Mobile payments and mobile credit

MOBILE PAYMENTS, E-MONEYAND MOBILE CREDIT IN JAPAN 24nd Edition, July 21, 2012 by Gerhard Fasol Eurotechnology Japan KK http://www.eurotechnology.com/ fasol@eurotechnology.com This is a trial version with only a few selected pages. Purchase latest version of the full report from: http://www.eurotechnology.com/store/mpay/(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 1 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

LICENSEThank you for purchasing licenses to our reports, and for your cooperation with our licensing conditions.Only through your purchases can we continue to produce high-quality market reports from JapanIN THE CASE OF SINGLE LICENSE: If you have purchased a single copy license of this report, you are not permitted to copy this report except for a single back-up copyIN THE CASE OF CORPORATE LICENSE: in the case that your company has purchased a corporate license, you may distribute this report inside your company includingprotected corporate information servers locked to the outside, but you cannot distribute this report outside your companyANNUAL SUBSCRIPTION: we offer annual subscriptions for a particular report, and also for all our reports in one single transaction at a great discount - please contact usfor details. Corporations subscribing will receive all updates at the time of publication, so that you can be sure to have the latest up-to-date informationThis research report comes without any warranty of any kind. The authors and Eurotechnology Japan K. K. do not warrant that the information in this report is withouterror, nor that the information serves any particular purpose. For legal advice please consult properly licensed legal professionals, for investment advice please consultproperly licensed ﬁnancial advisors. Trademarks mentioned are the property of their owners.Eurotechnology is a trademark or registered trademark in Japan and other countries.(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 2 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

EXECUTIVE SUMMARY: MOBILE PAYMENTS, E-MONEY, AND MOBILE CREDIT IN JAPAN- Electronic money and virtual electronic credit cards, based on multi-application smartcards and communicating via contactless NFC methods, and mobile phone based payments have broad usage in Japan both for purchases of goods and services, as well as for transportation tickets.- FeliCa-based multi-application smartcard chips and corresponding JAVA applications are today in most of Japan’s mobile phones, linking mobile payments, mobile credit cards, and e-money, and accelerating development.- “Gentle” regulatory supervision is a strong contributing reason why e-money has developed rapidly in Japan.- E-money in Japan is a vibrant free market, contested between private companies.- Key drivers of Japan’s new payment industry are: - SONY with FeliCa cards as hardware provider, - the world’s largest railway company JR-East with SUICA e-Money and prepaid fares - regional railway companies with corresponding e-Money and prepaid fare cards - retailers Ido-Yokado with e-Money Nanaco, and retailer AEON with e-Money WAON - online shopping mall Rakuten with Edy electronic money, - DoCoMo with the introduction of i-Mode based mobile payments and wallet phones- In addition many software companies, and IT integrators (e.g. NEC) are part of Japan’s e-money and mobile payment ecosystem- While Japan’s e-Money and mobile payment ecosystem is extremely advanced and impressive, Japanese companies have until now failed to build global business based on these technologies(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 3 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

AGENDA - LIST OF CONTENTS- Executive summary: Mobile payment, e-money and keitai credit- Competitive landscape for e-money and keitai credit- E-Money vs keitai credit- Disruptive innovation- New business model for mobile communications- DoCoMo: - investment in credit card companies - new mobile payment and credit brands - DoCoMo’s strategy- KDDI The Card and Jibun-bank- SoftBank Card- QuicPay, Smartplus and Visa-Touch- Electronic cash and mobile payments in Japan- Edy - electronic cash, Rakuten Edy KK, Mobile banking and Edy- Electronic money for Japan’s retailers (Nanaco and WAON)- I-Mode Felica Examples: AM/PM, Ticket-PIA, ANA- Felica and Mifare- mobile FeliCa wallet phones and the mobile FeliCa eco-system- M-Commerce, mobile payments and mobile transactions- SUICA, PASMO and transportation based e-cash systems- mobile payment for transport in Japan vs London- why does it take Transport for London at least 10 years to reinvent the mobile payment wheel?- QR-codes to pay bills, paying utility bills by mobile phone- DoCoMo Coin- Summary(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 4 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

