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Without points programs, coupons and other incentives, mass adoption of contactless-mobile payment will not happen in Japan.

That’s one of the main conclusions of a report released Monday by U.S.-based research and consulting firm Celent on Japan’s contactless-wallet rollout.

According to veteran Japan-watcher Red Gillen, author of the report, major backers of the contactless-mobile payment rollout in Japan, including dominant telco NTT DoCoMo, acknowledge they should have emphasized promotions and other reward programs a lot earlier than they did.

“Payments are a commodity; they (consumers) want points,” Gillen told NFC Times. “If it weren’t for points or promotions, adoption would be drastically lower.”

Moreover, Japanese merchants haven’t been “particularly interested in speed and cash-handling benefits” offered by contactless-mobile payment. Like consumers, they are interested in promotions the handset and mobile network can offer, said Gillen.

Japan boasts the largest deployment of contactless-mobile phones in the world by far, a rollout that began six years ago. More than 60 million phones carrying the NFC-like FeliCa chip from Japan’s Sony Corp. are in circulation, which can be used for a range of services, including transit ticketing, airline check-in and building access.

But payment has always been the premier application backers have promoted. And according to DoCoMo, more than 1.1 million shops now accept a range of contactless-payment applications that subscribers can download or activate. That figure probably includes vending machines and taxis.

Yet, most independent observers agree take-up of contactless-mobile payment by Japanese consumers has been disappointing.

Tapping for Teriyaki McBurger Discounts
But among the most popular services involving payment on Japan’s contactless wallet phones is “Kazasu Coupon,” a loyalty program offered by McDonald’s restaurants in Japan as part of a joint venture with DoCoMo.

Subscribers download coupons over the air just as they have done for years from McDonald’s Japan’s high-traffic Web site, which customers access both by phone and PC. But instead of showing the coupon on the phone screen to the clerk and paying with cash, customers can place their orders, redeem their coupons and pay the tab–all with just one or two taps of their wallet phones. The customers can punch in their food and drink orders on their handsets while waiting in line or even before leaving home.

All of the nearly 4,000 McDonald’s restaurants in Japan are equipped with contactless readers. According to a Japanese media report, 4.5 million subscribers had signed up for the Kazasu Coupon offer as of August 2009, less than 18 months after the launch of the program. Neither McDonald’s nor DoCoMo has released transaction figures, however.

“This kind of idea is becoming very popular, so many types of service providers start to implement these types of services,” said Hiroshi Tamano, head of DoCoMo’s European office, who spoke at this week’s Mobile Payment 2010 conference in Paris.

Most of the more than 16 million registered users of the McDonald’s Japan Web site still don’t use it in concert with the FeliCa chip in their phones. But McDonald’s doesn’t have to wait for customers to visit the site. The fast-food chain can push coupons to customers’ phones based on their purchasing history, noted Tamano.

Another example of a payment-service provider combining payment with loyalty is the contactless e-purse Edy, which cobrands with airlines, enabling customers to earn points and also to convert their yen in their Edy accounts to miles or their miles to yen.

Mobile Payments Hard to Quantify
Edy was the first payment application available on wallet phones, which DoCoMo introduced in July 2004, followed by other telcos. Japan has at least eight contactless payment schemes, most available on both cards and phones. DoCoMo launched its own payment brand, iD, in December 2005 and its own credit-payment service, DCMX, flying under the brand six months later.

Payment has been DoCoMo’s main business case for its large investment in the contactless-mobile rollout. It collects merchant and brand fees when consumers pay with DCMX and iD. But payment has yet to return DoCoMo's investment, sources agree.

As of March, there were 14.2 million subscribers registered for iD, of which 11.3 million were DCMX customers. And most of those were DCMX mini subscribers, who only require a quick opt-in to sign up for the service. They can then spend up to 10,000 yen (US$109) per month tapping their phones at iD terminals, with the transactions appearing on their phone bills.

DoCoMo’s Tamano told NFC Times the telco’s payment service is capturing enough low-value transactions, including purchases at the scores of convenience stores that accept iD and other contactless-payment brands. But mid- to high-value transactions were lagging. “It’s not the number of transactions; the amount used for each transaction is not up to our expectations,” he said.

Some observers believe low-value transactions are also less than expected. Among other things, many Japanese consumers still perceive the wallet phones as insecure, despite safeguards put in place by DoCoMo and other service providers. In addition, Japan is still a cash-based culture.

DoCoMo and other payment-service providers have not released transaction figures of any kind, either low or high value. So estimates of how often Japanese consumers tap their phones to pay is hard to come by.

Celent’s Gillen estimates there are 28 million registered mobile-payment accounts in Japan. Of those, roughly 20 million are “active,” which Gillen loosely defines as an account the subscriber uses at least once a month. A single subscriber could have multiple payment accounts on his phone.

Although it’s hard to be certain of the number of active mobile-payment accounts in Japan, one thing Gillen is fairly sure of is that m-payment transactions would increase if they were tied to more incentives.

And while the Japanese experience often doesn’t translate well overseas, he said the use of wallet phones in Japan is instructive to players contemplating rollouts of contactless-mobile services elsewhere. For example, it’s of special interest in such markets as the United States, where, like Japan, mobile operators, retailers and other nonbanks have been gearing up to offer mobile payment.

“That’s the big lesson (from Japan),” he told NFC Times. “They love points programs. They love coupons.”