Payments in Japan: Galapagos Syndrome?

16 September, 2021Eddie Butterman and Michael Aragona

Japan is a technologically advanced country, albeit one which has developed in near isolation. Its payment ecosystem can be expensive and complicated for non-Japanese multinational businesses to navigate. Michael Aragona and Eddie Butterman look at the problem and how fintech firms and Japanese banks are helping build a roadmap for corporate treasurers.

Mobile phone and card readerMost of us learned about Charles Darwin’s exploration of the Galapagos Islands in the 19th century where he formed his theory of evolution. That is, how isolation shapes development and adaptation occurs to meet the needs of a specific environment leading to distinct differences, even within the same species.

Today, we use the term ‘Galapagos Syndrome’ in modern business to describe products, services, and even processes that have developed with a focus on a single market – making them distinct when compared to the rest of the world.

The progression of offerings coming out of Japan over the past 30 years has often become synonymous with the term.

Japan is a technological leader and launched many of the world’s firsts, including the 1G network, the Walkman, camera phone, mobile payments, and a version of near field communication technology. However, as the Japanese built this technology specifically for its own market, little of this technology made it overseas in its original form.

Other markets adopted, and adapted, the technology for a broader audience leading to far greater adoption worldwide.

The Japanese payment ecosystem

The payment ecosystem in Japan has developed similarly. For example, Japanese banks made unique payment mechanisms available to consumers while offering in-house banking services to their large corporate customers – long before their counterparts in Europe and the US. 

Many of these offerings have remained exclusive to Japan, meeting the specific needs of the Japanese market. They lack global interoperability since the payment technology uses local language characters only: Katakana.

Japan’s payment systems, particularly Zengin – a 24/7 instant payment system – is an excellent example of this. Zengin evolved, innovating to promote speed of payments domestically, but requires use of Katakana.

Payments effected in the Latin alphabet fail and require significant manual intervention and regulatory reporting. The use of artificial intelligence for automatic translation has a low success rate, resulting in many returned payments.

Fintech companies and banks need to collaborate to make this technology work better in the future. In such a regulated market, this is often difficult. Many would-be challengers are competing on the outskirts of the financial services system.

What makes international payments so complicated?

It is not just all about language though, sometimes, the regulatory environment inhibits interoperability, for example, while making a simple international transfer.

Many Japanese banks still require the remitter to go to a branch to approve the payment, despite entering the payment into an online system. This is in part to comply with Japan’s regulatory policies.

Also, any payment made through Zengin in the Latin alphabet will require repair and be treated like a cross-border payment from a regulatory perspective. 

While payments pushed through Zengin are relatively inexpensive, Japan is notorious for charging high cross-border payment fees. So domestic payments not formatted in Katakana generally attract significantly higher fees. This is because they aren’t really considered domestic payments!

These points contribute significantly to the cost of international payments in Japan.

Can a corporate treasurer use Zengin?

The biggest challenge is for treasurers who operate in a global environment and prefer to standardise processes and manage accounts in Japan remotely from an Asia Shared Service Centre or Regional Treasury Centre.

Unless they hire a local language/local payment expert, they will lose access to valuable services and pay higher fees.

The alternative is hire a local service provider – such as an accounting firm – to assist in navigating the Japanese payment landscape.

In either case, this clearly adds cost and deviates from the centralised treasury model usually employed by multinationals.

How Japanese banks are supporting international customers

Banks are working to create a bridge for non-Japanese corporates. For example, some banks are helping to create and assign Katakana payment templates within a corporate treasurer’s system. 

Although this can take time to setup, it:

  • allows maximum flexibility in getting correctly formatted payments into the Zengin system, in the right language
  • helps both banks, and their customers, fulfil Japan’s strict reporting requirements and procedures
  • reduces the prohibitive costs of sending payment instructions through Zengin.

Japanese financial services will keep certain aspects of payments exclusive to Japan. The technology and regulatory environment do not yet allow any other options. 

However, local providers continue to follow Japan’s longstanding tradition of innovation, while continuing to work on creating a compatible, global payments ecosystem.

Navigating both the global payments environment and the domestic transfer market is tough, but with understanding and flexibility, corporate treasurers can enjoy the benefits of both worlds.

Michael Aragona edit

Michael Aragona is the Head of Global Transaction Banking Sales for the Americas at Mizuho Bank, Ltd. Currently based in New York, Michael has over 25 years of transaction banking advisory experience. He has worked around the world managing teams of treasury professionals and his own treasury consultancy business. He has also contributed to our CertPAY course.

Eddie Butterman is a Vice President at Mizuho Bank, Ltd. Currently based in New York, Eddie helps corporate clients navigate the complex world of transaction banking to deliver efficiencies for their organisations. He has also contributed to our CertPAY course.

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