I love the Internet and believe in the Internet. I think it is a tool, community, and wonder of the world. And so one very frustrating thing for me is the notion, long prevalent among both Internet natives and others, that “in real life” (IRL) and the Internet are somehow disjoint. Clearly, the Internet is real life.
And yet, this column is called Bits about Money rather than Atoms about Money both because it is a better pun and because software has historically had much more difficulty interfacing with atoms than it does interfacing with bits. This is changing in ways which are underappreciated, including in payments.
Voucher payments
A very frequent concern, as more economic activity migrates online, is whether we have a good access story for people who don’t have networked payment methods (like e.g. credit cards). In emerging markets, and (perhaps surprisingly) here in Japan, a common way to make online payments with physical cash is to use a voucher payment system.
Here is Japan they are mostly conducted in convenience stores (known universally as konbini), but they are also huge in Mexico (at the Oxxo convenience store chain and branded as such), in Brazil (through the boleto system), and elsewhere.
(This might be a good time to mention that this is obviously relevant to my day job at Stripe, which supports Oxxo, boleto, and as of this week konbini payments. As always, these are my own opinions.)
The general user experience is quite similar in every nation: you, the customer, agree on a transaction with some business or government entity. Here in Japan this can be almost literally anything up to about $3,000, from buying movie tickets to paying for an Amazon order to submitting one’s residence tax payment (if you are e.g. self-employed and so don’t have it deducted from your salary).
The business gives you a transaction reference number to bring to the konbini, generally advising you to print it out with barcode and instructions or, in some cases, physically mailing the same to you. You go to the konbini and follow the instructions, which depending on the chain are generally either “Show this to the clerk” or “Go to the automated kiosk in the konbini, select Make a Payment, key in this reference number, and take the piece of paper the kiosk prints out to the clerk.”
You then pay the clerk the exact pre-agreed upon amount of cash, and receive a receipt for it. From the user perspective, you’re done.
Why is this so special?
Konbini are deeply woven into the fabric of Japanese life, and I like to think of them as privately owned public infrastructure. You can rely on there being a konbini close to you, virtually everywhere in Japan, and since this is true for you, it is true for everyone you might do business with in Japan. There are seven within a seven minute walk of my apartment here in Tokyo, but there’s also one in all but the most isolated communities. They’re open 24/7, which is an annoying expectation for some rural franchisees but considered fairly core to the brand promise by the chains.
Konbini welcome all comers. People in our social class often do not appreciate that this is not true of all businesses in society, including banks. You don’t need a brand-name employer, good credit, stable housing, government ID, or even literacy to use most konbini services. If you’ve got cash, they’ll take it.
This is extremely unlike credit card issuers. And it is the dominant reason why people, once they hear about voucher payments, viscerally understand why they are so popular in emerging markets.
So what explains their popularity in Japan, which is a highly developed nation? You can probably immediately intuit why e.g. immigrants and tourists have YouTube explainers in every language imaginable for konbini services. Those reasons extend to members of Japanese society who exist at socioeconomic margins.
But konbini are used, extremely frequently, by all socioeconomic strata. Prior to the pandemic, they had about 20% share of B2C online payments.
In 2005, you could have guessed “This is basically downstream of low credit card penetration” and that would have been very plausible, but the financial industry has done a great job of pushing credit and debit cards since then, and almost all banked consumers have access to one. (The most effective single salesman for the credit card in Japan? Steve Jobs. Recurring bank debits are a pain here and receiving a paper bill in the mail monthly is annoying, so cell phone bills specifically were the transaction that motivated many card applications.)
Konbini continue to thrive even with high card penetration. One reason is lingering fears of abuse of cards if used online. Japan is a high trust society, but remote commerce has burned many Japanese people. One particularly common version was the behavior that is described in the seedier sides of the affiliate marketplace as “rebilling”, where a consumer intended to buy a teaser e.g. beauty supplement and unwittingly ended up with a commitment to purchase them monthly with no clear way to cancel. This was a common enough form of abuse that Japan passed a toothy law [PDF] against it in 1976, when the abuse largely happened via traveling salesmen or the telephone, and it hasn't gone away in the Internet age.
