Lost Without Cash

Commuters in Tokyo's crowded trains and subways need any advantage they can get. For about a year, I have been enjoying the benefits of the railway's e-money smart card, a prepaid card that replaces the conventional magnetic card. Instead of inserting a card in a slot, passing through the turnstile and taking the card on the other side, all I have to do is flash my plastic smart card and proceed. The prepaid card also saves me from calculating all the different fares on Japan's complicated rail and subway systems—where different lines are often operated by different companies—on those occasions when I have to switch among several lines. A big part of the card's appeal is that I can also use it at a growing number of kiosks, convenience stores and cafés. I can buy my morning newspaper in a millisecond as I dash for a train that has already arrived on the platform.

Japan is way ahead of most other countries when it comes to cashless payment systems. Over the past two years, Japan has seen a phenomenal rise in smart card payments. Nearly 100 million cards in circulation nationwide accounted for transactions worth about $8 billion in 2007, says to Nomura Research Institute, quintuple the number the year earlier, and that rate shows no sign of slowing. Nomura Research Institute expects cashless payments to grow by 60 percent in value this year. The problem, as I quickly found out, is that there are just too many different cards. Japan now supports six, each incompatible with the others. And this lack of compatibility is a pain.

As soon as I started using a smart card, I was hooked. The idea of fumbling for coins or bills began to seem like a useless hassle. I was disappointed, though, when I found out that the convenience store near my office and the supermarket chain stores I frequent do not accept the rail card. To go cashless, I had to acquire an Edy—the oldest and most widely accepted prepaid card system in Japan. It meant I had to remember to replenish two cards when their balances run low and find more room in my already bulky wallet. But I was OK with that, if it meant I could go cash-free. And for a few days I did.

Then I walked into a 7-Eleven. Anybody who wants to go cashless in Japan has to have a card that works in the biggest convenience-store chain in the country. But 7-Eleven accepts neither the rail card nor Edy, but instead asks customers to buy its own proprietary card, the nanaco. If I were to go cashless, I would have to start using a third card.

It would seem high time for some kind of unified system, but marketing experts don't see this happening soon. Japan's smart card is not merely an alternative to small cash payments. It's also a tool for cultivating customer loyalty—what's called "enterprise currency" in the trade, which has value only in one particular system. Like airlines' frequent-flier programs, different smart card operators offer savings programs with points that can be accumulated and cashed in. Some of them offer a yen in savings for purchasing ¥100 worth of goods. These incentives make unification "strategically difficult" for smart card firms, says Hiromichi Yasuoka, an expert at Nomura Research Institute. Indeed, at a time when the e-money market is still expanding rapidly and latecomers are growing faster than incumbents, there is little incentive to settle on one card system. If 7-Eleven began accepting Edy for the convenience of its customers, it would lose a marketing promotion and have to pay a fee to Edy's operator for each purchase.

Eventually, e-money cards will most likely follow the path of credit cards and settle down to a few widely accepted brands. But for the time being, the battle among smart card firms for a bigger share of the pie is intensifying, with no clear sign of which standard will prevail. This competition comes at a cost. BitWallet—which runs Edy and is the biggest provider, with more than 40 million cards—has said it is losing money, and analysts think none of its competitors is either.

The business model is another impediment to cashless payment cards. They are best suited for low-margin retailers, such as newspaper sellers and ticket offices, whose customers want the convenience of quick transactions. But these businesses are least able to afford the fees (estimated to run about 2 percent). Many store owners won't feel financially motivated to install a cashless system and pay a fraction of their sales in fees unless customers start demanding it. For this reason, outside of busy urban centers, where convenience is king, the adoption of smart cards has come slowly.

Ironically, as operators trip over each other to offer loyalty incentives, each type of smart card is becoming attractive in its own way. For example, this summer Edy launched a new savings program, which allows its users to make a purchase at some designated stores at a discount. When the industry eventually comes round to unifying, card holders will miss these benefits.

The progress of smart cards in Japan is being watched closely in China and Malaysia, which are adopting similar cashless payment systems for their rail and subway systems. They would do well to avoid the pitfall of allowing competing standards to proliferate. As for me, I am still putting off getting a nanaco. For the time being I'll use plain old cash.