TOKYO - The increase in inbound tourists has led to growing financial burdens for Japan’s credit card industry. When cards issued overseas are used at domestic stores, Japanese companies must pay fees to foreign issuers, resulting in annual losses estimated to reach 30 billion yen.
Former Bank of Japan Director of Payment Systems Hiromi Yamaoka, now a director at Future Corporation, joined us to discuss the impact on Japanese consumers and potential strategies moving forward.
As more tourists use credit cards in Japan, local card companies are facing an estimated 30 billion yen in losses this year. But why does the use of credit cards by foreign tourists in Japan lead to such deficits for domestic companies, and how does this affect consumers? These are the questions we’ll explore today with our guest, former BOJ Director Hiromi Yamaoka, now heading the Cashless Payments Research Institute.
When a foreign tourist uses a credit card issued in their home country to make a 10,000 yen purchase at a Japanese shop or restaurant, the credit card processing fee typically ranges between 1% and 3%, depending on the transaction volume. For simplicity, let’s consider a fee of 1.99% for a large-scale store, which would result in a 190 yen income for the card company. However, the issue arises with subsequent costs—Yamaoka explains that these companies must pay various fees, including about 10 yen for domestic system operations and 180 yen in interchange fees to the overseas card issuer. Additionally, they pay around 80 yen to international brands like Visa and Mastercard for the use of global settlement infrastructure. As a result, the card company ends up with a deficit of about 70 to 80 yen per transaction. This explains why the more foreign tourists use their cards, the deeper the losses for Japanese card companies.
The disparity in fees between domestic and international transactions is a key factor. When Japanese residents use their cards domestically, there is often no interchange fee, especially if the card issuer also handles merchant contracts—referred to as on-us transactions. Even when these roles are split, Japan’s interchange fees are lower than those abroad, due to the lower default rates in Japan. Conversely, international transactions involve higher fees, including brand usage fees to global networks like Visa and Mastercard. Since international transactions require the use of these global infrastructures, Japanese companies incur additional costs, which are not present in purely domestic transactions.
Lowering these fees is not straightforward. Yamaoka notes that Visa and Mastercard publish standard fee rates, which are difficult to negotiate due to their dominant positions in the global market. This issue is exacerbated by the sharp increase in inbound tourism, with over 30 million foreign visitors expected this year, surpassing pre-pandemic levels. The total spending by these tourists is also projected to reach a record 8 trillion yen, with the majority of payments likely being made by credit card.
The expected 30 billion yen loss for Japanese card companies this year is based on the assumption that 60% of the 8 trillion yen spent by tourists will be paid by credit card. In a survey conducted by the Nikkei, seven out of the eight major card companies reported widening losses, with six of them considering or already implementing higher fees for merchants to cover these costs. All seven companies cited high payments to international brands like Visa and Mastercard as the primary reason for their losses.
Yamaoka commented on the possibility of passing these costs onto merchants, acknowledging that while it might seem logical to reflect these costs in more detailed fee structures, such changes would effectively be price increases for merchants. He anticipated tough negotiations ahead, especially for luxury brands and high-end retailers heavily reliant on foreign tourists.
The survey responses also highlighted the impact of international brands like Visa and Mastercard on the losses. Yamaoka drew parallels to other industries, noting how the dominance of American tech giants in areas like semiconductors and AI drives similar financial dependencies, where countries like Japan end up paying significant amounts to use essential infrastructure built by these firms decades ago. The network effect—where the value of a service increases with the number of users—further entrenches this market concentration, making it challenging for Japanese companies to reduce their losses in the face of rising inbound tourism.
In conclusion, while consumers may not feel the direct impact immediately, the growing losses for credit card companies and the potential for higher fees at merchants could eventually translate into higher costs for the public. The search for solutions to mitigate these losses continues as Japan’s credit card industry grapples with the financial strains of accommodating an influx of foreign tourists.
Source: テレ東BIZ