JAPAN’S PRAGMATIC APPROACH- In my discussions with Japanese mobile payment managers and Bank of Japan ofﬁcials I observed that the Japanese have a pragmatic attitude towards electronic money and mobile payments. The introduction of these services in Japan is driven by practical business reasons, convenience and a fascination with technology.- Japan traditionally feels that it does not need to consider global standards - European CEOs and mobile-operator executives on the other hand seem more concerned with the more fundamental questions concerning e-money and mobile payments. - Indeed, a recent review of the “E-Money Directive” of 2000 by the EU Commission states that ‘growth of e-money in Europe is slower than expected’, and suggests recommendations to lighten the regulatory regime laid out in the directive(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 6 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

WHAT IS MONEY?- Because of the need for money, we are sooner or later faced with fundamental issues when introducing e-cash, even if we ignore them during a pragmatic introduction phase as is happening in Japan. So let’s have a quick look at the fundamentals and the history of money.- What is money?- Money is a matter of functions four: - a medium, - a measure, - a standard, - a store- Money is anything people use and trust as a way to exchange goods and services. In general terms, money is deﬁned by what it does, and trust is an essential part of money.(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 7 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

WHAT IS MONEY? IS JAPAN’S E-CASH “MONEY”?- While money’s primary use is to serve as a medium of trade, it is generally considered to have three functions (Reference: Ludwig von Mises “The theory of money and credit”) : 1.Medium of exchange 2.Unit of account 3.Store of value 4.(standard of deferred payment, unit for debt)- Using this deﬁnition, Japanese electronic cash and mobile cash do not fulﬁll the “store of value” criterion since Japanese electronic cash normally has an expiry date, ie, two years after last usage with no possibility of refund. Thus electronic cash in Japan today cannot be used to store live savings. However, this limitation can be removed by simple changes in the system software, and is not intrinsic to e-cash. - (Credit cards are normally not considered to be money, since credit-cards represent essentially a credit-account number)(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 8 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

TYPES OF MONEYDifferent types of money are :- Commodity money - has intrinsic value- Standard coins- Representative money - certificates which represent valuable goods stored by the issuer. For example, one British Pound Sterling represented one Tower Pound of Sterling Silver.- Fiat money - is not backed by reserves, but defined by laws or government decrees. The US switched to fiat money in 1971 when President Richard Nixon abolished the “Promise to Pay” in gold. Today most money globally is “fiat money”.- Credit money - The majority of money in developed economies is credit money, eg cheques and bank transfers. Strictly speaking, credit money and credit cards are not money, but certainly serve as a means of trade.(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 9 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

HISTORY OF MONEY- Money is a basic component of human civilization and is much more than a “medium of exchange” as defined in economics text books.- It is generally accepted that cattle were used as money starting about 8000BC. Later, white porcelain-like cowry shells represented money in China between 1500BC and 200AD. Salt, pepper, and other valuable items were used in other parts of the world. Some of the first coins originate from Greece and areas we now call Turkey, dating back to 680BC.- The word “Money” comes from the goddess Juno. As the wife of Jupiter, Juno was one of the highest Roman deities, and had many important roles. As “Juno Moneta” she protected the Roman Empire’s money.- Paper money was first issued in China around 650AD. The first recorded use of a banknote was in 1024AD was also in China. Sweden was the first European country to introduce paper money in the 17th Century, 1000 years after its introduction in the East.- Modern transport systems and the internet have greatly accelerated the speed of technology transfer between continents. Despite this, innovations still take longer then expected to spread – often five to 10 years or longer.(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 10 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

