month period. The package included a 5% cash-back campaign on all cashless
transactions for consumers, and a subsidy plan for merchants that covered a significant portion of hardware
installation and processing fees. Then in March 2020, COVID was announced, ironically compensating for the
lack of intrinsic incentive, undeniably accelerating the growth trend, albeit moderately compared to some other
XXIV. Merchant adoption rate
80% of merchants are said to have adopted at least one form of cashless payment. The average consumer
owns 4 types of electronic-money (e-money), 3 credit cards, and 3 bank accounts, each of which are often
reserved for its own purpose. Therefore, choosing the right payment service for the merchant’s average
customer profile requires a certain level of understanding that was not required in a cash-only society. Adding
differences in processing fees and deposit cycles into the equation, the distribution of adoption rate by type of
payment is quite evenly dispersed.
18. Although 80% may seem like a high number, only 23.4% can accept any method preferred by the consumer.
This is one of the reasons why over 78% of all consumers, including those who prefer cashless, report to always
carry cash around with them.
XXV. Impact of SMEs
According to an article by AU Pay, a mobile payment provider owned by KDDI, the average operating
margin for small and medium-sized enterprises (SMEs) in Japan is around 2%. Understandably, SMEs are the
last to consider going cashless and likely the first to leave if anything goes wrong or if deemed unsustainable.
However, their existence in the world’s third largest economy is not small enough to be ignored.
Data from the CAO and Japan Finance Corporation (JFC), a public financial services company for SMEs,
indicate that SMEs make up 99.7% of all companies in Japan, 70% of the total workforce, and 70% of regional
GDP, which excludes Tokyo. Economists have also claimed that the same could have an impact of up to 16%
on overall inflation, a figure that was only recently amended from a wildly underestimated 4%.
XXVI. Merchants’ new dilemma
The narrative so far has been straightforward. Cashless could prove to be an extremely useful tool for the
government, yet they are not at the stage to make drastic shifts in policy. Cashless also offers intrinsic benefits
to the private sector, but historically has not been enough to penetrate the market on its own. This has left a
significant portion of consumers and merchants with a retained preference for cash. However, this situation
could now lead to a new concern amidst an industry-wide unwind of the “over-banked” status.
Over the past two decades, the private sector as well as the BoJ has worked to eliminate the number of
financial institutions through mergers. As a result, the number of bank branches and ATMs have respectively
gone down by about 10% and 6%, which keeps Japan in the over-banked corner, but outpaces the decline in
population. Then came the nail in the coffin came on January 17, 2022, when Japan Post Bank (Yucho), the
largest Japanese bank by total deposits, decided to join in on a trend. Yucho announced a hike on coin deposit
fees, exponentially raising cash handling costs. (Chart 10) To be fair, a long-awaited, strategically reasonable
19. Making cash deposits, withdrawals, and exchanges, is part of a business cycle that almost all merchants
practice on a fixed schedule to manage cash flow. They are now at risk of incurring fees that may potentially
exceed the amount deposited. If you find it difficult to imagine the daily cash-management flow for a business,
you can also imagine a scenario where cash donations are deposited to a bank account after a long day of
volunteer work by a non-profit organization. Such deposits are only conditionally exempt.
The second table in chart 10 implies a near-ideal scenario where the maximum number of coins allowed per
fee bucket is distributed evenly across all types of coins. So, 16.6
5 coins each of 1, 5, 10, 50, 100, 500-yen coins
if a total of one-hundred coins are deposited. Note that under such a scenario, charges should be interpreted as
the minimum to be incurred. Another way to interpret this data could be by calculating the average value of a
single yen retained. If five hundred of each coin type was deposited, the value of 1 yen depreciates nearly 30%
on avg, to 0.72 yen.
XXVII. Quantity theory of money
The current situation can be analyzed from a macro-economic perspective as well. Consider the following
equation, which is known as the ‘Quantity Theory of Money’.