Accordingly, many consumers, particularly older consumers, prefer “push” payment methods rather than “pull” payment methods. You will never pay a yen more than what you expect for a convenience store payment, and you’ll never get charged again unless you go back to the store and pass more cash to the clerk.
Another reason is user privacy. We often think of privacy as a right against uninvolved third parties, intermediaries, or perhaps the business one is purchasing something from, but an underappreciated aspect of privacy is a right against members of one’s own household. This is true worldwide, but is particularly salient because of some social features of Japan, such as multi-generational households being more common, many adults living with their parents prior to marriage, and sometimes contentious norms about division of financial responsibility within marriages.
(The traditional normative expectation is that a salaryman earns his salary and immediately gives all of it to his wife for management, and she gives him a small allowance, to prevent spendthrift behavior. This often surprises foreigners, who would not predict this based on their assumptions about gender relations. Cultures are complex; film at 11. As with many traditional norms, this is in flux, far less hegemonic in 2022 than it may have been previously, and was sometimes observed in the breach even at the height of its practice.)
So you can go to a konbini and purchase anything you want without having to justify that transaction to anyone who reads your mail. You can also receive packages at a convenience store, which is a service they’ll happily extend for free in most cases. This is a win for privacy in some cases but is much more commonly used because the konbini is, again, reliably open 24/7. If you work irregular schedules and might not have someone home to receive a package when your friendly local logistics firm comes calling, send it to your local konbini instead and you can pick it up at your konbiniensu.
This creates a compelling loop of user behavior for all parties. Purchase something online, pay for it at the konbini, wait for it to ship, pick it up at the konbini. The konbini wins because you come in twice, and will likely pick up a drink or snack or something to make the most of your trips. Plus, like all of their offerings, increasing your affiliation with their store specifically helps against the brutal competition for user habit. There are more than ~50,000 konbini in Japan and anything they can do to convince you to come back versus using a competitor is worth doing.
The fascinating underbelly of cash management
After a konbini takes cash, what actually happens?
From a settlement perspective it is fairly straightforward. Konbini payments are operated by networks, of which there are a handful. The networks are overlays on top of individual konbini chains, and share financial infrastructure which the smaller chains couldn’t justify building out. At the point where the user makes the payment, the receiving store owes money to the network. These debts are quickly netted out using the standard banking system. The business receives a notification that the payment was processed “relatively soon” after it happens, and their payment is delivered via bank transfer, generally a few days later.
So what happens to the cash? Konbini historically have had huge cash management challenges, and the solution is genius: buy a bank. Or, if you’re a smaller chain, partner with one.
In both cases the objective is to put an ATM in each of your stores. Your franchisee can then recycle the cash they receive by depositing it into their bank account from the ATM in their own store. Instead of paying an armored car company to come drain the tills periodically, the franchisee and chain earn ATM revenue when payday rolls around. (Payday in Japan is the 25th monthly, and much of the country turns their salary transfer into cash on that day. This causes such a wild swing in cash inventory levels that banks arrange for deliveries of hundreds of thousands of dollars to each of their ATMs in advance of it. It’s a fun logistical challenge of the sort that Japan generally eats for breakfast.)
Being able to mix collected cash into the take of the store and make profitable operational use of it is one reason why konbini payments are so efficient. They’re offered free to consumers in Japan; the cost to businesses is broadly in line with cards.
A less happy detail of konbini payments historically is that you had to be a large business to gain access to them, because you need to do a business negotiation with each konbini network, and their sales processes assume that you’re only worth talking to you if you’re bringing in several hundred million yen worth of payments annually. One nice thing about aggregators like Stripe is that we can amortize negotiation, financial plumbing, and custom engineering work over many, many customers in parallel, and so offer them to any business capable of filling out a brief form and meeting the chains’ requirements. These are within the reach of e.g. Japanese sole proprietors within days of starting their business. Good news for the konbini, the businesses that can use them for the first time, the users who can now pay their preferred way, and of course us.
Making good experiences better
The user experience of konbini themselves is fantastic, so much so that there is a thriving genre on Youtube of tourists gushing about them. The user experience of konbini payments has historically had two really brittle moments in it: moving the transaction from the screen to the store, and incorporating the transaction into the business’ operations.
