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1、A Guide For BusinessesNavigating changing cross-border paymentsin Japan2Table of Content Introduction The Japanese business payments landscape Payments trends in Japan Japans changing payments at a glance -The state of cross-border payments in Japan -The impact of Type 1 licenses:Real-time payments
2、and beyond -Benefitsforbusinesses Future trends in Japanese payments Conclusion3Introduction In 2023,The Japanese government will reportedly soon begin to issue approvals for money transfer operators and other players to handle uncapped cross-border payments in and out of the country for the first t
3、ime.This means that cross-border business-to-business(B2B)payments,which have traditionally been largely confined to the SWIFT network,are setto see a surge in options over the next12 months.This transformation is occurring against a backdrop of ongoing change in the Japanese payments landscape and
4、sees the country increasingly align with other parts of the world on the availability of B2B payments options.However,it is doing so within a significantly different payments landscape compared to many other developed countries.In this report,we explore the current state and challenges of cross-bord
5、er payments to and from Japan,as well as how the introduction of these new capabilities will change access to B2B cross-border payments.Such changes will have evident benefits for both international companies doing business in Japan and Japanese companies doing business abroad;for companies,recogniz
6、ing how these changes can help reduce costs and improve efficiencies is vital to future growth.4The Japanese business payments landscapeThe payments landscape in Japan is quite different from that of many other countries of a similar development level,which extends to how businesses make payments,bo
7、th domestically and internationally.One of the key differences is that while the country is going through a period of extensive modernization in terms of its financial systems,it remains considerably more cash-based than many other developed countries.Many advances enacted over a decade ago elsewher
8、e have only been made in Japan in the last few years,while other changes are expected in the near future.For example,Japans domestic payments system Zengin-Net,which is the payment clearing network for Japanese banks,only began operating 24/7,365 days a year,in October 2018.Prior to this,it only ope
9、rated during working hours,which resulted in significant limits to how and when payments could be made.This included accessing ATMs,which in some cases could only be used during Zengin-Nets operating hours.This was unusually late for such a developmentin many parts of the world similar systems had b
10、een in place for at least a decadeand had a profound impact on how businesses could operate.No longer were they fixed to a timeframe determined by the Japanese financial system but could make transactions at whatever time best suited them.Similarly,the business-focused Zengin EDI system was launched
11、 in December 2018.This enables businesses to attach commercial information such as financial details to inter-firm remittance messages,which significantly enhanced the utility of domestic business payments made using digital methods.The system enabled the inclusion of vital information such as invoi
12、ce numbers with a payment,for the first time.Meaning that a payment could be made entirely through the system without the need for additional actions,such as a fax notifying a company what the payment was for.This not only reduced the risk of error for such payments,but also increased the efficiency
13、 of business payments.Beyond the domestic payments space,Japan is also seeing developments in cross-border payments.The Bank of Japan has taken steps to improve cross-border settlement risk with the launch of a cross-border delivery-versus-payment link with CHATS,the system for the Hong Kong dollar.
