japan financial services japan cashless credit cards ... · weighting of ofﬂine cashless...

Japan has made slow strides toward a cashless society, lagging behind other developed economies. However, with new modes of electronic payments such as contactless payments/QR codes and the government’s support, including subsidies to cashless operators, we see a structural shift towards cashless payments

among consumers. Within this report, we look at the various factors affecting consumers, retailers and cashless operators and try to answer four key questions:

1) What is the scope of increase in cashless transactions? We forecast cashlesspayments to double to ¥120 tn by 2025E from ¥60 tn in 2017, driven by growth ine-commerce and a rising weight of offline cashless transactions, especially followingthe recent uptick in contactless/QR payments in retail.

2) Which payment method/s are best positioned? We expect credit cards toremain the key payment method from a speed/points reward perspective.

3) Within the credit card ecosystem, which categories stand to benefit the

most? We expect the cashless profit pool to increase to ¥4.3 tn (2025E) from ¥2.6tn (2017), with credit card pool to grow to ¥3.7 tn from ¥2.5 tn. The key players are (i)financial service providers, (ii) retail-based businesses, (iii) IT companies, (iv) onlinepayment processors, and (v) card issuers.

4) Credit card business models poised for growth? i) IT players with a solid onlineecosystem and attractive reward points program, and ii) Financial service companieswith retail networks and a stable customer acquisition base without exposure toexcessive reward points competition.

Japan Financial Services

Japan Cashless: Credit cards remain front and center

24 April 2019 | 10:53PM JST

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by nonUS affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Taiki Okada +81(3)6437-9917 | [email protected] Goldman Sachs Japan Co., Ltd.

Katsunori Tanaka +81(3)6437-9973 | [email protected] Goldman Sachs Japan Co., Ltd.

Masaru Sugiyama +81(3)6437-4691 | [email protected] Goldman Sachs Japan Co., Ltd.

Sho Kawano +81(3)6437-9905 | [email protected] Sachs Japan Co., Ltd.

Masatomo Okawa +81(3)64379931 | [email protected] Goldman Sachs Japan Co., Ltd.

Tomoko Imoto +81(3)6437-9908 | [email protected] Goldman Sachs Japan Co., Ltd.

Yusuke Noguchi +81(3)6437-9894 | [email protected] Goldman Sachs Japan Co., Ltd.

Serene Yang +81(3)6437-8531 | [email protected] Goldman Sachs Japan Co., Ltd.

Shoto Sakuma +65-6654-6925 | [email protected] Sachs (Singapore) Pte

The following is a redacted version of the original report. See inside for details.

https://research.gs.com/

www.gs.com/research/hedge.html

Executive Summary: Credit cards remain front and center 3

1. What is the scope of increase in cashless transactions? 7

2. Which payment method/s are best positioned? 16

3. Within the credit card ecosystem, which categories stand to benefit the most? 22

4. Credit card business models poised for growth? 25

Disclosure Appendix 26

2

Goldman Sachs Japan Financial Services

Table of Contents

Note: The following is a redacted version of “Japan Financial Services: Japan Cashless: Credit cards

remain front and center" originally published April 24, 2019 [88pgs]. All company references in this

note are for illustrative purposes only and should not be interpreted as investment recommendations.

3


remain the preferred method of choice for cashless payments due to factors such as speed, convenience and attractive reward points. Our forecasts for cashless transaction value and the market profit pool are as follows:

We estimate that cashless payments will double to ¥120 tn in 2025E, from ¥60n

tn in 2017.

We expect the profit pool to grow to ¥4.3 tn in 2025E from ¥2.6 tn in 2017.n

For the credit card profit pool, we estimate fee income to increase to ¥2.4 tn inn

2025E from ¥1.5 tn in 2017. Including fees on revolving credit and cash advances,we forecast credit card profit pool growth to ¥3.7 tn from ¥2.5 tn over the sameperiod.

Four key questions 1. What is the scope of increase in cashless transactions? We expect cashlesspayments to double to ¥120 tn from ¥60 tn on e-commerce market growth and higherweighting of offline cashless transactions:

We estimate that e-commerce market growth will account for c. ¥19 tn of the ¥60n

tn growth in cashless payments and a higher weighting of offline cashlesstransactions in retail for c.¥23 tn.

We forecast that the e-commerce market will grow from ¥17.0 tn in 2017 to ¥24.8 tnn

in 2021E and ¥36.1 tn in 2025E, supporting an increase in cashless transactions.

We estimate that the weighting of retail cashless transactions will rise to 37% inn

2025E from 22% in 2017.

We believe the rise in weighting of offline cashless payments will be driven byn

changes in consumer behavior and more locations offering cashless paymentfacilities. Specifically, we expect smartphone/contactless payments will drive thegrowth in retail. We see recent government measures such as subsidies tocashless service providers, especially credit card providers, helping in themomentum too.

2. Which payment method/s are best positioned? Credit cards to remain thecashless payment method of choice:

4


Executive Summary: Credit cards remain front and center

Japan has made slow strides toward a cashless society, lagging behind other developed economies. However, with new modes of electronic payments such as contactless payments/QR codes and the government’s support, including subsidies to cashless operators, we see a structural shift towards cashless payments among consumers. Despite inroads made by new forms of cashless payments, we expect credit cards to

n We expect credit cards to remain the key payment method in the Japanese

market even as we expect a variety of payment methods to coexist.

n New payment methods include contactless payment mainly via smartphones and QR code-based systems, however, we expect credit cards to remain the top

consumer preference thanks to their speed, convenience, and additional

3. Within the credit card ecosystem, which categories stand to benefit the most?

We expect the profit pool to increase to ¥4.3 tn in 2025E from ¥2.6 tn in 2017: Thecashless payment profit pool can be broadly divided into card issuers, acquirers (such asUFJ Nisoc/SMBC Card, who encourage merchants to join a cashless payment network),and card networks.

We estimate that the profit pool totaled ¥2.6 tn in 2017, with the share of thesen

three categories at 78% (¥2.0 tn), 20% (¥530 bn), and 2% (¥5 bn), respectively(based on reported general fee share of various players).

We expect acquirers to gradually gain a greater share of the market, with share inn

2025E as follows: issuers 71% (¥3.1 tn), acquirers 27% (¥1.2 tn), and card networks2% (¥8.0 bn).

Looking at all industry players, we expect payment processors to enjoy the fastestn

growth, followed by IT companies, and then retailers.

4. Credit card business models poised for growth? We believe that credit cardpayments will eventually be the main form of payment as highlighted in the earlier point,and highlight two business models that have been successful within this space.

The model used by IT players that have a solid online economic ecosystem and ann

attractive reward points program.

The model used by companies that have a stable customer acquisition base, thanksn

to their retail networks, and are capable of stable profit growth without exposure toexcessive reward points competition.

5


benefits offered to consumers (reward points, discounts, etc.).

n When it comes to concerns about the impact of lower merchant fee rates on profit margins for credit card companies, we focus more on the impact of competition than the fee cap of 3.25% proposed by the government starting Oct 2019. This is because we estimate average market rates have already declined to 2.9% and

assume a further decline to 2.5% by 2025E.

