How U.S. FinTech Stripe Broke into Low-Tech Japan – Daniel Heffernan

Stripe’s Japan market entry did not go according to plan.

Things worked out worked out well in the end, but they did not go according to plan. Stripe is one of the world’s largest payment processing companies, but they remained flexible and agile enough to take advantage of some of the surprises they faced in Japan.

Today we sit down with Daniel Heffernan, the Japan head of Stripe, and he walks us through what happens when a technically sophisticated and streamlined FinTech company comes face-to-face with the very low-tech and slow-moving processes that make up FinTech in Japan, and how they made it all work.

They faced complex, lengthy technical specifications delivered in three-ring binders and un-copyable, printed documents, and they dealt with the Japanese aversion to integrating directly with banks and financial institutions. They even planned to support some of Japan’s more unique payment methods until surprises during development made them change course.

Stripe’s entry into the Japanese market is both an essential case study for any FinTech company considering coming into Japan and an entertaining story for those of us with an interest in business in Japan.

It’s a great discussion, and I think you’ll enjoy it.

[shareaholic app="share_buttons" id="7994466"] Leave a comment Links & Resources

Check out Daniel's blog Follow him on twitter @danielshi Find out more about Stripe

Transcript Welcome to Disrupting Japan, straight talk from the CEOs breaking into Japan’s. I'm Tim Romero and thanks for listening.

Stripe is one of the largest credit card payment processing companies in the world and their Japan market entry did not go according to plan. It went well, mind you, but it just did not go according to plan. Stripe was agile enough to take the changes and surprises in stride.

Today, we sit down with Daniel Heffernan, the Japan head of Stripe, and he walks us through the process where one of the most technically sophisticated and streamlined fintech companies in the world came face-to-face with a very low tech and manual nature of fintech in Japan, and he explains how they made it all work. From detailed, extensive technical specifications that were delivered as uncopiable, printed documents in three-ring binders, to the Japanese aversion to interacting directly with banks and financial institutions, to trying to support some of Japan’s more unique payments, and some of the surprised they discovered once they began work. Stripe’s entry into the Japanese market is both an essential case study, for any fintech company looking at Japan, and an entertaining story for those of us with an interest in business in Japan.

But you know, Daniel tells that story much better than I can. So let’s hear from out sponsor and get right to the interview.

[pro_ad_display_adzone id="1411" info_text="Sponsored by" font_color="grey" ]

[Interview]

Tim: I’m sitting here with Daniel Heffernan of Stripe and we’re going to talk about Stripe’s market entry into Japan. And you guys have just officially launched officially but let’s back it up and talk about when you first came in. What was Stripe’s main motivation of coming into Japan in the first place?

Daniel: Well, when we started looking at Japan, we looked at it kind of like we do every other market that we considered. There are a few things we look at when we’re trying to decide whether to go into a market. One of them is the size of the e-commerce economy. Japan is pretty big. Last year it was about $130 billion, which is significant. That’s actually number 4 in the world. So you have China and U.S., are giants at the top, then it’s kind of a big jump down, and you have the U.K., and Japan is actually just behind the U.K. If you think about it from a population point of view, it’s really weird because the population of U.K. is like half of Japan.

Tim: Yeah, I find that surprising from both a population and an economy point of view.

Daniel: Right. If you think about why that is, it’s because of the number of online transactions that are happening online, or aren’t. So in Japan, I think it was 4.7% of all transactions are online, which is really small. As someone who uses the internet 4.7% feels tiny.

Tim: Yeah, so what is a comparable number in the U.S. for example?

Daniel: The U.S. is actually pretty much in line, but if you look at the U.K., it’s jumping over 10% and it’s up around 14%. So in the U.K., lots of transactions are happening online, even though the absolute value of commerce is smaller. So there’s this sort of gap between Japan and the U.K. in how much is happening online. And there’s an even bigger gap within this generation of our expectation how of much transactions should be happening online and what it actually is.