14、This ensures the simultaneous delivery of Hong Kong dollars in Hong Kong and Japanese Government Bonds in Japan,helping banks conduct cross-currency repo transactions and so providing smoother payments between the two countries.While this may be beneficial for banks,there are further changes ahead t
15、hat are likely to have a more direct impact on businesses making cross-border payments both out of and into Japan.In many countries,including in the U.S.and Europe,businesses wishing to make cross-border payments have the choice of using either a bank or a money service business(MSB),which increases
16、 choice and reduces costs.MSBs often provide a more tailored solution for businesses than 5banks and often use their own rails,which allows them to in many cases provide the service more cheaply and with faster settlement.This competition between banks and MSBs has supported significant technologica
17、l advancements in cross-border payments,meaning businesses in many parts of the world now have access to more sophisticated payments technologies,particularly around real-time payments and transparency,than would have been the case a decade ago.However,Japan has not enjoyed such competition,signific
18、antly limiting the options available to businesses wishing to make payments either in or out of the country.Previously,businesses or individuals in Japan wishing to make a cross-border payment had to do so using a bank;this was changed in 2010 to allow the service to be handled by MSBs for values up
19、 to 1 million yen($6,950)through a Fund Transfer Service Provider(FTSP)registration,a classification that indicates an MSB has been given approval to operate in the country by the Japanese Financial Services Agency.Nevertheless,this low cap means that businesses still have little option but to use b
20、ank services running on the SWIFT network for most of their cross-border payments in and out of the country.As a result,there has not been the same competitive pressure on costs,nor the benefits of innovations in payments technologies.This is expected to change in the future.In 2021,an amendment to
21、Japans Payment Services Act lifted the 1 million yen cap as part of a set of initiatives designed to lower the cost of money transfers in and out of the country.This was the result of extensive lobbying by money transfer providers and will see 6non-bank companies that have been issued with a Type 1
22、license by Japans Financial Services Agency be able to provide uncapped transfers in and out of the country.No such licenses have been issued yet,but it is reported that the first will be issued in 2023.This is set to have a profound impact on the availability of cross-border payment services in and
23、 out of the country.For the first time,MSBs will be able to freely compete within the Japanese cross-border payments market,significantly improving the speed,efficiency and transparency of such payments,while also reducing the costs for businesses paying in and out of Japan.-Kazuma Ochi,Country Mana
24、ger,Japan,Nium“Today,only banks are allowed to transfer unlimited funds,but if a company is successful in getting a Type 1 license,in principle,they can offer much larger transfers that is currently allowed.7A timeline of key developments in Japanese payments2002120238Payments trendsin Ja
25、panThe Weakened YenIn terms of cross-border payments,one of the most significant is the relative weakness of the yen versus other major international currencies.Over the past year,the yens value has weakened significantly against the U.S.dollar,which has increased its attractiveness for outbound cro
26、ss-border trade.As of May 2022,this had not had a measurable impact on Japans export volume,according to data from the Bank of International Settlements;however,many analysts expect this to change.Notably there have already been rises in some categories between January and May,primarily textiles and
27、 miscellaneous,which indicates that there are growing export opportunities for businesses operating in non-traditional categories.Opportunity in DataOne area that presents a growing cross-border payments opportunity is in data.While exports were traditionally physical,the flow of information across
28、borders is creating new sources of revenue for countries around the world,including Japan.This is reflected by the fact that cross-border data flow to and from Japan tripled between 2017 and 2021,according to the Japan External Trade Organization(JETRO).The country now also hosts 2.5%of the worlds d
29、ata centers,including several owned and operated by Amazon and Microsoft.Data is designed to move smoothly across borders and the businesses that buy and sell it expect the payments that accompany it to do the same.However,at present,with MSBs unable to provide full solutions in the country,the paym
30、ent is often a much slower and inefficient process than the transition of data it pays for.As restrictions on MSBs subside,we can expect businesses with a more digital focus in particular to embrace the efficiencies that their products provide.Growth of TechnologyThe growth of technology has also co
31、ntinued to shape cross-border business payments beyond data.According to JETRO,Japans exports of digital goods reached record highs in 2021,growing 21%year-on-year.Hardware was primarily responsible for this,with semiconductors and related components leading the way.And given that the leading market
32、 for semiconductors,Taiwan,is currently subject to significant geopolitical tensions,this is an area that is likely to see continuing growth in cross-border trade in the future.Such significant growth is likely to see some companies that previously operated 0Net FDI inflows($bn)6-4-2246810121416Cons