𝑀 ∗ 𝑉 = 𝑃 ∗ 𝑇
This theory represents a concept that most modern-day central banks reference when discussing ways to
reach inflation targets. At a high level, it states that M = money supply and P = price level in an economy is
directly proportionate to each other. The problem in Japan’s current situation, and likely elsewhere, is that
20. 1) unless the geographic adoption area of each* cashless services can be properly accounted for, V =
velocity of money, which is simply the distance money travels over time, can very easily be
2) coin fee revisions of modern magnitude are equivalent to charging negative interest rates directly on
cash. Therefore, we can exchange M for M-prime (M`), a number that will always be less than M, to
reflect the actual value of cash in circulation rather than the issued supply and can reasonably assume
that V for cash will also decrease given points outlined throughout this paper. Assuming T = volume of
transactions will likely not change; the theory suggests deflation.
In the worst-case-scenario, both 1 and 2 are true, and the central bank may need to print more money to
compensate. However, given inflation development in the world now which is partly atoned to the combination
of monetary and fiscal policies, characterized by heightened money supply, such compensation can also lead to
undesired consequences. In this regard, what the BoJ is expected to do, is to take some time to observe the
natural reaction of the private sector, while differentiating policies between cash and cashless.
XXVIII. Cashless vs cash for merchants
The chart displays an incredibly simplified example of what merchants will now be required to consider.
Here are some notes and takeaways.
• Only processing fees are considered
• Cash is still cheaper
• Coin costs > banknote costs
21. There are several other points worth noting. First, this chart is not representative of all merchants,
particularly as mid-to-larger scale merchants have outsourced means of managing cash. Second, this is a
snapshot, and does not take into consideration the expected rise in cash handling costs.
XXIX. Why the fee revision?
The update to strategic cost cuts is partly in response to the long-standing negative interest rate monetary
policy. Comparing pre- and post-inception, some financial institutions have seen their profit margins compress
by over 50%.
Given lack of interest income from loans and investments coupled with the concurrent spread of cashless in
nearby economies, financial institutions turned to cost cuts. Specifically, one of the first KPIs they set was the
withdrawal of money changer ATMs. While all ATMs typically cost a few hundred thousand USD to install and
thousands monthly to maintain, money changers require roughly double that amount. When Yucho announced
its fee hike, consumers rushed to ATMs to exchange or deposit thousands of coins at a time, which ultimately
led to a spike in malfunctions. It is also worth highlighting that ATMs and vending machines require updates to
its semiconductors, currently in shortage due to COVID and the Ukraine war, to process any newly minted cash.
Recall from section VIII how retail banking was already a dying revenue stream. This meant that for
financial institutions, the benefits of dematerialization outweighed the drawbacks of digitalization. Thus, the
decision to raise fees on coins makes perfect sense from a business perspective and should be understood as just
the beginning of a market-wide trend.
Merchants have always had issues with cashless, but cash is now becoming an increasing concern. This is
particularly clear in the micropayment and SME sectors of the economy. Considering the likelihood of further
rises in cash or coin handling costs, and the estimated time it will take to solve the issues related to existing
cashless services, the market now requires a for-merchant solution that retains the benefits of dematerialization
while offering a clearer risk-to-reward of digitalization.
While everyone else brainstorms ways to cut or transfer cost, for example by rounding up prices to the tens
digit or by exploring other income streams such as through buy-now pay-later (BNPL) services and the interest
income that comes with it, my solution, which may intuitively seem like an innovation reversal, is going
On a high level, this proposal will allow the merchants to continue accepting payments in cash, but the
change (i.e., just the coins) is charged, on credit, to the customer’s mobile wallet via a QR code transaction. The
balance received by the consumer can then be used as payment or to charge an account they own at other
22. service providers. While consumers who are already fond of cashless transaction may find this tedious, it offers
The obvious win is the reduced hassle of coins, but fee revisions by banks is a threat to everyone in the
private sector, which means 1) the coins you have sitting at home will only continue to depreciate, and 2) unless
everyone in the private sector is able to adopt a uniform set of cashless payment methods and the infrastructure
required for it, 1 cannot be avoided. Most modern ATMs do not even accept coins. Thus, this service
exemplifies a more inclusive form of finance and aims to create a middle-ground for merchants, consumers, and
Do note that it is critical to understand that this concept does not look to compete with the existing whales of
the digital payments industry. The vision this service aims to achieve is the realization of inclusive finance
while retaining a degree of privacy offered by cash, by realizing an economy that is powered by either fully
cashless or semi-cashless transactions only.