Japan lagging the rest of the world in the transition to cashless payments As shown in the exhibit below, where we compare each country’s cashless payment ratio as of 2015, the weighting of non-cash payments remains low in Japan, at 18%, versus 89% in Korea, 60% in China, 55% in the UK, and 45% in the US. However, Japan is distinguished by a relatively higher percentage of credit card payments and usage of prepaid cards (e-money) . In our view, the factors contributing to Japan’s low cashless ratio include (1) the social climate: Japanese people prefer to use cash, and the volume of cash in circulation-to-GDP is much higher relative to other industrialized nations, with ATM usage (convenience) also high; (2) retailers’ perspective: retailers often avoid cashless transactions owing to the cost of installing payment terminals and the need to pay merchant fees; and (3) consumers’ perspective: a number of factors preclude greater uptake by consumers, including the presence of shops unable to process cashless transactions, concerns about overspending and security, and “general unease amongst older shoppers” (excerpt from METI’s Cashless Vision, released in April 2018). Nonetheless, we believe the market trends outlined further in the note will play a role in lowering these barriers, as will the emergence of new players in the payment space. We accordingly see the shift to cashless payments accelerating going forward.

Exhibit 1: Japan has a low cashless ratio … Cashless ratio by country (2015)

Exhibit 2: ...and when non-cash payments are made, it is usually by credit card (2016)

89%

60% 55% 55% 51% 49% 45%

39% 38%

18% 15%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Credit card Debit card Pre-paid (E-money)

Credit Card oriented Debit Card oriented

Source: METI: “Cashless Vision”

Source: Japan Consumer Credit Association, METI

Exhibit 3: Cashless payments and estimates Cashless payments (¥ tn) and growth rate (%)

34 36 39 43 47 51 55 60

66 73

80 88

95 103

111 120

0%

2%

4%

6%

8%

10%

12%

14%

0

20

40

60

80

100

120

140

tn y

en

Source: METI, BOJ, Goldman Sachs Global Investment Research

6


1. What is the scope of increase in cashless transactions?

We expect cashless payments (which we define as the total of payments via credit cards, e-money, branded debit cards, and using QR codes or barcodes) to double to

¥120 tn in 2025E from ¥60 tn in 2017. We estimate average annual growth of 9.2% over the eight-year period from 2017 to 2025E, which marks an acceleration from the 8.3% growth recorded over the previous eight years. We look for the cashless weighting, defined as the volume of cashless payments as a proportion of household spending, to increase to about 40% by 2025E from roughly 20% in 2017 (Exhibit 5). We expect three factors which will help cashless payments to double by 2025E

are: 1) e-commerce expansion - ¥19 tn, 2) retail - ¥23 tn and 3) support from

government policy.

Exhibit 4: We expect cashless weighting to rise to 40% in 2025E

Cash/cashless total：：190tn yen

Cashless：：60tn yen

Credit card：： 53tn yen

E-money：： 5tn yen

Debit/QR：： 2tn yen

Online：： 15tn yen Offline：：45tn yen

E-commerce expansion

Offline cashless expansion Government support

Cash/cashless

Cashless：：120tn yen Cash

Credit card：： 95tn yen

E-money：： 11tn yen

Online：：33tn yen Offline：：87tn yen

QR/code：：

11tn yen

Debit：： 10tn yen

Cash: 70 tn yen (where cashless payment's not available) Cash：：60tn yen (where cashless payment's available)

Payment type Offline cashless expansion

Government support

2017 Cashless ratio

2025 Cashless ratio

40%

1) Debit data is for branded debit cards only. 2) Credit card data includes revolving credit payments. 3) Cashless weighting defined as volume of cashless payments as proportion of household spending.


Exhibit 5: Increase in EC and in retail sector cashless payments to fuel market growth Cashless payments by industry (¥ tn)

Exhibit 6: Growth not just in credit card usage, but also in the uptake of e-money, debit cards, QR payment Cashless payments by consumer means of payment (¥ tn)

15 33

31

54 14

33

0

20

40

60

80

100

120

140

FY2017 FY2025E

Others

Retail

E-commerce

60 tn yen

120 tn yen

50 77

3

13 5

5

10 10 5

FY2017 FY2025E

E-wallets (QR)

Debit

E-money

Credit (QR)

Credit (contactless)

Credit

60 tn yen

120 tn yen

53

95

Source: METI, Ministry of Internal Affairs and Communications (MIC), Goldman Sachs Global Investment Research

Source: METI, BOJ, Japan Financial Services Association, Goldman Sachs Global Investment Research

7


1A. E-commerce market growth Of the ¥60 tn increase we forecast for cashless payments (from ¥60 tn in 2017 to

¥120 tn in 2025E), we expect roughly ¥19 tn to come from the expansion in the

e-commerce market. We see the e-commerce market growing from ¥17.0 tn in 2017

to ¥24.8 tn in 2021E and ¥36.1 tn in 2025E. As approximately 85% of transactions

in the e-commerce market were cashless (as of 2017), we believe an expansion in

e-commerce will inevitably spur growth in cashless payments.

Drivers of e-commerce market growth We see e-commerce market fueled by expansion in retail e-commerce (+¥3.7 tn),

service e-commerce (+¥2.7 tn), and digital/C-to-C e-commerce (+¥1.4 tn). In 2017, the e-commerce market was worth ¥17.0 tn, breaking down into ¥8.6 tn from retail-related e-commerce, ¥6.0 tn for service-related e-commerce, and ¥2.4 tn for digital and C-to-C related e-commerce. On this basis, e-commerce accounted for 5.7% of total household spending. We project an average annual growth of about 10% for the e-commerce market, which we expect will reach ¥24.8 tn by 2021E (8.2% weighting) and ¥36.1 tn by 2025E (11.6% weighting) (Exhibits 9). Between 2017 and 2021E, we expect the e-commerce market to expand by ¥7.8 tn, breaking down into (1) +¥3.7 tn, for retail-related e-commerce (Exhibit 8; includes +¥1.2 tn from the food and beverage segment as a result of omnichannel selling, and +¥0.9 tn in the apparel segment as online purchasing becomes more convenient); (2) +¥2.7 tn, for service-related e-commerce, mostly in travel; and (3) +¥1.4 tn, in digital and C-to-C related e-commerce, underpinned by growth in sharing services.

