A Study on the Profit Sustainability of Financial Institutions in Cashless Society

Abstract

There is a movement to promote cashless payments in Japan. The total settlement amount of Japanese credit cards, debit cards, and electronic money against personal consumption expenditures was 27% in 2019. The Japanese government aims to raise the cashless settlement ratio to 40% until 2025.

The purpose of this paper is to examine the elements necessary to promote cashless society. I will consider the factors necessary to promote cashless payments especially in Japan based on the situation in the United States, which is leading the way in cashless society. In order to promote cashless society, it is necessary to look at it from four perspectives: the policy of the country, the behavior of consumers, affiliated merchants, and financial institutions. I will pay particular attention to the behavior of consumers and financial institutions comparing Japan and the United States in this paper.

In Japan, cashless payments are centered on the use of credit cards as in the United States. However, Japanese credit cards are often used for monthly payment, and their contribution to profits in the credit card business is not as large as in the United States. In recent years, new payment methods have appeared and mobile payments are increasing in Japan as well. Although many of these new payment methods improve consumer convenience, new payment methods as cashless payments do not necessarily contribute to profits.

In the United States, a cashless society is developing and the usage of credit cards is high among the major developed countries. The expansion of credit card usage has boosted personal consumption expenditures and supported economic growth through the increase of consumer credit in the United States. The cashless society in the United States has progressed in combination with the expansion of the use of credit cards to promote personal consumption expenditures and the actions of financial institutions to generate profits from them. In fact, major US financial institutions make annual pre-tax profits of 200-300 billion yen mainly in the credit card business.

I clarify that it is necessary for financial institutions to continuously record profits as an element to promote cashless society. The promotion of cashless society in Japan has entered a stage where it is necessary for profit sustainability of financial institutions. In order to promote cashless payments, financial institutions that handle cashless payments must be able to generate profits at the same time as improving consumer convenience.

The contribution of this paper is to present the elements for promoting a cashless society after understanding Japanese peculiar situation. Especially in Japan, the low profitability of financial institutions that make cashless payments is a problem. I hope that this paper will contribute to the further promotion of cashless society in Japan.