Most large businesses in Japan implemented konbini in the late 90s and have not substantially updated their konbini flows since then. (Much like in the U.S., checkout flows are designed by people who have idiosyncratic beliefs about checkout flows. For example, if you work in payments, you are almost certainly a credit card geek and can gush about the relative benefits of your favorite three reward programs. As as a result, you’ve probably not used cash-on-delivery or konbini payment or similar in years, and you haven’t even checked your own site for how these work because why would you.)
Back in the late 90s, the transaction was almost certainly happening on a desktop, and the dominant convention was telling the user to print out a particular page to take to the konbini. Web development in Japan didn’t stop for 25 years, and as companies updated their checkout flows the konbini confirmation page became technical debt, and so often e.g. moved to a separate, out of the way location where it still looks like it did in 1996. This is true of firms which you would assume it could not possibly be true about.
Anyhow, in the last few years Japan has introduced this magical technology called a cell phone. (Perhaps you’ve heard of it.) One thing you can do with a phone is carry a web page on it while you walk around town. Stripe’s konbini implementation is particularly slick in that we host that page for users (they can, naturally, build their own if they want, but again the largest and most sophisticated companies in Japan can’t convince their teams to do this work), and gave it features like being able to dynamically swap convenience store chains on the fly. Thus, if you thought you were going to go to the Family Mart next to your office but instead found yourself walking into a Lawson for a quick coffee, one tap and you’re done. (Incredibly, this previously required canceling your order and redoing it in many implementations.)
The other backend improvement supports operations. Many e-commerce merchants structure themselves, technically and operationally, around the assumption that payment is captured at the time an order is made. Konbini payments are one type of asynchronous payment; they’ll be captured hours or days after the order. This introduces two different speed issues at different scales.
The fast one: Users expect confirmation that the thing they just did will have the effect they want very quickly. Historically, konbini networks passed payment confirmations to merchants over a download-the-CSV-file-periodically-via-SFTP methods which added a few hours of latency between the user handing over their cash and the merchant sending them an email saying they would ship the order. That’s a terrible experience; we replace it with webhooks that can move at the speed of typical Internet transactions.
The slow one: You have to make changes to your operations to support asynchronous payment, like having some abstraction for a good order which isn’t paid for yet. That might require e.g. reserving the stock for the order. There are also some subtle downstream operational consequences, like issuing refunds.
Card networks have refunds built in. Konbini payments do not; you can’t tell the user “Can you go to the store an ask for your money back?” But, of course, the payment isn’t final because no payment is final. If the customer returns the goods to you, you will want to (and in Japan, due to the aforementioned law, possibly have a duty to) refund them.
We built a fully automated service for this into our implementation: you can click to refund a purchase from the Dashboard (or trigger it via the API), and we’ll email the user to collect bank account information to send them the refund. This saves you from having to have your operations team send several calls or emails to get the information necessary to return what is, probably, a relatively small sum, in the majority case where the user has access to a bank account or postal bank account. (You can have your operations team send e.g. a postal money order to them if this doesn’t work for any reason, or otherwise solve this yourself.)
Distributed identity verification
Another example of an offline/online convergence is distributed identity verification. One way this is happening is through automated ingestion of IDs and selfies via smartphones, and that is such a fascinatingly deep rabbit hole I think I’ll do an essay on it alone someday.
But smartphones aren’t the only physical technology that is improving rapidly. Shenzhen is transforming our physical environment worldwide, including here in Japan, by making bespoke hardware development orders of magnitude quicker and cheaper than it has been historically. And some of that hardware is designed to bridge the gap between governments and businesses consuming their services.
Governments got into the identity game to raise armies and taxes to pay for them, but in the millennia since then, they offer identity as a service to the wider community. This is widely underappreciated; one reason the DMV in the U.S. is as annoying as it is is because it is the unsung lynchpin in this service, which almost every business consumes in some fashion.
Japan has drivers licenses but they’re less hegemonic as a proof of identity here than they are in the U.S. You can easily find middle class Japanese people without them, for example, where that would be uncommon in the U.S.
Japan also has some higher ceremony identity / authorization proofs, which are necessary to explain before I tell you about the really cool machine at the local konbini.
When I bought my wife a car in Japan, the dealership understandably needed to confirm that I was actually me prior to binding me to the purchase and a substantial loan. I don’t have a driver’s license, and while I do have government issued identification, for high-value transactions, employment, or similar Japanese businesses will often ask you to get either a certificate of residence or a certificate proving registration of your personal seal.