Exhibit 7: We see e-commerce market growing from ¥17.0 tn in 2017 to ¥24.8 tn in 2021E EC market scale (BtoC and CtoC) (¥ tn)

Exhibit 8: Forecasting 10% average annual growth over seven years through 2025E E-commerce market scale (lhs, ¥ tn) and weighting (rhs, %)

8.6 12.3

6.0

8.7 2.4

3.8

0.0

5.0

10.0

15.0

20.0

25.0

2017 2021E

Digital + sharing

Service

Retail17.0

24.8

7.8 8.5 9.5 11.2 12.8 13.8 15.4 17.0 18.7 20.6 22.6 24.8 27.3

29.9 32.9

36.1

2.8% 3.0% 3.4% 3.9%

4.4% 4.7% 5.3%

5.7% 6.3%

6.8% 7.5%

8.2% 8.9%

9.7% 10.6%

11.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0 EC market size (LHS, tn yen)EC ratio (vs households consumption)

Source: METI, Goldman Sachs Global Investment Research


8


1B. Shift to cashless payments in the retail market Of the ¥60 tn increase we forecast for cashless payments, we expect roughly ¥23

tn to come from migration to cashless transactions in the retail market. We expect

the cashless weighting for retail to increase from 22% in 2017 to 37% in 2025E, and

expect cashless growth in the offline market to be driven by changes in users’

payment practices and an increase in the number of places accepting cashless

payment. We believe diversification in available payment methods will drive the

aforementioned changes in users’ payment practices, and believe the emergence

of new players will contribute to an increase in the number of places accepting

cashless payments. We also anticipate increasing support from government

policies.

Cashless payment study: We conducted a field study at a convenience store, finding that even at a store located in central Tokyo, cash transactions still account for 58% of the total

The exhibit above shows the results of our field study into payment methods used at a convenience store in the vicinity of Roppongi Hills (central Tokyo). It breaks down the payment methods used by the 76 customers paying at the register between 1:00 pm and 3:00 pm on March 13, 2019. Within this sample, males accounted for 55% of the total, and the cashless weighting was 42%. Based on our findings we came up with some hypotheses as outlined below.

In our view, it is not necessarily correct to assume that cash is still king because of a n

dearth in places accepting cashless payment. Convenience stores in Japan accept just about all forms of payment, but more than half of the customers in our field

Exhibit 9: Cash still accounts for 58% of payments at convenience store in central Tokyo Payment methods used at convenience store (GSe)

Cash 58% Transport.

Card (e.g. Suica) 19%

Credit card 7%

iD 4%

PayPay 4%

QUIC Pay 1%

LINE Pay 1%

Edy 1%

QR (unknown)

1%

Cashless (unknown)

4%

Note: Field study took place at a convenience store in central Tokyo (Roppongi Hills) between 1:00 pm and 3:00 pm on Tuesday, March 13, 2019, and involved 76 customers (42 male, 34 female)

Source: Goldman Sachs Global Investment Research

9


study still used cash. This being the case, we assume there are other reasons for customers continuing to use cash, potentially such as concerns over the use of credit cards to settle small transactions, and the fact that people are likely more used to carrying cash and find it very convenient.

In our view, rebates alone will likely not encourage a switch to cashless for small n

transactions: Recently, LINE Pay, PayPay and others conducted virtually simultaneous promotional campaigns in which a maximum 20% of the transaction amount was credited to users’ accounts, principally for small transactions. During PayPay’s first such campaign in December 2018, many users took up this offer as the ceiling amount was high. At the convenience store we visited, though, only 4% of payments were made using PayPay, and for LINE Pay the figure was lower still at 1%. It may appear that in instances where the customer spend is low, as in convenience stores, the effort of downloading an app and linking it to the user’s bank account potentially outweighs the appeal of a 20% rebate.

The retail industry is ever-evolving, and there is every possibility that the competitive landscape will change dramatically going forward, in our view. Still, it is very difficult to alter consumers’ behavior, and we believe it is unlikely that cashless payment

methods independent of credit cards—such as QR codes—will threaten the

dominance that credit cards already have in the field of cashless payment.

What will propel a shift to cashless in retail? 1) greater use of cashless at places accepting such payments, and 2) an increase in

the number of places accepting cashless payments.

Exhibit 10: Cash payment weighting is high for relatively small transactions, but ample opportunities lie in smartphone and contactless payments Overview of Japan’s payments market (2017)

Credit/debit 55tn yen (o.w. E-commerce 15tn yen)

E-money 6tn yen

Cash 40tn yen

Payment amount high

Cash 90tn yen

Payment amount low (below 5,000 yen)

Bigger Smaller shops

New QR players

We use the BOJ’s definition of “e-money”

Source: , BOJ, METI, Goldman Sachs Global Investment Research

10


In addition to the growth in e-commerce, we identify the greater use of non-cash transactions in offline markets, in particular in the retail market, as another factor likely to promote the shift to cashless. Japan’s retail market was worth ¥143 tn in 2017 (according to 2017 METI statistics on commercial sales value by type of business), which is a considerable amount when set against the 2017 figure of ¥293 tn for household spending. By our calculations, the retail market cashless weighting was only around 22% (calculation is based on the sum-up of the each segments shown in exhibit 12) in 2017, but by 2025E we see this figure rising to 37% (Exhibit 12). We expect this increase to be driven by 1) a change in consumer practices accompanying less

aversion to cashless payment especially when such facilities are available at

stores; and 2) growth in the number of places accepting cashless payment.

Will consumers become less averse to using cashless payment when these are accepted mode widely at stores? We consider this possible, and believe diversification in payment methods will be

key. Reasons cited by consumers for avoiding cashless transactions include 1) concern about overspending, 38%; 2) the size of the payment amount, 31%; 3) low benefits in the form of reward points and discounts, 24%; and 4) speed and convenience of payment, 24% (Bank of Japan’s Opinion Survey on the General Public’s Views and Behavior (June 2018), Exhibit 13). We believe the shift to cashless could accelerate as diversification in payment methods aid in overcoming these hurdles.

Concern about overspending: In the case of credit card payments, the settlement 1.

comes 1-2 months after purchase, so there remains some concern about overspending. We believe such concerns will be allayed, though, with the increasing use of debit cards which deduct money directly from the consumer’s bank account,

Exhibit 11: We see cashless weighting for retail market as a whole rising from 22% in 2017 to 37% in 2025E Retail market size (lhs, ¥ tn) and cashless weighting (rhs, %)

22%

40%

33%

27% 28%

20% 25%

18% 13% 13%

37%

55% 50%

45% 41% 40% 40%

35%

29%

18%

0%

10%

20%

30%

40%

50%

60%

70%

0

20

40

60

80

100

120

140

160 FY2017 (market size), LHSFY2017 (cashless ratio), RHSFY2025E (market size), LHSFY2025E (cashless ratio), RHS

Source: METI Census of Commerce and METI Current Survey of Commerce, Goldman Sachs Global Investment Research

11


smartphone e-wallets that enable the consumer to manage the balance personally, and prepaid top-up cards.

Size of the payment amount: As shown in Exhibit 14, when the amount is ¥1,000 2.

or less, cash is used 80% of the time, dropping to 70% when the amount is between ¥1,000 and ¥5,000, 63% when the amount is between ¥5,000 and ¥10,000,and 48% when the amount is between ¥10,000 and ¥50,000. As is evident from our field study at a convenience store, where we estimate the cashless weighting remains at only around 27% despite the fact that almost all methods of cashless payment were available, cash remained mainstream only when the payment amount is small. Going forward, though, we believe that even comparatively small transactions will increasingly be settled in a cashless manner as retailers roll out new payment methods. Aeon, for example, began accepting contactless payments in November 2018, Aeon and Marui offer an app supporting smartphone payments, Seven & i Holdings plans to start accepting payment via 7pay starting July 2019, and Lawson is trialing a smartphone-based self-payment system that can be used anywhere in the store.

