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The AfterPay (& Affirm) of Japan: Paidy

Before diving into the fun stuff, let's start with some clarifying background details...

When thinking about the ways in which consumers pay for goods and services around the globe today, one can broadly look at it from both the developed & emerging market perspectives:

  • Developed markets - credit & debit cards are seemingly ubiquitous, while the likes of PayPal, Venmo, Apple Pay & other digital payment methods are increasingly growing their market share. Cash, on the other hand, is often last.

  • Emerging Markets - digital mobile payment methods - think AliPay & WeChat Pay in China - have surged over the past decade to become one of the dominant forms of payment in what have historically been almost exclusively cash-based transaction economies. Emerging market consumers are effectively leapfrogging credit & debit cards, similar to how they jumped right over desktop computers and went straight to mobile.

While the above generally holds true, there is one unique quasi-outlier within the developed market bucket: Japan.

A fact that is perhaps less well known among those having never visited or lived in Japan is that among Japanese consumers, cash remains king. Four out of five Japanese consumers prefer to transact in cash, while cash in circulation relative to real GDP topped out at 20.4% according to the Bank of International Settlements in 2017 (see below chart).

Source: Bank of International Settlements

The reasons for this are largely cultural, including a general aversion to personal financial debt, the believed safety of cash (think fraud), a greater perceived ease with which one can reliably track their spending when using cash as well as long-standing ceremonial ties associated with cash (i.e. pochi bukuro). Inadequate financial education during one's formative years & the entrenched behaviors of older generations - a group representing 28% of Japan’s total population when considering those aged >60 - likely rounds out the core reasons behind the relatively slow adoption of cashless payment options in Japan.

Quite aware of the effective "drag" that the continued use of cash has on the Japanese economy as the world further digitizes (~$18Bn in annual costs, to be exact, to simply maintain & replenish ATMs), the Government has made concerted efforts to encourage the use of digital payment methods. For example, when the consumption tax jumped from 8% to 10% in October 2019, the Government simultaneously introduced a nine month "cash-back" program rewarding those using cashless payment options:

"Under the state-funded program, consumers receive[d] points worth up to 5% of the value of purchases made with cashless payment methods at smaller shops. The government provides subsidies to credit card firms and other cashless payment service operators to cover the value of the reward points."

The ultimate goal is to increase cashless payment methods as a percentage of total household consumption spending from today's 27% up to 40% by 2025. Ambitious, but doable.

Alright, so to recap, while credit & debit cards are used in Japan - and are, in fact, very easy to obtain in Japan - most consumers still prefer cash. The Government is also pushing hard to encourage a more cashless society, as the economy further transitions from analog to digital. Now, that leaves us with an interesting question: what digital payment options exist today in Japan that cater, in ways, to the still pervasive norms outlined above & further below, but also lean heavily into the digital-first world of the future?

Great question! We'll get to an answer in a second, but let's first focus our attention on a sector where cashless payments are most prominent & impactful: e-commerce.

Japan’s e-commerce penetration remains relatively low compared to other digitally advanced peers. More specifically, pre-COVID figures peg Japan’s e-commerce penetration at around 9%, while that of China, the UK & South Korea stand at 35%, 22% & 22%, respectively. Clearly, a very long runway remains for digital commerce in Japan. However, as we've laid out earlier, barriers have existed & still remain in many ways that do not allow for the most seamless of online buying experiences...particularly when it comes to paying, and especially so for merchants and the younger, more tech-savvy, digital-native consumers.

As a broader example of this friction, only 37% of Japanese online shoppers are comfortable with storing their payment information on apps. As a result, “cash-on-delivery” or ordering online and then paying at convenience stores is a very common default for most online shoppers in Japan.

For merchants, this reality opens up two key risks: i) a need to effectively "float" the purchase until it has been delivered, paid for & the cash ultimately passed along to the merchant (which can take several days at best or up to weeks in some cases); and ii) dealing with uncompleted deliveries (i.e. the purchaser never ultimately takes possession of their order, as they change their mind, never paid anything upfront & quite literally then just "ignore" the delivery - this is more common than thought in Japan).

