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Japan's love of cash is a costly business

ATM running costs, inefficient competition cost economy $17bn a year

Different bankbook designs are one reason Japanese banks cannot share their ATMs.

TOKYO -- If you go out for drinks with your colleagues in Japan, chances are that you end up doing warikan at the end of the night. And the warikan, or the splitting of the bill evenly, is most likely done in cash despite almost everyone having plastic and electronic money in their wallets. Thanks to this die-hard affection for cash, Japan loses over 2 trillion yen ($17.6 billion) every year.

The Japanese are one of the most cash-loving peoples in the advanced world. According to Boston Consulting Group, about 65% of payments in Japan are settled in cash, more than twice the average 32% among other rich economies.

The reason seems straightforward. The greater the demand for cash, the more ATMs banks install. The better the access to cash, the stronger the incentive to use cash.

In fact, ATMs are ubiquitous. According to the Japanese Bankers Association, there were 137,000 ATMs run by banks, shinkin banks (credit associations) and Japan Post Bank in the country at the end of September 2016. Add in the 55,000 machines run by retailers -- including Seven & i Holdings' Seven Bank and Aeon's Aeon Bank, and the total is over 200,000 ATMs in operation across the country.

Blame the bankbook

ATMs proliferated because banks prioritized improving customers' access to cash as well as allowing them to deposit excess cash more easily. They competed by increasing the number of ATMs and making them smarter to offer more services. The result was an abundance of ATMs and their bloated costs, which now weigh heavily on banks' balance sheets.

Banks, however, find it difficult to reduce their ATMs. Even introducing joint ATMs among several banks is not an option. The problem is the bankbook, said an executive at a major bank that once considered and gave up the idea of integrating ATMs with another bank.

Different banks have different bankbook designs, with irreconcilable differences such as where the magnetic stripes are placed. Their ATMs therefore need different specifications and cannot be integrated easily. "If only bankbook design were standardized in Japan," the official lamented.

In June, Shinsei Bank got rid of its own ATMs and started sharing them with Seven Bank. This was possible "largely because [Shinsei Bank] does not issue bankbooks to customers," a Shinsei Bank official said.

The bankbook problem would not have arisen if ATMs were mere cash dispensers. But thanks to fierce competition, the machines have gotten smarter and now accept bankbooks to record transactions. And once services have been expanded, they are hard to roll back, in part because "many small businesses still use their bankbooks as account books," a bank official said.

Local banks getting ahead

ATMs cost about 3 million yen apiece, and security, monitoring and other operating costs amount to some 300,000 yen a month, according to a bank official. It is hard for banks to bulk-order ATMs to reduce per-unit costs because they already have ties with multiple ATM suppliers, who are themselves customers of the banks, a bank official explained. Unifying the ATMs would be very expensive, because it would involve negotiating with many different suppliers. This prevents major banks from adopting shared ATMs, forcing them to run their own machines.

Financial institutions in Japan spend some 760 billion yen every year on maintaining their ATM networks, reckons Yasushi Sasaki, senior partner and managing director of Boston Consulting Group. Including personnel and cash-transfer costs, the Japanese financial industry loses as much as 2 trillion yen a year just to maintain cash services, Sasaki estimates.

But he also pointed out that "as more consumers opt for cashless payments, there is less incentive on the part of the banks to operate their own ATMs."

Local banks are moving to take advantage of ATMs at and run by convenience stores. Ehime Bank, for example, plans to cut in March its fee for early-morning and night-time transactions at such ATMs by half to 108 yen to encourage customers to use ATMs more. Some smaller local banks are considering reducing their own ATMs and sharing convenience store ATMs with other banks.

If costs to operate ATMs fall, banks will be able to improve other, more valuable services. As banks across the country move to overhaul their operations, and fintech takes on a bigger role, Japan's vast web of ATMs may undergo a dramatic change.

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