Japan's financial institutions, once renowned for their technologically advanced infrastructure and high availability, are now facing challenges in meeting the needs of modern consumers and businesses. Account-to-account payments are an emerging advancement in the payments space that are worth exploring.

The team at A24 attended Japan FinTech Festival 2024 this March and took part in discussions exploring the role of Account to Account Payments in the future of Japan’s emerging payments Technology .

Whilst Japan once led the world in bank services such as the ability to pay bills and make transfers at ATMs, such legacy infrastructure and complex structures hinder their ability to compete with today’s new digitized economy. Years of mergers and consolidation add to the complexity of the system leading to a high cost of operation and service.

In Japan it typically costs 3 to USD 5 to make a simple account to account transfer between banks – regardless of amount – and this is in effect a regressive tax, impacting customers and small businesses alike.

The Japanese banking world, in its desire to achieve consensus for all customers, tends to evolve services at a pace with the laggards, rather than the first adopters. Strategies that manage cost control rather the revenue creation has to date been favored. This combined with the ubiquitous availability of cash at every convenience store makes change away from a cash based society slow.

This is compounded at the same time, at the check out. Consumers are presented with a plethora of payment choices; there may be as many as 20 payment options (credit cards, debit cards, transit cards, prepaid cards in all forms, QR code payments,…. The list goes on.) Many also attracting loyalty points, discounts and other incentives.

So how have the banks survived, you might ask?

It could be argued that there has been protection through regulation inhibiting some of the new entrants and new services in the Bank to Bank and Acount to Account space. Once such regulation (at least untill recently) has determinded that salaries are paid into bank accounts. The result, is that Japan is not only the highly banked, but perhaps overbanked, with consumers and companies typically having more than one account.

But changes are coming…

Whilst true integration with the banking system requires a full banking licence, some players have chosen to go around the banking system and evolve their own ecosystem. One prime example is PayPay. They have invested heavily over a number of years with tens of millions of users across Japan. PayPay’s recent partnership with both LINE and Yahoo offers an even larger ecosystem outside of the main banking environment. This is a development in the industry to keep watching.

It seems that, unlike the banks, these new entrants are less interested in making money from account to account transfers, and more focused on ancillary and value-added services. They may even take on the traditional credit space - offering credit at the point of need, by using past behavior to establish credit worthiness.

Whilst not implemented yet, in market regulation have recently been adjusted to allow the transfer of salaries directly to digital wallets. There are currently some limitations on balances and the like but this change, and the direction of evolution it signals, could be earth shaking for the traditional banking sector. We will continue to work with financial organisations to navigate both the regulations, compliance, data security and Data Privacy requirements to ensure consumer confidence remains buoyant as the Japanese payments market evolves.

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