These are issued by your town hall for a small fee. They provide a set of proofs. One is your claimed name and address match what is on file at town hall. One is that you went to town hall and convinced a competent Japanese bureaucrat of your identity. One is that if you are fibbing about any of this you are now defrauding the Japanese state, not merely your counterparty. And one is that you have very high intent to engage in a non-routine transaction that required you to go to town hall.
Why is that last one important? Because licenses and other forms of ID in your wallet are used promiscuously in society and so they leak. Thousands of businesses have seen my ID before. Some of them doubtless have a copy on file. Many of them will lose that copy to a hacker.
So it is not necessarily a given that anyone presenting a copy of something that looks plausibly like my ID is necessarily me, or that a woman saying “This is my husband, he’s totally in agreement about purchasing this car, and here is his stamp and ID” is necessarily my wife and actually authorized to commit me to purchasing a car.
Thus requiring a certificate from town hall. They’re single use by design, unlike IDs, and your counterparty will invariably require a recently issued one. And they prove that I personally went to town hall (or sent a legal designate with some appropriate level of ceremony) with intent to engage in a non-routine transaction. (Town hall generally doesn’t inquire into specifics, unless e.g. you’re a senior citizen taking instructions from a cell phone and they’re worried you might be being swindled.)
That’s the backstory why this exists. Notice that it introduces pain for myself, town hall (which has to staff a line continuously to deal with these requests), and the dealership (which will lose the transaction if I can’t organize myself to do this, which hurts but hurts less in expectation than fraud).
Now here’s the cool machine: My local konbini has a multifunction printer/scanner kiosk that can do about a hundred things. One of those things is that it can read a chip in my My Number card (Japan's I-suppose-I-can't-call-it-new-anymore-even-though-I-got-here-first national ID), ask me for my password, authenticate it with the chip, connect to town hall and present them a certificate request signed by the chip, and print out the certificate for me. This is more convenient than trudging to town hall, has no office hours, required no highly trained public servant, and is approximately as secure.
Moreover, while it is difficult to get that security out of a My Number card remotely, one can request someone submit a certificate remotely. (And, if one cared to, one could call up town hall, read them the certificate number, and ask them to confirm that their copy reads the same as the copy received from a customer. In practice, most Japanese businesses don’t bother calling, because the certificate is such good evidence of benign intent.)
This thus turns the konbini into a sort of offline/online hub connecting and solemnizing remote transactions with a built-in guarantee that anyone committing fraud is doing so against the government, on camera, and (probably) close to where the police can make their acquaintance.
That, in turn, makes certain transactions viable remotely, or partially remotely, which would have required multiple in-person visits before. Certificates move through the mail easily and can also be trivially captured via the camera on one’s phone, allowing one to do higher-ceremony transactions without needing to physically meet anyone to verify ID.
There’s always more to discover
A very smart person once heard me gushing about these systems and said “... They should all be web apps.”
One intuition there, that the world should become more convenient and more orchestrated by software, is obviously correct.
However, I’d expect vastly more deployment of online capabilities in offline lives as time goes on. The most important platform for it will continue to be the smartphone, and increasingly “web apps” will be able to treat the camera and other “embedded peripherals” as a first-class I/O device, but (regardless of where you live in the world) you’re going to start seeing some innovations here.
An obvious one: kiosks at banks which will connect to an officer in a call center rather than an in-branch employee. This will eat the class of transactions which are more complicated than a teller can handle but can be done by a branch banker. The economics supporting that use case are absolutely overwhelming; you can stop needing to staff (and massively underutilize) relatively expensive sales professionals in high-cost metros and replace that fraction of their work with ~100% utilized specialized call center employees. It is already in trials in Japan and, mark me on this, it is coming to your neighborhood before 2030.
Software is famously eating the world, but Shenzhen is, too. The faster hardware cycle times get, and the more amenable they become to orchestration at the speed of software cycle times, the more entirely offline processes will migrate to this sort of hybrid existence.
I wish I had enough space here to cover those kiosks, tax payment machines, and other cases in more detail, but that will have to be another issue. Drop me a line if you enjoy geeking out about this stuff.
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I write about the intersection of tech and finance, approximately weekly. It's free.