33、tructionChemicals andpharmaceuticalsServicesLumber and pulpFinance andinsuranceTransportationTextilesCommunicationsGeneral machineryElectric machineryMetals20021Source:Japan Ministry of Finance9-Kazuma Ochi,Country Manager,Japan,Nium“For consumers in Japan,cash is still king,although for
34、the past five years our government has been trying to push cashless policies.We are still cash-driven,but its slowly changing.domestically begin to sell cross-border for the first time,creating new demand for cross-border payments.It is also creating new appeal for foreign companies looking to inves
35、t in Japan,with semiconductor manufacturing in particular having been a key source of foreign direct investment in the country.Such technology-led companies have traditionally been faster to adopt new payment technologies in other parts of the world,meaning that they are likely come to Japan with gr
36、eater expectations around B2B cross-border payments than their Japanese counterparts.This is likely to increase demand for more innovative payments infrastructure in and out of the country.While many of these trends are likely to impact larger companies in the country,there are cross-border payment
37、trends that are more directly impacting smaller businesses in the region.According to SME Support Japan,over 99%of organizations in the country are small businesses,making this a significant potential market for cross-border payments.Small businesses tend to be more directly impacted by consumer pay
38、ments trends,behaving in a manner that is closer to consumer payment activity than to enterprise payment activity.Where they engage in cross-border payments,they generally do not have the scale to access enterprise-level services,meaning they experience greater friction when making a cross-border pa
39、yment than their larger counterparts.This is exacerbated by the prevalence of cash within Japans domestic payments system 67.5%of consumer payments were made in cash in 2021,according to the Ministry of Economy,Trade and Industry,with B2B payments reported to be even higher.By contrast,20%of consume
40、r payments in the U.S.were made in cash in 2021,according to research by the U.S.Federal Reserve.10While cash dominance is largely the domain of domestic business payments,it can extend to cross-border transactions.Most banks now no longer allow cross-border payments in cash for businesses,having en
41、acted stricter processes to comply with increased regulations around remittances.This means that businesses who mainly operate in cash face larger barriers to making cross-border payments,as they must deposit cash first before initiating a payment.The Japanese government has been making considerable
42、 efforts to reduce cash use,particularly as it seeks to respond to the growth of eCommerce and other digitization-led advances.This has led to the establishment of the Cashless Promotion Council,which was established to move Japan towards a cashless society and has a goal of cashless transactions re
43、aching 40%by 2025.In pursuit of this,the Council runs a variety of incentive schemes targeting both businesses and consumers and provides regular updates on the status of digital payments in the country.It has also been a key driver of changes to financial regulations in favor of greater digitizatio
44、n and reduced restrictions on the movement of money,which are reducing red tape for business payments.This also comes as the opportunities for small businesses to engage in cross-border trade,in particular through cross-border eCommerce,have been on the rise.The growth of social media platforms and
45、marketplaces have created new ways for Japanese businesses to reach international customersas well as to source goods and services internationally,however the payments system remains somewhat behind.There is similarly a growing gap between domestic and cross-border experiences,which are raising expe
46、ctations for what cross-border payments should be like for businesses.Beyond the dominance of cash,Japan has seen an upswing in eCommerce,which has also helped drive advancements in its domestic payments system Zengin.According to the Ministry of Economy Trade and Industry,consumer eCommerce account
47、ed for 8%of domestic eCommerce sales in 2020,while B2B eCommerce accounted for 33.5%in the same year.Cross-border eCommerce also saw 7.6%growth year-on-year over the same period.There has also been an increase in the range of payment methods available to Japanese consumers.Cashless payments have bee
48、n primarily led by credit cards and prepaid cards for services such as transport.However,digital wallet-based payment services have been on the rise,including contactless services such as Apple Pay and Google Pay,as well as QR code-based payment services.Businesses have seen improvements in the rang
49、e of domestic payment options,with virtual B2B payments by credit card becoming increasingly popular due to their improved convenience and reduced operational costs.These trends,while not directly impacting B2B cross-border payments,are changing expectations of payments in Japan and highlight the sh
50、arp difference between cross-border and domestic payments experiences.11Japans changing payments at a glanceAt present,the process of making a cross-border payment of more than 1 million yen to or from Japan is complex and time-consuming for businesses.If a business needs to transfer money abroad,th
51、ey will in many cases need to send a representative to a branch of their bank,with a host of documentation.This typically includes documents confirming the corporate status of the business;the identity and employment status of the representative;the reason for the transaction;financial details of th
52、e recipient and any invoices or other relevant background documents.This will then be reviewed by a representative of the bank,following which they will need to wait for a bank teller to talk to SWIFT to confirm the paymenta process that can take over an hour.Then,they will need to wait for it to ar