XXXI. Flow chart
Here is a step-by-step, in example format, of how I envision this service to work.
1) Customer makes a purchase using a 1,000 JPY banknote for a service that costs 790 JPY
2) Customer will display his/her QR code on their smartphone
3) Merchant will use their own device to scan the QR code and send a request to the server
4) Server will either approve or reject based on outstanding credit balance etc.
5) If approved, 310 JPY worth of e-money will be allocated/sent to the customer’s e-money account
23. 6) Customer is free to use the balance as they would any form of prepaid cashless service
7) Any outstanding credit balance with merchants will be cleared monthly
XXXII. List of benefits
1. No coins
2. Tracking household expenditure in line with preference*
It has been reported over several occasions that one of the reasons why consumers who prefer cash are loyal
because it is easy to keep track of their own expenditures. My hypothesis regarding this is that the hassle of
withdrawing, paying, and subconsciously keeping track of the rough amount in their wallets is the traditionally
preferred, less-workflow intensive method of keeping track of their spendings.
Evidently, there are very few individuals who can tell you exactly how much balance is left on their QR
code account - given how easy it has become for them to charge on the spot. Coinless could serve as a credible
way to test this theory.
3. Minimum information, less privacy concerns
1. No upfront cost
2. Low processing fee*
In a coinless transaction outlined in section XXIII, there is no need for anyone to charge an account prior to
use. The lack of banks and certain payment gateways as a mandated intermediary suggests that such fees are not
required or can be kept to a minimum.
Furthermore, this service will allow merchants to transact on credit, which is equal to the value of change,
not revenue, which is typically a much smaller value. This combination will lead to a significantly less
3. Alleviates liquidity (cash flow) concerns
If a merchant already accepts cashless payments and are experiencing liquidity strains as they wait for their
revenues to be deposited, this service will create a situation where the merchant will receive more cash than the
cost of service offered and will help to alleviate this situation.
4. Inflow of pro-cashless consumers
1. In line with dematerialization strategies
2. Does not intrude original banking business like some providers
Cashless service providers
24. 1. Able to charge their accounts cheaper than existing schema
A consumer has the option to use the e-money they received to charge an account they own elsewhere. For
instance, if a user receives 310 JPY worth of e-money but wants to use the same balance for transportation that
only accepts a certain type of payment method, they should be able to transfer balance to any transportation IC
based e-money account that they own.
Although detail is to be discussed, if a bilateral agreement can be made between the other payment provider
to optimize settlements, service providers will be able to charge their accounts without engaging pricy legacy
systems, users will gain access to a wider network of merchants, and this model will be able to retain debt while
reducing capital cost, which is a fraction of outstanding balance in circulation.
As a business
2. Controlled credit risk, deviation from growing consumer debt*
The risk that this service will incur is more operational than credit. A merchant receives banknotes excess
the cost of service provided, thus ensuring a state of sufficient cash liquidity to pay back the issued (borrowed)
amount. Whether liquidity will last until monthly clearance is therefore operational.
3. Less capital reserve requirements*
As this is a coinless service, the upper limit to how much a merchant can send to a consumer per transaction
is capped at 999 JPY. This effectively places an upper bound to capital reserve requirements, making it easier to
forecast and control. Additionally, if balance is transferred to other providers, our requirements will decline.
Furthermore, unlike most other providers, who operate under the Funds Transfer Service License and
require the equivalent of at least 100% of existing balances in their reserves account, the Prepaid Payment
Service License that we will be licensed under only requires 50%.
4. Low money laundering and hacking risks*
Criminal activity is also based on cost-benefit analysis. Technology needs to be studied, and investments be
made. This service is an inefficient target for them given focus on micropayments.
5. Non-profit friendly*
Historically, majority of donations came from donation boxes installed next to cash registers. Whenever a
consumer received change, he/she deposited whatever coins they didn’t want for themselves. Thus, the rise of
cashless ultimately led to a decline in cash donations. Further, coin donations are not necessarily exempt from
the bank fees. Some non-profits have reported losses up to 20%.