Benefits regarding reward points and discounts: We believe rebates will remain a 3.

prominent feature of each payment service.

Speed and convenience of payment: We believe the emergence of Apple Pay, 4.

Google Pay and other such platforms will ensure that payment is swift relative to regular credit cards, as will credit cards embedded with Mastercard Contactless, JCB Contactless and other contactless payment solutions.

Exhibit 12: Concern about overspending, payment amount, benefits, and speed & convenience among reasons cited for not using cashless Reasons cited for not using cashless (in BOJ opinion survey)

Exhibit 13: The smaller the payment amount, the higher the incidence of cash payments Breakdown of payment methods by payment amount (2017)

38% 31%

24% 24% 23% 22% 15%

32%

45%

58%

41%

31% 34% 25%

0%

10%

20%

30%

40%

50%

60%

70% Who don't use cashless payment Who use cashless payment

80% 70% 63%

48% 40%

7% 20% 31% 49% 56%

13% 9% 5% 2% 1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Others

E-money (incl,debit)

Credit card

Cash

BOJ’s Opinion Survey on the General Public’s Views and Behavior (June 2018)

Source: BOJ

Note: Section on main means of payment in Public Opinion Survey on Household Financial Assets and Liabilities, for households with at least two members

Source: Central Council for Financial Services Information

12


Are more places likely to start accepting cashless payments? While a reduction in merchant fees is likely to be key, given the operating profit margin for retailers averages only 2.8%, the hurdles are not low, in our view. As shown in Exhibit 16, payments made in cash in 2017 totaled roughly ¥130 tn. Of this, about ¥60

tn were made at places accepting cashless payment, and the remaining ¥70 tn in

payments were made at places where cashless is not accepted. Reasons cited by retailers for not introducing cashless payment solutions include upfront costs for the installation of cashless payment terminals, and ongoing pressure on margins from merchant fees. According to FY3/17 data from METI’s Basic Survey of Japanese Business Structure and Activities, retailers have an average OPM of 2.8%, and considering the average merchant fee is about 3% at present, such fees certainly impose a considerable burden on retailers. In order for retailers to sustain current OPMs, it is essential that introduction of cashless payment leads to higher sales, which, we believe, could be a significant hurdle. As outlined below, however, we believe cashless payment will still gain traction because of the government’s support (see point 1C below) and competition among payment providers to lower merchant fees.

Exhibit 14: The smaller the average purchase price, the lower the cashless weighting (2017) Size of each retail market segment, cashless weighting (GSe), and average purchase price (horizontal axis shows cashless weighting, vertical axis shows average purchase price)

Source: METI Census of Commerce, METI Current Survey of Commerce, Company data, Goldman Sachs Global Investment Research

13


Exhibit 15: High merchant fees the main factor stopping retailers from accepting cashless payments Retailers’ reasons for not accepting cashless payments (n = 140)

Exhibit 16: Retailers’ average OPM is 2.8% … Retail industry OPMs, by level of capitalization (FY3/17, yen)

11%

14%

14%

14%

26%

29%

32%

36%

42%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

No place for installation

Trust cash

Atmosphere issue

Takes time until receipt of money

High installation costs

No customer needs

Difficult to handle by local stuff

Do not feel the merit

High merchant fee

2.8% 2.7%

2.2% 2.5%

2.7% 2.8%

4.2%

2.9% 2.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

METI survey on adoption of cashless payment, published on February 28, 2017 (n = 140 )

Source: METI

Source: METI’s Basic Survey of Japanese Business Structure and Activities

Exhibit 17: …...but to offset merchant fees for cashless payments they must grow sales, which is by no means guaranteed OPM sensitivity analysis

Marginal profit ratio30%

0% +1% +2% +3% +4% +5%0.0% 2.8% 3.1% 3.4% 3.7% 4.0% 4.3%1.0% 1.8% 2.1% 2.4% 2.7% 3.0% 3.3%1.5% 1.3% 1.6% 1.9% 2.2% 2.5% 2.8%2.0% 0.8% 1.1% 1.4% 1.7% 2.0% 2.3%2.5% 0.3% 0.6% 0.9% 1.2% 1.5% 1.8%3.0% -0.2% 0.1% 0.4% 0.7% 1.0% 1.3%

Marginal profit ratio50%

0% +1% +2% +3% +4% +5%0.0% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3%1.0% 1.8% 2.3% 2.8% 3.3% 3.8% 4.3%1.5% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8%2.0% 0.8% 1.3% 1.8% 2.3% 2.8% 3.3%2.5% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8%3.0% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3%

Sales growth

Merchant feeratio

Sales growth

Merchant feeratio

Source: METI’s Basic Survey of Japanese Business Structure and Activities, Goldman Sachs Global Investment Research

14


1C. Support from government policy

Opportunity for reward points programs accompanying October 2019 consumption tax hike In April 2018, the government announced a cashless weighting target of 40% by 2025, two years earlier than the original timeframe for achieving this goal. Among recently announced strategies is a temporary reward points program for cashless shopping to soften the impact of the consumption tax hike scheduled for October 1, 2019. Under

this program, which will run during the nine months between the tax hike and the

2020 Tokyo Olympics, consumers will receive a 2% (for chain stores) or 5% (for

others) rebate when using cashless payment, the cost of which will be borne by

the government. To bring more retailers into the program, the government has also announced a 3.25% cap on credit card processing fees charged by payment operators during the same period and will shoulder two-thirds of the cost of installing cashless payment devices across retailers, with payment operators to cover the remaining one third, such that retailers bear none of this cost. We believe this is just the first of the government’s strategies for accelerating cashless uptake given its target for 2025, but given the Japanese consumers’ proclivity for reward point programs, we believe this measure has potential to act as a significant catalyst for cashless payments. We believe retailers stand to benefit from participation in this system, as before the introduction of this reward points program for cashless shopping, the government had advocated a subsidy program for mitigating the effects of the consumption tax hike whereby it would cover three quarters of the cost of installing payment terminals, leaving the retailer to pay the remaining one quarter.

Exhibit 18: Government targeting cashless weighting of 40% in 2025; near-term focus on reward points program accompanying October 2019 consumption tax hike Government strategies to promote cashless adoption


15


2. Which payment method/s are best positioned?

We expect credit cards to remain the key payment method within cashless

payments in the Japanese market even as a variety of payment methods coexist,

and we expect the credit card profit pool to grow to ¥3.7 tn in 2025E from ¥2.5 tn

in 2017. Alternative payment methods include contactless and QR code-based

systems, but we expect credit cards to remain the main payment method thanks

to their speed, convenience, and perks (reward points, discounts, etc.). When it

comes to concerns about the impact of lower merchant fee rates on profit

margins, we focus more on the impact of competition than the fee cap of 3.25% to

be placed by the government starting Oct-19. We estimate that average market

rates have already declined to 2.9% and assume a further decline to 2.5% by

2025E.

