Why Foreign Tourists Are Causing Losses for Japanese Credit Card Companies

Hiromi Yamaoka, former director of payment systems at the Bank of Japan and now a director at Future Corporation, spoke to us about the impact on Japanese consumers and possible strategies going forward.

As more tourists use credit cards in Japan, local credit card companies are estimated to lose 30 billion yen this year. But why is the use of credit cards by foreign tourists in Japan leading to such shortages for domestic companies, and how is it affecting consumers? These are the questions we’ll explore today with our guest, former BOJ governor Hiromi Yamaoka, who now heads 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 store or restaurant, the credit card processing fee is typically between 1% and 3%, depending on the transaction volume. For simplicity, let’s assume a 1.99% fee for a large-scale store, which would result in an income of 190 yen for the card company. However, the problem arises with the subsequent costs: Yamaoka explains that these companies have to pay various fees, including about 10 yen for domestic system operations and 180 yen in interchange fees to the foreign card issuer. In addition, they pay about 80 yen to international brands such as Visa and Mastercard for using the 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 greater the losses for Japanese card companies.

The disparity in fees between domestic and international transactions is a major factor. When Japanese residents use their cards domestically, interchange fees are often non-existent, especially if the card issuer also handles merchant contracts, also known as on-us transactions. Even when these roles are split, interchange fees are lower in Japan than abroad, due to Japan’s lower default rates. Conversely, international transactions incur higher fees, including branding fees for global networks such as Visa and Mastercard. Because international transactions require the use of these global infrastructures, Japanese businesses incur additional costs that are not present in purely domestic transactions.

Reducing these costs is no easy task. Yamaoka notes that Visa and Mastercard publish standard rates, which are difficult to negotiate given their dominant position in the global market. This problem is exacerbated by the surge in inbound tourism, with more than 30 million foreign visitors expected this year, surpassing pre-pandemic levels. Total spending by these tourists is also expected to reach a record 8 trillion yen, with most payments likely to be made by credit card.

The 30 billion yen loss expected for Japanese credit card companies this year is based on the assumption that 60 percent of the 8 trillion yen tourists spend will be paid for by credit card. In a survey by Nikkei, seven of the eight major credit card companies reported that their losses were widening, with six of them considering or already implementing higher fees for merchants to cover those costs. All seven companies cited high payments to international brands such as Visa and Mastercard as the main reason for their losses.

Yamaoka commented on the possibility of passing these costs on to merchants, acknowledging that it might seem logical to reflect these costs in more detailed fee structures, but that such changes would effectively be price increases for merchants. He predicted tough negotiations ahead, particularly for luxury brands and high-end retailers that rely heavily on foreign tourists.

The survey responses also highlighted the impact of international brands like Visa and Mastercard on losses. Yamaoka drew parallels with other sectors, noting how the dominance of US tech giants in areas like semiconductors and AI creates similar financial dependencies, with countries like Japan ending up paying significant sums to use critical infrastructure built by these companies 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 increasing inbound tourism.

In conclusion, while consumers may not feel the immediate impact, the growing losses for credit card companies and the potential for higher fees at merchants could ultimately lead to higher costs for the public. The search for solutions to limit these losses continues as the Japanese credit card industry struggles with the financial pressure of accommodating an influx of foreign tourists.

Source: Business Intelligence