53、rive.On some corridors,this will occur within a day,but in many cases,it will take up to a week.Some banks offer an alternative e-trade service,which requires a similarly extensive number of documents but which can be done online.However,while this does reduce the amount of time an employee needs to
54、 spend arranging the cross-border payment,it does not impact the speed at which the transfer itself occurs.The State of Cross-Border Payments12In many cases,banks will only offer such services to businesses that have signed up as customers with them,which significantly limits the choices available t
55、o consumers.They also may charge monthly fees to access the service,which necessitates a certain level of cross-border payment activity to make its use viable.Some banks are currently offering reduced rates on their online service to incentivize its use,but beyond this many businesses have few optio
56、ns when it comes to making a cross-border payment.There may also be a lack of clarity about how much money will actually arrive in the recipients bank accounta particular issue when paying invoices.This is because fees charged for the transfer are deducted from the amount sent and often are not clea
57、r up-front.This means that the amount that lands in the recipient companys bank account may be notably different for the amount sent.This is,unsurprisingly,a frustrating experience for many businesses,stifling their ability to operate across borders and effectively plan for money transfer costs.Once
58、 MSBs are able to operate freely in Japan,there will be far greater transparency,as well as the ability to perform transfers far more quickly,increasing the efficiency of the process.-Kazuma Ochi,Country Manager,Japan,Nium“Speaking to business owners,some are very fed up with the cross-border paymen
59、ts service from big banks.You pay very high exchange fees,and sometimes an extra charge happens after the funds arrive:its not very transparent.13The introduction of FTSP licenses for transfers below 1 million yen has transformed the experience for this part of the market,with consumers getting acce
60、ss to much faster speeds,greater transparency and lower costs.However,for businesses with higher send needs,this remains a challenge.The approval of Type 1 licenses will change this,increasing convenience,speed,transparency and pricing significantly.This is because MSBs will be able to compete with
61、banks in a manner not previously possible under current restrictions,enabling them to broaden the ways in which businesses can make cross-border payments.In particular,once MSBs are able to gain these licenses,businesses will be able to access services that run on companies own payment networks,rath
62、er than via the SWIFT network.This will give them access to solutions that can interface directly with their own accounting systems,and which complete payments in real-time with up-front pricing.This will mean the experience for businesses making money transfer payments will be dramatically improved
63、 compared to what is at present typically offered by banks,particularly for smaller companies.Niums own solutions are an example of this.The Impact of Type 1 Licenses:Real-Time Payments and BeyondThis means that not only can it offer a solution that is faster than a traditional bank,but which also f
64、eatures a user interface that is much smoother than the complex system of making a payment many Japanese businesses face today.“Under Nium,customers will know the fees upfront,it will be cheaper,and it will also be faster.SWIFT usually takes two days to a week,but Nium can send payments to over 190
65、countries,with over 100 in real-time.Our UI is also more convenient to use than a hard-to-understand bank web portal.So,theres speed,convenience and coverage.-Kazuma Ochi,Country Manager,Japan,Nium14B2B cross-border paymentsExampleArranging a cross-border payment CostTransparencySpeed Typically two
66、days to a week,depending on corridor BeforeOften requires visiting a branch in person and filling in forms manually Potentially very high Little transparency on potential costs AfterDigital interface with process taking minutes Significantly reduced by efficiencies and increased competition Upfront
67、information about the overall cost of the transfer before sending money Up to real-time,depending on corridor BenefitsforBusinessesThis is likely to have a transformative impact on how Japanese businesses are able to operate overseas.The reduced friction and costs will increase access to cross-borde
68、r operations for smaller businesses,widening the pool of potential customers and suppliers.Some providers will also offer additional services such as local bank account information,enabling businesses to reduce costs for international customers as well as for themselves.There will be similar benefit
69、s for international businesses looking to work with suppliers and other partners in Japan.Reduced costs and friction for payments lowers a major barrier for accessing the business opportunities in the country,and so is likely to help increase the appeal of the country for companies.It may also enabl
70、e companies already working with suppliers or partners in the country to increase the frequency of payments and increase the amount of business involving Japanese companies.This comes at a time when the yen is low relative to some other currencies,in particular the dollar,making this an especially a
71、ppealing time to work with local businesses.Before and after MSBs in the Japanese cross-border payments market15-Kazuma Ochi,Country Manager,Japan,Nium“The USD is getting stronger,and the JPY is getting weak.So,for foreign companies outside Japan,its a very attractive opportunity to invest in Japan.