Structure of cashless payment network and the companies that play a part In this section, we describe the structure of the cashless payment network and the types of companies involved. We show how merchant fees are generally distributed when a consumer makes a purchase worth ¥1,000. This transaction flow is based on our assumptions, drawn from discussions with companies involved in the process.

Distribution of merchant fees (3% scenario) on a basic transaction: If we 1.

assume merchant fees are set at 3%, when a consumer makes a purchase of ¥1,000 the merchant receives ¥970, after the 3% fee is deducted. The 3% fee is distributed amongst the card issuer (who receives 1.9% of the transaction value), the card network provider (0.1%), and the acquirer (who receives 1.0% in return for bringing the merchant on board). The role of the card issuer is to guarantee the payments made by the cardholder. The acquirer makes it possible for card payments to take place, by installing a card machine at the merchant. The card network provider makes available the infrastructure needed to facilitate secure transactions between the card issuer and the acquirer.

In Japan, the card issuer often also plays the role of acquirer; card issuers that 2.

are part of a retail business have been performing particularly well: It is quite common in Japan for the card issuer and the card acquirer to be the same entity. Major retailers such as Aeon, Marui, and Seven & i either have their own credit card business, or a subsidiary that is a credit card issuer. They also act as the acquirer in relation to purchases made at any of the businesses within their retail group. Rakuten and Yahoo Japan also issue their own credit cards. Many of these companies encourage cardholders to use their card as widely as possible, by offering benefits and substantial reward points when the card is used to make purchases at any of the retailers within the company’s group. These card issuers that are part of a retail business are gaining market share.

Online payments (e-commerce) involve payment processors: As there are no 3.

card machines involved when a consumer makes a purchase online, the acquirer needs to provide additional systems to process the payment data online. In this scenario, a payment processor sets up an online payment website on behalf of the

16


Overview of cashless payment network structure

merchant. The payment processor tries to bring more merchants onto their network by encouraging retailers to make their products and services available online and developing an e-commerce system on behalf of the retailer. Based on disclosures from major payment processors (such as GMP-PG), we note that payment processors earn around 0.3-0.4% commission on the value of each transaction. However, major e-commerce companies like Rakuten, Yahoo, and Amazon have their own departments to process online payments made by their customers.

Back-end payment processing: There are also card payment networks such as 4.

CAFIS (developed by NTT Data) and JCN (developed by JCB), which connect with the acquirer, authorize card payments, and process the sales data. According to disclosure from METI, these networks earn around ¥4 on each transaction they help process.

Which new payment methods could likely become mainstream? Exhibit 21 shows an overview of new payment methods in the Japanese market. New payment methods can be broadly divided into two categories: contactless and QR code

payments. For contactless payments, consumers make payments using front-end interfaces such as Google Pay and Apple Pay, with QUICPay/iD/electronic money networks often used as an intermediate layer. Finally, payments are executed using credit cards/debit cards/electronic money. Credit card network companies such as

Exhibit 19: In a typical scenario, we estimate that a 3% merchant fee is split between the card issuer (1.9%), acquirer (1.0%), and card network (0.1%) How transaction charges for cashless payments are distributed (based on a 3% merchant fee)

Consumer Merchant fee 3.0%

Issuer (issue card)

Card network

International ：Mastercard, Amex

Acquirer

Network authorizes card at issuer

fee 1.9% fee 1.0%

fee 0.1%

Acquirer requests to authorize

Bank：UFJ Nicos, SMBC card Independent：Credit S, JCB Retail：Aeon FS, Marui IT: Rakuten, Yahoo, Softbank, KDDI

Bank：UFJ Nicos, SMBC card Independent： JCB Retail：Aeon FS, Marui IT: Rakuten, Yahoo, Softbank, KDDI, LINE, mercari

Issuer acquires customers Acquirer acquires merchants

Online payment Offline payment

Online payment processor (Online merchant acquirering,

IT：GMO-PG, Softbank payment, paygent Independent： Digital garage

fee 0.3-0.4%

E-commerce channel acquiring

Pay 1,000 yen Take 970 yen

processing intermediary CAFIS (NTT data) JCN (JCB, etc)

card authorization/processingnetwork

connection (around 4yen)

Other

ATM Retail: Seven Bank, Lowson bank, Aeon bank Bank： Mega bank, JPB

Note: We assume the full 3% is initially paid to the acquirer, and then divided among the acquirer, issuer, and card network provider. The breakdown of merchant fee is based on data from METI and company disclosures.

Source: METI, Company data, Goldman Sachs Global Investment Research

17


MasterCard and JCB are also focusing on expanding the use of contactless payment platforms such as MasterCard Contactless and JCB Contactless in Japan. For QR code payments, a variety of players exist within Japan: i) Rakuten Pay/PayPay, which support both credit card and bank account payments; ii) LINE Pay/merpay, which mainly offer bank account payments and do not support credit cards (LINE announced it is preparing for credit card issuance); however, LINE Pay/merpay support the use of QUICPay and iD, which are accepted at roughly 840,000 (19/1) and 900,000 (19/2) locations, respectively, as part of their strategy to expand the number of accepting locations; and iii) bank/retail services, which are expanding usage by leveraging their customer bases (bank accounts) and linking to sales promotions in their own markets.

Exhibit 20: Payment network to become more complex amid diversification of payment methods, but we expect credit card-linked systems to ultimately become the main payment method New payment methods: Widening use of contactless and QR code payments

Current

Contactless

Change

QR payment

Google Pay Apple Pay

New payment wave

Front-end

Middle/back-end

Card contactles

QUIC Pay iD E-

money Card

contact

Debit card

Credit card

E-money

Rakuten Pay

PayPay

LINE Pay

merpay

Origami Pay

Bank relate

QUIC Pay iD Credit/

debit

Bank account,

E-

Retail related

Credit card

Debit card

E-money

Rise of terminals which accepts every types of payment Merchant payment terminal

Expansion of QR terminal

Smartphone-smartphone QR payment

Note: 1) LINE Pay slated to issue credit card in 2019; 2) Retail and bank QR code systems include credit card-linked or non-linked systems

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 21: Since around 2018, players have been increasingly adding new payment methods New payment methods: Widening use of contactless and QR code payments

2016/10 Service start ：Suica/iD/QUICPay available

Cont

actle

ss

2016/12 Service start ：Edy available

2017/04 nanaco available

Apple Pay

Google

Contactless IC

(card)

2018/05 Suica/WAON available

2017 2018 2019

2018/10 QUICPay/JCB contactless available

2017/9 MasterCard contactless/JBC contactless/American Expres contactless available

2018/09-11 Lawson starts to accept contactless IC

2018/03 McDonald's starts to accept contactless IC

2019/02 Aeon G starts to accept contactless IC

Aeon card starts to issue touch payment card

2017/06 Kansai Airport starts to accept contactless IC

SMBC debit (contactless) issued

楽天Pay

PayPay

LINE Pay

merpay

Origami Pay

Bank

Retail

2016/10 Service start

2019/3- 20% point reward campaign


2019/4 Payment fosus app released

2019/3 「Pay Toku」20% reward, business 2018/12 「Pay Toku」20% reward 2019/1 Credit card issuance 2018/6 QUICPay available

