Nikkei Asian Review September 9, 2020. Online 6:02 JST “Softbank wants to burn money”. “Masayoshi Son zeros in on Japan where he is ready to lose billions in a battle to conquer cash”
Most Americans would be surprised that India and China have become increasingly cashless societies. In China “credit card is generally not welcomed”, “cash is passe” Merchants prefer digital payments on APPs like Ali Pay and WeChat because commissions are lower, they are paid immediately from the user’s account and in the COVID-era these payment methods are touchless and contactless. Safety is important as Japanese money-handlers are going to great extremes in Japan and South Korea to “sanitize” currency.
Softbank, as some may know, was extremely successful making an early bet on Alibaba but since has been hit hard by failures with WeWork (Loss of $10B), Uber-still below its IPO price and COVID-related declines in their heavy tech stock investments. So softbank's CEO Masayoshi Son and investors are looking for a hit. Year ending March Softbank has, largely as planned, lost $771M with its version of a digital payment APP known as PayPay. The APP like others, at least 12 other firms are vying in this arena (See Above), is downloaded, linked to the user’s bank account, the users keep the account to their preferred cash-level and then at point of transaction they scan the purchased item’s QR code or the merchant scans their APP’s unique code.
Japan is seen as a “plum” digital-payment market worth as much as $1.3T but unlike India or China much of the population is resisting the new digital push preferring to withdraw daily amounts of cash from ATMs or scan a QR code using their existing mobile phone platforms. So far just 1% of retail transactions in the $5T Japanese economy are digital. Softbank's PayPay is a latecomer and hopes to gain marketshare by using incentives. So far they have enlisted 30M users or ¼ of the Japanese population and 2.3M merchants for a total of 1B transactions.
Softbank is famously wedded to a “Cash Burn” strategy-initially providing huge incentives for users and merchants to convert to PayPay. They used a similar approach with Uber. The idea being that when the APP achieves scale they are hoping to retain market share while gradually scaling-back incentives.
Mutual fund and other investors are increasingly nervous about Masayoshi Son’s gambles including his heavy investing in tech stocks. Son, holds 30-% of Softbank stock and sees this digital-payment campaign as “Its Winner Take All”. The belief being that such an APP is the path to being an significant gateway player to all forms of financial payments.
“Becoming a key player in cashless payments is critical for any firm that wants to be a dominant player in the digital ecosystem in the long term” says Michael Couston (Retail Analyst at SmatKarma). But he adds that “nobody will make money for a long time” until PayPay scales back costly incentives (see "Late to the game" below for fees). There’s plenty of competition in this field of ride-hailing, e-commerce-deliveries and digital payments with significant investments by the likes of Alibaba, Amazon, Tencent, Google, Toyota and others. (see figure-Digital Payment in Japan)
For its part, Softbank is shoring-up its $100B “investment vehicle” raising an additional $41B in cash by selling assets or taking loans. The actions have push up their stock to a 20-year high and a profit of 1.2T Yen for fiscal quarter 1.