WHAT IS THE DIFFERENCE BETWEEN E-CASH AND CREDIT CARDS?- E-cash is fundamentally different to payment by credit card or debit card: - e-cash: the cash resides in the integrated circuit (IC) on the smartcard as encrypted code information (in the case of e-cash smartcards the IC is embedded in the card, in the case of the phone it is imbedded in the mobile-phone handset). e-cash account information and transaction records are also held at the e-cash service provider data centre. The balance and record on the card or wallet phone and the information in the data centre are asynchronously updated when a connection is established - Credit card or debit card: the cash and transaction record resides at the data centre only. The credit card or debit card only contains the card number and some additional information, eg, expiry data, but no balance or transaction records.(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 11 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

E-CASH IS DIFFERENT TO CREDIT CARDS AND DEBIT CARDS Electronic cash differs to electronic Wallet phone electronic e-cash payment, payment with credit or debit credit card cards. For electronic cash, as debit card illustrated here, the cash resides electronically in the card or in the (c)2007 Eurotechnology Japan KK www.eurotechnology.com wallet phone. From time to time,JAVA application service provider the balance on the card and the with access to (credit card, bank, etc) FeliCa-chip data center Credit Card debit card balance in the data centre areapplication/data reconciled asynchronously. In the on FeliCa-chip 1234 5678 1234 case of credit and debit cards, the antenna Read & Read only card only contains the account write number. All balance and transaction information is held and reader/writer terminal reader/writer terminal manipulated at the data centre only.(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 12 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

JAPAN’S MAJOR E-CASH SYSTEMS Edy SUICA PASMO nanaco WAON iD (mobile credit) Tokyo area Bitwallet transportationCompany JR-East Seven & I AEON NTT-DoCoMo (Rakuten) companies (+ JR- East) tests: April 8- July tests: 1999 8, 2011start March 18, 2007 April 23, 2007 April 27, 2007 Dec 1, 2005 start: Nov 2001 start: Nov 18, 2011Number ofaccounts 48.4 million 25.89 million 12.27 million 7.77 million 9 million 11.58 million(March 2009)Number of 26.21 million (not 10.78 million (nottransactions/ 24.5 million counting rail counting rail 29 million 20.50 millionmonth fares) fares) 62,000 planned (5 20,000 + vending 20,000 + vendingNumber of stores 70,000 million JCB 5000 machines machines partners) AM/PM, FamilyMart, BIC Seven-Eleven, Ito- Mitsumoto- Camera, AEON stores,Stores Same as SUICA Yokado, Deny’s Kyoshi, CircleK, Jonathan, Shin Lawson, Ministop Japan Sunkus, ANA Nihon Oil, JAL(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 14 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

TOTAL NUMBER OF E-CASH CARDS ISSUED 120 000 000 e money cards issued 110 000 000 c 2009 Eurotechnology Japan KK 100 000 000 www.eurotechnology.com 90 000 000 BoJ data 80 000 000 including mobile e money cards issued 70 000 000 60 000 000 50 000 000 Edy SUICA 40 000 000 30 000 000 BoJ data 20 000 000 mobile e money 10 000 000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012- Currently about 120 million e-cash cards (including about 12 million “mobile cards”) are in circulation- The number of e-cash cards is about to exceed the population of Japan, ie on average everyone in Japan has at least one e-money card(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 22 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

COMPETITION BETWEEN BRANDS- At the point of sale, e-cash and keitai credit cards compete.- All Japanese e-cash and keitai credit systems use SONY’s Felica systems, therefore they can all be combined into a single terminal as shown on the right hand side, where customers can select a particular type of e-cash by pressing a button(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 74 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

MOBILE PAYMENTS AND KEITAI CREDIT AS NEW BUSINESS OPPORTUNITIES FOR THE MOBILE INDUSTRY(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 79 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

BUILDING MOBILE PAYMENT BUSINESS: DOCOMO’S INVESTMENT IN MITSUI-SUMITOMO CREDIT CARDS(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 84 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

DOCOMO’S ID STRATEGYDoCoMo’s strategy is to attract part of the small payments (YEN 100 - YEN 1000) from cash tomobile phone payments(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 100 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