Tim: So Japan is still very much a cash-based society?

Daniel: Yeah, it’s cash-based, it’s offline. People aren’t buying things on the internet. These numbers include cash on delivery and things like that, so it’s transactions which are happening in the supermarkets instead of online shopping platforms.

Tim: Okay. So I take it Japan was not Stripe’s first overseas market?

Daniel: No. We look at the amount of e-commerce that’s happening online as one thing and it’s number 4, so it’s like, what is the 4th market you’re in. If you look at China, which is way up there at the top, it’s not a market we’ve gotten into yet. So another important thing is complexity and Japan is relatively complex. If it wasn’t, I don’t think you would have this podcast. There wouldn’t be enough to talk about but I think there’s plenty to think about when you’re thinking about trying to get into Japan and that’s because of all this complexity. So China is incredibly complex and Japan is pretty complex.

Tim: All right. So when you first came into the market, Stripe ran in stealth here for a good year, year-and-a-half or so?

Daniel: Yeah, we first got moving on Japan probably around January 2014. That was I was on the scene before, even, but we had identified SMCC, Sumitomo Mitsui Card Company, as a partner. We knew we were going to make it happen. We started opening the box and looking at what the technical integration might look like, what the deal would look like, what kind of agreement it is, but we haven’t started executing on it. So when I joined, which was April 2014, three months in, the first thing to do was to figure out this contract and then make a local entity so that we could sign the contract, and then we had a whole bunch of local vendors we would have to work with on things like data centers and things like credit card authorization switching networks.

Tim: You finally officially launched in September 2016, was it?

Daniel: October 4th.

Tim: October 4th, 2016. So in that two-and-a-half years, was that the expectation going in, or what took so long?

Daniel: So Japan actually wasn’t a long time for us. We have other markets where we’ve been in beta for longer. I think we approach new markets as engineers, so whenever we come into a new market—and I think this was true in Japan as well—we are working towards launch, and our partners are saying to us, “When is the launch? When is all the PR going to happen? When are you going to do the big reveal? When is the launch party?” And for us, that’s not something that we’re thinking about from day one. The first thing we should think about is getting to first charge. So the first live payment transacted in the local country. So it’s sort of a step by step process. We get to first charge, we bring in the first user, we run a private beta, and we just use invite-only, and we pick who comes into that. After that, we sort of move towards a public beta, where anyone can sign up, and for that, we need to be a bit more confident about the stability of the system, our risk in underwriting and KYC, (know your customer), ID verification plots. Once we have everything in place with the product market fit, then we move towards launch, so it’s a very careful step by step deploy. It’s not like doing this huge fork in your code, having this enormous branch, hitting deploy and praying that it will work.

Tim: Okay. Payments are particularly local. Every single market seems to have its own set of payment processing companies. And when you came into Japan, where there specific regulatory licenses you needed to get and how did you go about that?

Daniel: On the regulatory side, there are actually no specific relation yet, which covers credit card payment processors, and there is regulation coming, and it’s something where we’re sort of chatting with the Ministry of Economy Trade and Industry, making sure we’re in the loop there, we can see these things coming, and it’s interesting when you talk about payment methods. When we started working on Japan, the top of our list were things like Konbini, the convenience store payments where you, when you’re buying something online, you say you want to pay for the convenience store, they give you a number, or they give you a piece of paper to print out, and you go to the convenience store and you key it into the kiosk, or you scan the bar code, and you give them cash. Then the convenience store will tell the online seller that the cash has been accepted. JCB is a large Japanese credit card brand. And it’s not the largest in Japan anymore these days, but it’s still significant. And we were looking at these as sort of critical payment methods which we needed to have. We launched without them and what we realized while we were verifying that our product market fit was strong, was that these kinds of methods are critical for the businesses which are already in existence. I mentioned $130 billion a year of e-commerce in Japan. That is obviously generated by companies who already exist and I think this gap between this 4.7% and our expectation, for me,