6. Foreigner friendly
App will eventually offer internationalization for inbound traffic
VISA or Mastercard is currently the most preferred method of payment by tourists, but the same charge the
highest average processing fees in Japan. Further, most other smartphone-based services cannot be installed to
25. offshore phone numbers. Cash is still a dominant force in this market, and this app will ultimately seek to
extend this service to non-JPY currency.
XXXIII. SME turnover rate
One might wonder at this point, what the turnover rate of the merchants, or more specifically, SMEs are.
Afterall, although a reasonable argument can be made that risk is more operational, the risk will be classified as
credit, the majority of which are going to be against SMEs, as outlined in section XVII.
The following chart is taken from an annual whitepaper report (2022) published by the Small and Medium
Enterprises Agency. The orange line represents mortality rate while the blue indicates new business opening
rate. Since 2010, the opening rate has consistently outpaced mortality rate, which was only at 3.3% in 2020
even during COVID.
Comparatively, the Federal Reserve Board of New York’s 2021 Household Debt and Credit Report reveals
that the overall delinquency and default rate of credit card debt was more than double at 6.8%. That’s just for
credit cards, and the entry of new players in the BNPL space should only contribute to its rise as consumers are
given numerous methods to incur debt simultaneously.
26. XXXIV. Example: convenience stores
The chart takes an average convenience store in Japan as an
example and compares the processing fee for a leading service
provider against the one being proposed in this paper. To make
things easier, we assume a processing fee of 1.6% for both services.
Results indicate a 1.02% difference in total fee against the
revenue earned using the respective services. This difference is a
simple result of charges on the average revenue of 725 JPY per
customer, versus charging on the 275 JPY change to be digitalized.
The other note worth highlighting is the impact on liquidity
management. Existing schemes by other providers offer the default
plan of depositing revenue once or twice a month. Customization or
use of a payment processor requires additional fees.
Observe to the left that the
pending revenue from cashless
transactions minus its
processing fee is 5.99mm JPY.
Comparatively, our proposal will produce a situation where the same
business sits in a cash pool of 6.09mm JPY from the revenue it made, plus
the accrued credit of 2.31mm JPY. The latter figure is equivalent to
approximately 40% of the pending revenue.
There will be four sources of income.
1. Fees on outstanding credit balances, and
2. Fees to transfer balance to other service providers, and
3. Fees from donations, and
4. (possibly) monthly charges that are either fixed or proportionate to frequency of usage
An example of number 4 would be charging a 500 JPY monthly fee to use the service. The reason this or a
similar approach will likely be required is because any outstanding credit may potentially be offset if the
merchant receives a payment of sufficient size. In this scenario, credit balance can either become zero or
negative, but the service would still need a way to secure minimum revenue to handle server cost etc.
While detail is pending on data to be gathered from beta testing in summer to fall of 2023, an example of
what a revenue model could look like can be found below.
27. In case revenues from 2 and 3 are or becomes sufficient, this business will explore possibilities of reducing
charges on 1 and 4. There is a separate document outlining how the author envisions this business to progress. *
XXXVI. Market Size
• 36.8bn USD in coin circulation
• 760bn USD in notes circulation
• 7.3% of all online purchases (excl. purchases of digital contents) are made in cash
Readers may be wondering how sustainable this idea is as a business in the long-term. Particularly as the
fact that everyone, including Japan, is moving towards a cashless society doesn’t change. In my opinion, this is
almost an irrelevant discussion given the size of the gross market cap.
Cashless ratio is a figure calculated by referencing “Consumption of Households” minus “Imputed Rent” as
the denominator. This figure, as of 2022, is 45.2% of nominal GDP, or just shy of 2 trillion USD. This means,
that in a scenario where the 80% KPI target, which is likely to lie sometime between 2030~2035, is achieved,
the industry size is still worth over 400 bn USD. See below for details. 400bn USD is a figure that comfortably
sits in the top 10 when ranking industries by market cap in Japan. For example, the online gaming industry here
is worth 29bn USD in 2021.
28. XXXVII. Ideal partnerships
• Convenience store banks
o Seven Bank
o Lawson Bank
o Rakuten Bank
o Other Regional Banks which offer after-hour services*
• Cash management security companies
o Asahi Security
• Minting office
• Local Authorities
• Other cashless service providers
o Bank-offered QR or debit
XXXVIII. Inflation resistant
When I say inflation resistant, it doesn’t mean the concept won’t be impacted at all. However, when
compared to other payment types, particularly ones that issue credit, which is again a service that some of the
local providers are trying to build as a secondary source of income, the service should see less of a rise in any
fees it will charge.