2019/2 Service start, iD available

2019/3 business partnership with LINE Pay


2018/1 10%OFF (Origami Premium Friday)

2018/9 10%OFF (Origami Premium Friday)

2019/3 10% OFF coupon QR

paym

ent

2019/3 J-Coin Pay start (Mizuho bank） 2016/10 Ginko Pay (GMO-PG) service start

2018/5 3 maga banks agreed on unifying QR code 2019/4 over 700 banks jointly release QR

payment in Oct

2019/7 Seven Pay servise start 2018/4 Lawson Smartphone Payment servise 2019/7 Fami Pay servise start 2018/12 Marui EPOS Pay servise start


2018/12 10bn yen/20% point reward campaign

2019/02 10bn yen/max 20% campaign

Source: Company data, Goldman Sachs Global Investment Research

18


Credit cards to remain the main method of payment in view of speed, convenience, and reward points/discounts We see two main reasons why credit card-linked payments are likely to remain the

main method of payment:

1) Speed/convenience: We believe that in terms of speed and convenience,

contactless payments are superior to QR code payments, which, in our view, are

comparable to physical credit cards in this regard. We expect the use of contactless payments to accelerate with the increasing use of i) payments using credit cards/electronic money registered on payment platforms such as Apple Pay and Google Pay, and ii) the contactless payment platforms of credit cards (MasterCard Contactless, JCB Contactless, etc.). The use of QR code payments is also likely to expand given their ease of adoption by merchants, especially among smaller businesses. However, in terms of speed and convenience, we note the time it takes from launching the app to payment is longer than for contactless payments.

2) Benefits such as reward points/discounts: In December 2018, PayPay (joint venture of Yahoo Japan and Softbank) launched a ¥10 bn giveaway campaign offering 20% cashback, and LINE Pay/Rakuten Pay also introduced comparable cashback promotions, leading to greater competition. Even if the 20% cashback is a temporary measure to acquire users, aggressive cashback initiatives will likely continue going forward, in our view. For market players, this would mean sustained contribution losses, but it would also present an opportunity for expanding the use of QR code payments. In terms of cashback rewards for QR code payments, Rakuten Pay is offering double reward points to customers if they sign up for a Rakuten Card and make payments using the Rakuten Pay app. It is working to promote the use of QR code payments while offering additional reward points for the use of its credit card, thus providing consumers with the incentive to make credit card payments via QR code systems. We therefore

look for an increasing number of payments using registered credit cards for QR

code payments.

19


Credit cards to remain main method of payment

As shown below, the cashless payments break down in 2017 was follows : credit cards (physical), 85%/¥50 tn; credit cards (contactless), 5%/¥3 tn; electronic money, 8%/¥5 tn; and branded debit cards, 1%/¥0.7 tn. With the diversification of payment methods with new payment players of contactless and QR codes, we estimate the breakdown will change by 2025E as follows: credit cards (physical), 64%/¥77 tn; credit cards (contactless), 11%/¥13 tn; credit cards (QR code payments), 4%/¥5 tn; electronic money, 9%/¥11 tn; debit cards, 8%/¥10 tn; and e-wallet (QR code payments), 4%/¥5 tn. Thus, we estimate that credit card-linked payments will expand from ¥53 tn in

2017 to ¥95 tn in 2025E.

Exhibit 22: Contactless credit card payments to be favored by consumers in terms of speed of payment/reward points. QR code payments attractive due to high cashback rates, but sustainability uncertain Front-end/back-end payment methods: Speed of payment, reward point rates, examples (from consumer viewpoint)

△ ◎ ○

0.5%-2.0% 0.5%-2.0% 0.5%-2.0%

e.g.：credit card e.g.：Apple Pay with registored creditcard, Mastercard contactless

e.g. ：Rakuten Pay/PayPay QR paymentwith registored card

◎ ◎

0%-1.0% 0%-1.0%

e.g.：WAON/Suica payment e.g. ：Apple Pay with Suica, Google Paywith WAON

△ ◎

0.5%-1.0% 0.5%-1.0%

e.g.：Debit card of Mitsubishi UFJ e.g.：Mizuho wallet apps, Mastercardcontactless

◎ ○

0%-1.0% 0.5%-2.0%20% campaign (occasional)

e.g. ：Mizuho wallet apps e.g. ：LINE Pay/Rakuten Pay/PayPay QRpayment via bank account

Payment

(back-end)

Credit card

E-money

Debit card

E-Wallets

Payment (front-end)Speed/convenience

（◎:fast, ○:normal, △slow）

Plastic cardContactless

<Smartphone, Mastercard/JCB,etc>

Smartphone<QR code, barcode>

Average points reward, discount

Example of payment type


20


Pressure on profit pool from margin deterioration The Japanese government has proposed that it will shoulder the cost of 2% or 5% cashback rewards for cashless payments in the nine months after the sales tax hike in October 2019. In order to receive government subsidies for these cashback rewards, payment operators will need to set the merchant fee rate below 3.25%. This raises the potential for margin deterioration among credit card companies stemming from lower merchant fees. However, we see no cause for excessive concern about this measure for two reasons: First, the estimated portion of merchant fees taken by each company based on fee income/transaction value is in the 1.5% to 1.7% range . Even if these figures are adjusted to include all components of merchant fees , the average rate is only around 2.0-2.5%, which is well below the 3.25% cap sought by the government. Second, even without the government subsidies, merchant fees have been declining across the industry due to competition, so we do not expect such subsidies to trigger a sharp decline in merchant fees.

That said, the decline in merchant fee rates due to increasing competition is a concern. We estimate the average merchant fee rate for the entire market at 2.9%, and expect it to decline by roughly 5 bps a year to 2.5% in 2025E. From the merchants’ perspective, lower merchant fees are obviously appealing. As we mentioned earlier, from the consumers’ perspective, we believe the main factors in deciding between payment options will be speed/convenience and benefits such as reward points and discounts. We will be keeping a close eye on whether cashbacks remain at their current high levels.

Exhibit 23: Credit card-linked payments to remain the main method of payment even amid diversification of payment methods Growth outlook for cashless payments by payment method (¥ tn)

50

77

3

13 5

5

10 10 5

FY2017 FY2025E

E-wallets (QR)

Debit

E-money

Credit (QR)

Credit (contactless)

Credit53

95

60tn yen

120tn yen

Note: Credit includes online payments

Source: METI, Bank of Japan, Goldman Sachs Global Investment Research

21


3. Within the credit card ecosystem, which categories stand to benefit the most?

The cashless payment profit pool can be broadly divided into card issuers,

acquirers (who encourage merchants to join a cashless payment network), and

card networks (such as Mastercard/JCB). We estimate that the profit pool totaled

¥2.6 tn in 2017, with these three players having shares of 78% (¥2.0 tn), 20% (¥530

bn), and 2% (¥5 bn), respectively (calculated based on reported general fee share

by players). We expect acquirers to gradually gain a greater share of the market,

with market shares within a profit pool of ¥4.3 tn in 2025E as follows: issuers 71%

(¥3.1 tn), acquirers 27% (¥1.2 tn), and card networks 2% (¥8.0 bn). Looking at all

industry players, we expect payment processors to enjoy the fastest growth,

followed by IT companies, and then retailers.