I-MODE-FELICA EXAMPLE: AM/PM CONVENIENCE STORES CUSTOMER FIDELITY PROGRAM(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 146 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

SUICA, MOBILE SUICA AND TRANSPORTATION BASED NFC PAYMENT AND E-CASH SYSTEMS(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 180 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

SUICA VS LONDON TRANSPORT’S OYSTER:WHY DOES IT TAKE LONDONTRANSPORT 10 YEARS TO RE- INVENT THE MOBILE PAYMENT WHEEL(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 185 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

WHY IS TRANSPORT FOR LONDON AT LEAST 10 YEARS BEHIND TOKYO?Mobile fare payment in London: Mobile fare collection in Japan:unsolved problem as of July 17, 2012, tested and works since 2003> 500 millisecond time/transaction commercial since January 28, 2006Transport for London does not seem to know < 100 millisecond time/transactionthat mobile fare collection already is commercial + electronic moneyin Tokyo since January 28, 2006no electronic moneyTransport for London Customer ExperienceDirector Shashi Verma about mobile phone RFID/NFC based fare collection:“We found that the technology was not fastenough to complete the transaction in under 500milliseconds, which we would require)on July 11, 2012 quote in Wallstreet JournalTechEurope blog(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 186 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

WHY DOES IT TAKE AT LEAST 10 YEARS TO REINVENT THE MOBILE PAYMENT WHEEL IN LONDON?- Quick answer: human nature and organizations are the barriers(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 187 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

SUCCESS ≠ SUCCESS London JapanOyster card (Myfare system) Suica (FeliCa system)huge success - but.... huge success totally capitalistic commercialpublic service, non-commercial strategic business tool, competitive weaponhuge (more than 50% discount): no discounts at all. Suica is always same price orcash fare: 4.30 pounds, Oyster: 2 pounds more, never cheaperSecurity: breached Security: never breached (except insider fraud)(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 188 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

SUMMARY: JAPAN’S MOBILE PAYMENT AND E- MONEY ECO-SYSTEMS- Electronic money, based on multi-application smartcards and communicating via contactless NFC methods, and mobile phone based payments have broad usage in Japan both for purchases of goods and services, as well as for transportation tickets.- Felica multi-application smartcard chips and corresponding JAVA applications are today in most of Japan’s mobile phones, linking mobile payments, mobile credit cards, and e-money, and accelerating development.- “Gentle” regulatory supervision is one of the major reasons e-money has been developing rapidly in Japan.- E-money in Japan is a vibrant free market, contested between private companies.- Key drivers of this new payment industry have been SONY with Felica cards and Edy electronic money, the world’s largest railway company JR-East with SUICA, and DoCoMo with the introduction of i-Mode based mobile payments and wallet phones.(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 192 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

MORE INFORMATION• reports:http://www.eurotechnology.com/store/• twitter: http://twitter.com/gfasol/• website: http://www.eurotechnology.com/• personal site: http://fasol.com(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 193 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

EUROTECHNOLOGY JAPAN KK FOUNDED: FEBRUARY 1997 IN TOKYOServices and products - focus areas are high-technology, telecommunications, software, middle-ware,environmental technology and medical equipment:- Market entry to Japan for European and US high-tech companies, turn-round, reshaping, planning and building of distribution networks- European business development and strategy for Japanese companies- M&A (European and US companies acquiring Japanese companies, Japanese companies acquiring or investing in Europe)- Turn-round preparations and management of foreign business in Japan- Market research and strategy- Due diligence of high-tech companies, environmental due-diligence- Advisory services for investment fund managers and investors in technology ﬁelds- we publish a series of market reports for about 10 years, which are purchased world-wide, distributed direct and via distribution partners: http://www.eurotechnology.com/store/(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 195 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