Specifically, what consumers and merchants should be aware of is the impact of central bank rate hikes on
annual percentage rates (APR). APR is the annual interest rate that is charged on credit or loans made by the
29. issuer. While not directly proportional, a rate hike by the central bank will almost always indicate a hike on
APR. This is a trend already observed in the U.S., and if this happens in Japan, it should lead to a natural shift
away from such payment methods into more ground-level schemes to better manage their expenses. But
managing expenses, at least in Japan, has historically been a job for cash.
Leaving the option of cash, while contributing to the partial hedging of credit risk by transfer of balance
between different providers, this service can be a long-term survivor during such environments. However, it is
important to note that the market is probably long-overdue on a new approach for credit risk analysis, which
will always be one of the top priorities of this business.
XXXIX. Actual cashless ratio
Although it doesn’t change the narrative in terms of what the market currently needs and having enough of a
market size to pursue this opportunity as a business, it should be mentioned that the accuracy of the cashless
ratio announced by the METI is currently under review. Several proposals have been made on how it can be
improved. On average, the actual ratio, seems to be closer to 50%, which is in line with other developed
economies, and more importantly from the merchant perspective. More detail can be found on METI’s
XL. The future
Funny enough, even amidst one of the most complicated periods of financial uncertainty over the past few
decades, the consensus around the future of digital payments never seems to waver. Everyone believes that at
some point in the future, everything will be cashless and stablecoins or Central Bank Digital Currencies
(CBDC) are likely to play a significant role. For the most part, I agree, however, the path is not as linear or clear
as most make it out to be. Understandably, these individuals have a tough time justifying the long-term survival
rate of the business proposal in this paper without hearing the arguments I’ve outlined. However, I feel as
though this question about business rationale is the same as me saying to them, “chatgpt is here, why are you
still working the same desk job?”. What’s important is having a long-term view on the industry and
understanding how your idea will fit in or add value in what phase. So, let’s talk about the future.
A 100% cashless society seems to be the consensus, so let’s start there and move on to the more relevant
questions of how and when. Like it or not, stablecoins are already here and wholesale CBDCs seem to be on
their way. Although the original intent behind its introduction is different, the most recent indicator of such
digital forms of money entering the market is the Fed’s deployment of FedNow instant payment service. The
system will likely serve as the facilitation platform for digital-USD in the future. BRICS nations recently
announced plans to consider the release of a new, digital reserve currency to replace USD. The BoJ announced
that while the decision is ultimately up to the government, they envision a future with digital-JPY.
30. Central banks and private firms will spend the next 5 to 10 years piloting within their own domains,
observing the developments in front-runner nations like the U.S., and ultimately aim to design a prudent form of
digital currency that will serve as a substitute or sub-option of not just fiat, but a variety of private money
currently in circulation. In this scenario, I expect two things to happen; 1) the role of traditional retail banks and
payment providers could become limited to providing e-wallets for facilitation, security, and reward
distribution, which will make competition even more difficult in an overly saturated market, and 2) the near-
term focus of the industry will naturally shift to the task of onboarding parts of the private sector that so far has
not conformed to cashless, with a clear monetization plan that will allow it to be practical. In either case,
entering the market as a new service provider without a clear differentiator among other institutions, or only
with a single intended stream of revenue is - an unwise choice.
Theoretically, the coinless, semi-cashless service outlined here checks off both conditions. Without going
into too much detail on long-term plans, this service offers unique features that differentiates itself from
competition and targets the pro-cash consumer sector. Furthermore, surveys and hearings on both the merchant
and consumer front shows that the need is there. However, it can be difficult to understand something never
seen before without the opportunity of lengthy explanation. Therefore, as with most other businesses with solid,
new ideas, the critical factor is execution and the amount of support I can gather from not just the private sector,
but among all stakeholders within the financial system which only allows a low margin of error. In that regard, I
have several other features and approaches in mind, and if interested, further discussion should be held over
The best resources are in Japanese and published by the government entities, banks, or mobile carriers.