So, some meaningful friction exists on both the merchant & consumer sides. What to do about this?

Enter: Paidy.

Having early on identified this "pain point” in the digital payments space in Japan, two non-Japanese - Lee Smith & Russell Cummer - officially launched Paidy in 2014. Over the ensuing years, the two have recruited a team of over 150 employees representing 30 nationalities and have built what is today a leading late-stage Japanese payments startup.

At its core, Paidy provides point-of-sale financing to millions of Japanese consumers, requiring only their name, email address & mobile phone to transact - no account creation or sharing of closely protected payment details needed. Purchases are fully underwritten by Paidy.

According to Cummer:

"The thesis is consumers want an offering that is as friction-less at checkout as cash on delivery, but then every moment thereafter is as powerful as a card."

To make such transactions possible, Paidy uses proprietary, increasingly intelligent machine learning algorithms to score consumer creditworthiness, while also guaranteeing timely payments to merchants. At the end of each month, purchasers receive a consolidated bill that includes invoices for all purchases completed through Paidy during the last 30 days. These outstanding bills can be paid in full or via installment plans and can be done so by using more familiar & comfortable payment options such as paying in cash at a local convenience store, direct debit or via bank transfer. Notably, because no interest is charged for the 30-day billing period, it isn’t thought of as a loan or credit product by typically debt-averse Japanese consumers.

On the merchant side, Paidy helps increase conversion rates, average order values & repeat purchases, while reducing incomplete transactions (i.e. purchases that buyers ultimately don’t pick up and pay for).

Loosely translated: fill your online shopping cart, register with Paidy to pay, receive your package, pay your outstanding balance with Paidy via bank transfer or at your local convenience store

Paidy's unique payment offering has scaled so much in recent years that Amazon partnered with Paidy in November 2019 to offer its “Buy Now, Pay Later” installment payment option on - a powerful testament to the up-till-now success of Paidy, as Amazon chose not to push its own similar in-house offering that is today available in other global markets.

Not surprisingly, the company’s achievements have not gone unnoticed. Paidy has raised roughly $278M in debt & equity from an impressive roster of international investors, including Visa, PayPal, Goldman Sachs, an affiliate of Fidelity, Soros Capital Management, Tybourne Capital Management & Arbor Ventures. Significant Japanese corporates MUFG, ITOCHU, Mizuho & Sumitomo have also stepped in to back the company on both the equity & debt side.

Paidy, of course, does have some serious home-grown & international competition in the digital payments space in Japan. The two biggest are arguably PayPay, a mobile payments platform developed by Softbank, Yahoo Japan & Paytm of India, & LinePay.

With that in mind, Paidy is now stepping on the gas, with the stated aim of reaching 11M users by the end of 2020 (up from ~2M a year prior). The company is also exploring a range of new financial service offerings and payment methods, while increasing its focus on “enterprise” merchants and pushing deeper into the still-massive offline market opportunity.


As a closing section to this piece, let's break out our crystal balls & think about how Paidy may look over the next several years and beyond. Our quick take: don't forget this one!

As we've outlined above, Paidy’s core offering today is its powerful “buy now, pay later” digital payment tool. Admittedly, this is not a novel concept unto itself. Paidy co-Founder Cummer even says so himself:

"In Japan, deferred payment options have existed for longer than Paidy, they’ve just never had the consolidation that we have, and they tended to be shorter term at about two weeks. We looked at that and thought we could give people basically until next month.

However, as Cummer notes, the innovative & low-friction way in which the product is "packaged and delivered" within the norms of Japanese culture is certainly unique.

Taking a further step back, we can easily identify several other leading technology companies across the globe who have already found success or are about to embark down a similar path with a "buy now, pay later" point-of-sale consumer financing product. Among these companies are Shopify with their Shop Pay Installments, Klarna with their Paying Later With Klarna, Affirm in general, and AfterPay, the very recent Australian public market darling. These examples and several others like them lend credence to the seemingly universal appeal & growing traction of this low-friction form of digital payment.