We expect profit pool to grow to ¥4.3 tn by 2025E from ¥2.6 tn in 2017 We estimate that the profit pool from processing cashless payments will increase by ¥1.7 tn between 2017 and 2025E, from an estimated ¥2.6 tn to ¥4.3 tn. We break the profit pool down into two major components, as shown below.

Fees paid by merchants to credit card companies/payment method providers 1.

(issuers, acquirers, and card network providers); estimated increase from ¥1.6

tn in 2017 to ¥2.8 tn in 2025: Cashless payment charges paid by merchants are divided between credit card companies and payment method providers (issuers, acquirers, and card network providers, based on a percentage of the transaction value. We estimate that total cashless payments in Japan will increase from ¥60 tn in 2017 to ¥120 tn in 2025E, but we expect average merchant fees to fall from 2.9% to 2.5%, as a result of changes in the breakdown of cashless payments across the available payment methods, and downward pressure on fees. On this basis, we expect total merchant fees on cashless payments to increase from ¥1.6 tn in 2017 to

Exhibit 24: Average merchant fees to decline from 2.9% in 2017 to 2.5% in 2025E Our assumptions for industry average merchant fee rate (%)

2.9% 2.8% 2.8% 2.8% 2.7% 2.7% 2.6% 2.6% 2.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

FY2017 FY2018E FY2019E FY2020E FY2021E FY2022E FY2023E FY2024E FY2025E


22


¥2.8 tn in 2025E. Our estimate breaks down into fees from payments using: (1) credit card payments (up ¥900 bn from ¥1.5 tn to ¥2.4 tn), (2) e-money (up ¥80 bn from ¥90 bn to ¥170 bn), (3) branded debit cards (up ¥150 bn from ¥20 bn to ¥170 bn), and (4) e-wallets, including QR code payments (up ¥130 bn from ¥10 bn to ¥140 bn).

Fees from value-added services (revolving credit, cash advances, and 2.

advertising/marketing services); estimated increase from ¥1.0 tn in 2017 to ¥1.4

tn in 2025E: (a) In addition to the merchant fees described above, the main source of income for credit card companies is interest earned on revolving credit and cash advances provided to customers. According to the Japan Consumer Credit Association, in 2017 revolving credit accounted for around 11% of total credit card transactions. As of 18/3, based on the disclosure from major listed companies we estimate major credit card companies earn around 20-40% of their revenue from revolving credit facilities, and that this increases to 30-60% if we include cash advances. These two sources of income have become significant to credit card companies as they face downward pressure on commission rates. We expect total revenue from revolving credit and cash advances to increase by ¥300 bn between 2017 and 2025E, from ¥980 bn to ¥1.28 tn, and (b) We estimate that revenue relating to advertising and marketing will increase by ¥170 bn between 2017 and 2025E.

Companies involved in the cashless payments market and their estimated share of the profit pool Acquirers gaining market share; we expect online payment processors to enjoy

the strongest growth, followed by IT companies, retail-based businesses, and

financial service providers. Based on our estimate that the profit pool from cashless

Exhibit 25: We project an increase in the total profit pool from ¥2.6 tn in 2017 to ¥4.3 tn in 2025E; this includes growth in the credit card profit pool, including revolving credit/cash advance charges, from ¥2.5 tn to ¥3.7 tn Estimated profit pool from cashless payments (¥ tn)

1.5 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2

0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.2

0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1

0.7 0.7

0.7 0.8

0.8 0.8

0.9 0.9

0.9

0.3 0.3

0.3 0.3

0.3 0.3

0.4 0.4

0.4

0.1 0.1

0.1 0.2

0.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

FY2017 FY2018E FY2019E FY2020E FY2021E FY2022E FY2023E FY2024E FY2025E

Ads/marketing/etcCashingCredit card (revo)E-wallets (incl, QR)Brand debitE-moneyCredit card

Fee related rev.

Value-added rev.

2.6tn

4.3tn

Source: METI, BOJ, Japan Financial Services Association, Goldman Sachs Global Investment Research

23


payments will increase from ¥2.6 tn in 2017 to ¥4.3 tn in 2025E, in this section we break our growth forecast down into the different types of companies involved in cashless payments, and the individual companies. We also project changes in market share.

In 2017 the total profit pool from cashless payments was ¥2.6 tn, and that market share

was divided up into each category as follows: (1) card issuers 78% (¥2.0 tn), (2) acquirers 20% (¥530 bn), and (3) card network providers 2% (¥5 bn). We expect acquirers to gradually gain a greater share of the business, and by 2025 we expect market share to be divided up as follows: issuers 71% (¥3.1 tn), acquirers 27% (¥1.2 tn), and card network providers 2% (¥8.0 bn). We believe the key reasons for the shift will be 1) a shift in profit pool from issuer to acquirer because of the increase of QR payments without credit card registered, and 2) the growth of revolving/cash advances revenue to be less than the cashless transaction volume growth.

1) Financial service providers (market share ↓, growth ↑): Between 2017 and 2025E, we estimate the market share for financial service providers to fall from 52% to 48%. We expect financial service providers to continue generating growth, with the growth in cashless market providing a tailwind, but we believe growth will be below the industry average. We see market share shifting toward retail-based operators and IT companies. We expect this shift to be driven by (1) credit card issuers that can tap into their own retail group, as they encourage more retailers to sign on to cashless payments, and as they develop attractive reward point programs, and (2) the emergence of new payments methods such as QR codes, which do not involve credit cards. At the same time, we

Exhibit 26: We expect acquirers to gradually gain a greater share of the total profit pool Estimated share of profit pool across issuers, acquirers, and card network providers (bn yen)

1,050

1,750

670

910

310

360

530

1,000

170

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2017 2025

Network

Acquirer (ads, etc)

Acquirer

Issuer (cashing)

Issuer (revo)

Issuer (fee)

2,600

4,300


24


see the spread of debit cards, which deduct payments directly from the customer’s bank account, as a tailwind for financial service providers.

2) Retail-based companies (market share ↑, growth ↑↑): Between 2017 and 2025, weestimate that market share will increase from 15% to 18%, and we forecast averageannual growth of 8-10%. We expect market share to continue to increase as (1)companies secure more cardholders on their own turf , (2) they widen the opportunitiesfor customers to earn and spend their reward points , and (3) they attract morecustomers by developing new points campaigns across their retail group.

3) IT companies (market share ↑↑, growth ↑↑): Between 2017 and 2025, we estimatethat market share will increase from 10% to 18%, and we forecast average annualgrowth of 9-11%. We believe market share growth is driven by the access to their ownhigh-growth e-commerce market, and the tendency to offer more reward points thanretail-based businesses. In some cases, these businesses have taken a hit on profits inorder to secure new merchants or customers, as demonstrated by the limited offer ofreward points worth 20%, launched in December 2018. We believe both of these factorswill also help drive up market share.