EUROTECHNOLOGY JAPAN KK- Leading high-technology business development boutique in Tokyo, working globally- Founded in 1996/1997 - 14 years experience, relationships, cooperations and success record.- CEO works with Japan’s high-tech / telecom sector since 1984 - 27 years experience, resources, cooperations.- Wide network of cooperations in Governments, Embassies, trading companies, distributors, ﬁnance, VCs, traditional corporations, venture start-ups, industry associations- Experience: market-entry, restructuring, M&A, acquisitions, due-diligenceCustomers include:- More than 100 investment fund managers- Industrial customers: - NTT-Communications, SIEMENS, Deutsche Telekom, Cubic, Unaxis (now: Oerlikon), CITI Group, CLSA Asian Markets, Genscape, Google, IKEA, Isabellenhuette, Landis+Gyr, National Instruments, Swisscom, TechnoCom,- Government - New York Police Department, European Union, TEKES (Technology Research funding organization of the Government of Finland)Deep Japanese technology market knowledge - we publish a series of market reports for about 10years, which are purchased world-wide. You can purchase our reports on Bloomberg: https://www.bmart.com/search?&nuts%5B%5D=WIRE%3AEUT, and via eSellerate: http://store.eSellerate.net/s.aspx?s=STR0576176470 and from http://www.eurotechnology.com/store/(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 196 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

GERHARD FASOL PROFILE: HTTP://WWW.FASOL.COM/PROFILE/- Worked successfully with Japan’s high-tech sector since 1984 - 27 years. Came first to Japan in 1984 to help build NTT’s first international R&D cooperation on semiconductor lasers- Entrepreneur in Tokyo since 1996, Eurotechnology Japan KK worked with many large corporate groups (e.g. SIEMENS, NTT, Deutsche Telekom, Asahi Glass...), more than 100 investment fund managers- Assoc. Professor of Electrical Engineering at Tokyo University. Record of Fasol-Laboratory at Tokyo University: http://www.fasol.com/tokyo_university/- Elite “Sakigake” (Pioneer) R&D project on Spin-Electronics of Japanese Government Science and Technology Agency. This work was evaluated by US National Science Foundation and US Department of Trade: http://www.wtec.org/loyola/erato/ch7_5.htm- Co-initiator of spin-electronics device research in Japan, one of the first to start work on spin- electronics in Japan in 1991- Tenured Faculty member at Cavendish Laboratory/University of Cambridge.- Assoc. Professor of Electrical Engineering at Tokyo University- PhD in Solid-State Physics (Cambridge University, Trinity College, UK)- Diplom-Physiker, Ruhr-University Bochum (Diplom-Thesis on Superconductivity)- Publication list (Books, patents and publications, several publications are specifially concerning electron-spin and spin-electronics): http://www.fasol.com/profile/publications.shtml- Languages: English, German (native), French, Japanese, and some Swedish(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 197 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

GERHARD FASOL WITH TETSUZO MATSUMOTO, EXEC VP OF SOFTBANK MOBILE CORPORATION(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 198 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

“POST GALAPAGOS STUDY GROUP”25 JAPANESE LEADERS + 1 FOREIGNER (GERHARD FASOL) WORKING FORONE YEAR ON CONCEPTS TO OVERCOME JAPAN’S “GALAPAGOS EFFECT” see: http://accjjournal.com/the-galapagos-effect/(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 199 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

“POST GALAPAGOS STUDY GROUP”25 JAPANESE LEADERS + 1 FOREIGNER (GERHARD FASOL) WORKING FORONE YEAR ON CONCEPTS TO OVERCOME JAPAN’S “GALAPAGOS EFFECT” see: http://accjjournal.com/the-galapagos-effect/(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 200 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

CONTACT• Eurotechnology Japan KK, Tokyo, Japan.• http://www.eurotechnology.com/• CEO: Gerhard Fasol• Mobile +81-90-8594-6291• Email: fasol@eurotechnology.com and gfasol@gmail.com(c) 2012 Eurotechnology Japan KK www.eurotechnology.com 201 Mobile payment, e-money, mobile credit report (24nd Edition) July 21, 2012

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Mobile payments and mobile credit

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