As we feel it is likely the best example of what we believe Paidy will increasingly grow into at the moment, let's focus on AfterPay briefly.

Source: AfterPay's website

We'll leave it to readers to take a closer look at AfterPay themselves, but to provide a very quick overview, the company offers a fast-growing "buy now, pay later" digital payment tool, targeting predominately tech-savvy Millenial & Gen Z consumers. Their payment option replaces cash & credit cards and is rapidly seeing adoption - on both the consumer & merchant sides - beyond just digital storefronts, but now also more deeply within the offline retail world. AfterPay is valued at roughly $14Bn USD, or ~30x NTM sales, as of mid-August 2020, up from roughly $500M during the summer of 2017, shortly after its IPO - lots of growth & lots of multiple expansion. Recent financial & operational metrics are outlined below:

Source: July 2020 AfterPay company presentation

Suffice it to say, the company is growing like a weed. Something is working!

Paidy is similarly situated with a fast-growing "buy now, pay later" payment offering that is also predominately geared towards tech-savvy Millenials & Gen Z consumers in Japan. As we briefly highlighted earlier, Paidy is now aggressively pushing into the offline world, capitalizing on its increasing brand awareness & proven value-add among merchants in addition to its rapidly expanding & deepening relationship with consumers. One could easily argue that Paidy is simply following AfterPay's now established playbook; it would be imprudent almost not to:

Source: June 2020 AfterPay company presentation

It would also appear that at least one of the two is fashioning their own website after the other (somewhat kidding here, but who knows!):

Looking ahead for both AfterPay & Paidy (as well as Affirm & Klarna for that matter), they each have the opportunity to increasingly leverage their i) growing user bases & broadening data sets of consumer credit & spending metrics; and ii) expanding merchant populations & related sales statistics to further build out their product suites to allow for new, adjacent & profitable revenue streams requiring minimal, if any, incremental acquisition costs.

On the consumer side, examples could include personal "micro-loans" (as Square is now testing with Cash App), payroll advances and cryptocurrency trading / payments (thinking Cash App here as well & specifically in Japan where crypto interest is meaningful), while offering growth capital via loans, data-analytics and value-add SaaS tools to merchants.

Taking things a few steps further, with their vibrant, youthful brands, deepening consumer trust & easy-to-use products tailored to the mobile-first, tech-savvy generations of today, there's a real possibility to build out a new type of "community consumer bank"...something far more "cool", relevant & impactful than your run-of-the-mill bank of your parents. We've seen Affirm take this route in partnership with Cross River Bank, while Klarna itself has a bank license in Sweden. Doing something like this would be relatively novel in Japan, though the path leading there becomes clearer by the day.

The same could be said for merchants, and perhaps even more so, to where Paidy is able to offer far more tailored & relevant financial products to online & offline SMB merchants who are often jumping through hoops to adequately access financing & other needed services from overly risk-averse traditional banks...a particularly relevant reality in Japan. Examining Shopify's recent activities are instructive in this regard.

In sum, the future is very bright for Paidy. The team has the funding, inertia & capabilities to create a significant, enduring, new type of financial services company that touches huge swaths of the Japanese economy. Supporting this process, global peers have laid out compelling blueprints that make it easy to envision Paidy's continued arch of success.

Perhaps even more interesting, however, is the question of what about beyond Japan? While we sincerely hope that Paidy can become a truly global Japanese technology company, it would not surprise us to see an Affirm, an AfterPay or even a PayPal swoop in with an offer too hard to refuse. The Japanese market is huge, idiosyncratic and, at this point, exceedingly difficult to break into with a competing offering given Paidy's increasingly entrenched market leadership position.

To close, we intend to introduce & discuss other Japanese companies like Paidy with the aim of highlighting the emergence of a vibrant late-stage startup ecosystem in Japan. Paidy is but one such company in the latest cohort. Dozens more are set to follow across a growing number of verticals over the next decade & beyond. We'd urge readers to keep an eye out & please do touch base if you'd like to further discuss!

Not financial advice. Opinions my own.

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