4) Online payment processors (market share ↑↑, growth ↑↑↑): Between 2017 and2025, we estimate that market share will increase from 3% to 6%, and we forecastaverage annual growth of 11-19%. Of the different business formats involved in cashlesspayments, we expect payment processors to enjoy the strongest growth rates. Thereare structural factors in play, including the growth of e-commerce overall, as well as thegrowth of C2C e-commerce and the new trend of using credit cards to pay online forservices such as utility bills, tax bills, and real estate services.

4. Credit card business models poised for growth?

We believe that credit card payments will ultimately be the main form of

payments, which leads to the question of which credit card companies will be

successful. We see two models for success for credit card firms. The first is the

model exemplified by IT players that have a solid online economic ecosystem

and attractive reward point program. The second is that adopted by companies

that have a stable customer acquisition base, thanks to their retail networks, and

are capable of stable profit growth without exposure to excessive reward points

competition.

25


Disclosure Appendix

Reg AC We, Taiki Okada, Katsunori Tanaka, Masaru Sugiyama and Sho Kawano, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.

GS Factor Profile The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specific metrics for each stock. The normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may vary depending on the fiscal year, industry and region, but the standard approach is as follows:

Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a higher percentile indicating a higher growth company. Financial Returns is based on a stock’s forward-looking ROE, ROCE and CROCI (for financial stocks, only ROE), with a higher percentile indicating a company with higher financial returns. Multiple is based on a stock’s forward-looking P/E, P/B, price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher percentile indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns percentile and (100% - Multiple percentile).

Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs for the fiscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics).

For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative.

M&A Rank Across our global coverage, we examine stocks using an M&A framework, considering both qualitative factors and quantitative factors (which may vary across sectors and regions) to incorporate the potential that certain companies could be acquired. We then assign a M&A rank as a means of scoring companies under our rated coverage from 1 to 3, with 1 representing high (30%-50%) probability of the company becoming an acquisition target, 2 representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard departmental guidelines we incorporate an M&A component into our target price. M&A rank of 3 is considered immaterial and therefore does not factor into our price target, and may or may not be discussed in research.

Quantum Quantum is Goldman Sachs’ proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAIN GS SUSTAIN is a global investment strategy focused on the generation of long-term alpha through identifying high quality industry leaders. The GS SUSTAIN 50 list includes leaders we believe to be well positioned to deliver long-term outperformance through superior returns on capital, sustainable competitive advantage and effective management of ESG risks vs. global industry peers. Candidates are selected largely on a combination of quantifiable analysis of these three aspects of corporate performance.

Disclosures Coverage group(s) of stocks by primary analyst(s) Taiki Okada: Japan-Specialty Finance. Katsunori Tanaka: Japan-Banks, Japan-Brokers & Asset Managers, Japan-Insurance, Japan-Regional Banks, Japan-Specialty Finance, Japan-Transportation. Masaru Sugiyama: Japan Internet and Games, Japan-Consumer Electronics, Japan-Media. Sho Kawano: Japan-Retail/Restaurants.

Japan Internet and Games: Bandai Namco Holdings, Capcom, CyberAgent, Kakaku.com, Konami, LINE Corp., Mercari Inc., Nexon, Nintendo, Rakuten, Recruit Holdings, Sega Sammy Holdings, Square Enix Holdings, Yahoo Japan, ZOZO.

Japan-Banks: Aozora Bank, Japan Post Bank Co., Mitsubishi UFJ Financial Group, Mizuho Financial Group, Resona Holdings, Shinsei Bank, Sumitomo Mitsui Financial Group, Sumitomo Mitsui Trust Holdings.

Japan-Brokers & Asset Managers: Daiwa Securities Group, Japan Exchange Group, Nomura Holdings.

Japan-Consumer Electronics: Panasonic Corp., Sony.

Japan-Insurance: Dai-ichi Life Holdings, Japan Post Insurance Co., MS&AD Holdings, Sompo Holdings, Sony Financial Holdings, T&D Holdings, Tokio Marine Holdings.

Japan-Media: Dentsu, Hakuhodo DY Holdings.

Japan-Regional Banks: Chiba Bank, Concordia Financial Group, Shizuoka Bank, Suruga Bank.

Japan-Retail/Restaurants: ABC-Mart, Adastria, Aeon, Ain Holdings, Askul, Cosmos Pharmaceutical, FamilyMart UNY Holdings, Fast Retailing, H2O Retailing, Isetan Mitsukoshi Holdings, J. Front Retailing Co., K’s Holdings, Komeri, Lawson, Marui Group, MonotaRO, Nitori, Onward Holdings, Pan Pacific International Holdings, Ryohin Keikaku, Saizeriya, Seven & i Holdings, Shimamura, Skylark Co., Sugi Holdings Co., Tsuruha Holdings, Welcia Holdings, Yamada Denki.

Japan-Specialty Finance: Aeon Financial Service Co., Credit Saison Co., GMO Payment Gateway Inc., Orix Corp., Seven Bank Ltd..

Japan-Transportation: ANA Holdings, Japan Airlines Co., Japan Post Holdings, Kawasaki Kisen Kaisha Ltd., Mitsui OSK Lines Ltd., Nippon Yusen KK.

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Company-specific regulatory disclosures Compendium report: please see disclosures at https://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research

Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe

As of April 1, 2019, Goldman Sachs Global Investment Research had investment ratings on 2,840 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See ‘Ratings, Coverage groups and related definitions’ below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months.

Price target and rating history chart(s) Compendium report: please see disclosures at https://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research

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The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst’s area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy generally prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director or advisor of any company in the analyst’s area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman Sachs & Co. LLC and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities held by the analysts.

Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at https://www.gs.com/research/hedge.html.

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Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 35% 53% 12% 66% 58% 52%

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Research reports do not constitute a personalized investment recommendation as defined in Russian laws and regulations, are not addressed to a specific client, and are prepared without analyzing the financial circumstances, investment profiles or risk profiles of clients. Goldman Sachs assumes no responsibility for any investment decisions that may be taken by a client or any other person based on this research report. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.

European Union: Disclosure information in relation to Article 6 (2) of the European Commission Delegated Regulation (EU) (2016/958) supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest is available at https://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research.

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Ratings, coverage groups and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock’s total return potential relative to its coverage. Any stock not assigned as a Buy or a Sell on an Investment List with an active rating (i.e., a stock that is not Rating Suspended, Not Rated, Coverage Suspended or Not Covered), is deemed Neutral. Each region’s Investment Review Committee manages Regional Conviction lists, which represent investment recommendations focused on the size of the total return potential and/or the likelihood of the realization of the return across their respective areas of coverage. The addition or removal of stocks from such Conviction lists do not represent a change in the analysts’ investment rating for such stocks.

Total return potential represents the upside or downside differential between the current share price and the price target, including all paid or anticipated dividends, expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The total return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership.

Coverage groups: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at https://www.gs.com/research/hedge.html.

Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

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Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.

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