72、16Future trends inJapanese paymentsThe emergence of MSBs in the Japanese payments market,which the issuance of type 1 licenses will bring,is set to have a profound impact on cross-border payments in Japan for businesses.This is likely to see a powerful change in the dominant players in the space ove
73、r the next few years as businesses see MSBs and banks fully compete for their business for the first time.This,in turn,may prompt other developments in Japanese fintech in much the same way as we have seen in other parts of the world,such as the U.S.and Europe.There are also some other developments
74、that are currently key topics of discussion in Japanese payments,and may ultimately play a key role in the future transformation of the industry.Currently,the other prevailing topic is the ability to pay salaries digitally to mobile wallets rather than to bank accounts.At present,this is not permitt
75、ed,but the Japanese government is introducing a system that will allow businesses to implement digital salary payments.Another initiative of Japans Cashless Promotion Council is set to launch by spring 2023 and is designed to help promote growth and expand the Japanese financial services market,whil
76、e also helping foreign workers in Japan,who can struggle to access payments via bank accounts.It will also enable companies to offer additional perks,including cashback and rewards for using digital app-based payments,as part of their employee benefits.Adoption is expected to be relatively slow,with
77、 some reports suggesting that less than a third of Japanese businesses are ready to support the initiative.Nevertheless,it speaks to a wider movement to embrace newer and emerging payment technologies that may be replicated in various segments of Japanese businesses.Beyond this,the Bank of Japan(BoJ
78、)is also exploring how financial services can be further digitized in the country.In 2022,Governor Kuroda Haruhiko delivered a talk on digitization where he predicted that there would be more advancements in digital financial services,in part led by the need to take into account global fintech trend
79、s.He pointed to greater data coupling to facilitate improved cross-border payments as one area that the central bank was exploring.-Kazuma Ochi,Country Manager,Japan,Nium“The hot topic at the moment is payroll.The Ministry of Health,Labour and Welfare is reviewing regulations on payroll so that empl
80、oyers can pay payroll into non-banks.17There is also continuing work around blockchain technologies and their potential use in the Japanese payment system,including potentially through the use of central bank digital currencies(CBDCs).The BoJ is conducting experiments with CBDCs but,as with many oth
81、er developed economies,remains noncommittal about their future in the Japanese financial system.Executive Director Uchida Shinichi said in 2021 that there was a“reasonable possibility”they could become key to the global payment and settlement system,but it will be many years before the technology be
82、gins to see widespread mainstream use.18ConclusionThe Japanese payments landscape is undergoing important changes as it increasingly looks to digitize its capabilities and bring its cross-border payments in line with global expectations.While the dominance of the SWIFT network currently means that m
83、aking payments to and from Japan is a slow,opaque and potentially expensive process,the introduction of Type 1 licenses will change how companies are able to access cross-border payments for the better.Companies of all sizes are expected to see benefits,but the organizations with the biggest potenti
84、al gains are likely to be small and medium-sized businesses.They are not well served under the current system,creating strong potential for improvements,and internationalmarkets may bring them considerable additional business.The ability for many more types of providers to support uncapped cross-bor
85、der payments in and out of Japan will have clear knock-on impacts on the market in the country,creating significant increases in competition and bringing marked improvements for customers.Speed,including the provision of real-time payments,is likely to be a major element here,but API-led capabilitie
86、sto integrate with companies ownsystems will also be a factor and so,inevitably,will cost.This is one step on a wider journey of change for Japans payments system,but for businesses in Japan,it is set to be a particularly monumental one.19To find out how you can enjoy the value of a truly modern payment system visit to book a consultation with one of our payment experts.Reach out to us to learn more.CONTACT US