Death of cash? Maybe, but not quite yet in Japan

February 20, 2013, 1:44 PM UTC

FORTUNE — How do you persuade a nation that is deeply in love with cash — and even looks askance at credit cards — to pay for goods and services with the swipe of a phone? Unfortunately for Japan’s dawdling economy and the credit card firms who hope to thrust such mobile e-wallets on all of us the answer to that question remains decidedly unclear.

A recent survey tells the tale: “I’m a cash man myself,” was a typical sample answer from a 23-year-old man in a poll that asked Japanese if they’d like to use the e-wallet technology that already exists in 65 million phones across the country. “I don’t feel I can trust the security aspect,” was another from a woman in her forties. Hardly encouraging for companies such as eBay (EBAY), boosted by mobile payments at home, and Apple (AAPL) which is rumored to be adding an e-wallet chip to its next iPhone.

Conceived by a government determined to bolster a drooping economy (a cashless society would help snuff out Japan’s dogged deflation is the theory) paying for stuff wirelessly through mobile phones has been around in Japan for eight years now. Japanese digital wallets can be loaded with cash at stores or through an arrangement with a credit card company. Technologies, such as near field communication (NFC) that employs short-range wireless communications, carry out financial transactions wirelessly when they touch or are swiped near a retailer’s terminal. This allows data exchange between devices in close proximity. “Japan is certainly way ahead of the rest of the world with its ‘Osaifu-Keitai’ (literally ‘wallet phone’) implementation,” says Tokyo-based mobile technology consultant Steve Nagata.

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NTT Docomo (DCM) launched an electronic wallet service named Osaifu-Keitai for its mobile phones in 2004 based on the “FeliCa communications protocol,” one of the NFC standards. Now that Osaifu services are supported by all Japan’s mobile phone carriers FeliCa has become a de facto standard there. So far, the country has six main competing cashless payment systems, many of them embedded into mobile phones. Osaifu services include electronic money, identity card, loyalty card, and even fare collection.

The appeal of an e-wallet is obvious. For example, after loading Docomo’s version with yen, I found it simple to access public transportation, pay for meals, and even persuade one of Japan’s omnipresent vending machines to cough up some tinned tea. Other NFC apps allow you to turn your phone into a boarding pass or concert ticket. So how come Japan, with its slightly unhinged obsession for total convenience and the new, has managed to snub such novel and terrific expedience?

According to analysts at financial services specialist Celent, for the overall contractless payments market, the total number of e-money (stored value) cards of all types issued in Japan was worth just $179 million as of July 2012. There were 260 million transactions on these cards in that month, or, a not-very-active average of 1.5 transactions per card issued.

There is some controversy over just how much switching and swiping is going on with e-wallets in Japan with some pundits, such as tech experts at Eurotechnology Japan, declaring Osaifu a triumph. “NFC/mobile payments and everything around it is a huge success locally inside in Japan and for the Japanese companies involved,” claims Eurotechnology’s Gerhard Fasol.

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Other surveys and analysts contradict Fasol. “Where I believe the controversy lies, the crux of the issue is that while many users have registered for the function, there appear to be few active users,” explains Kyong Sun Kong, an analyst at researcher Celent. “There appear to be no statistics available on active use, either in terms of number of active users , or of transaction volumes. Considering the plethora of detailed statistics on mobile phones, this is a good indication the industry does not want to advertise the low usage rates.”

Approximately 20% of these cards, or 37 million e-money cards, are Osaifu-Keitai (mobile phone contractless payments) registered users. This is equivalent to 29% of the 126 million total mobile phones in Japan and 52% of phones with the Osaifu-Keitai chip embedded. Obviously many are not bothering to load their phones with cash, or more probably go through the “pain of filling the card ” for credit as one poll respondent put it.

How to remedy such indifference? Kong thinks that to increase the number of active users, mobile payments players in Japan should not only preload Osaifu-Keitai in mobile phones but also develop a strategy for promoting Osaifu-Keitai effectively. With cash often taking precedence over even credit cards for large transactions in Japan it will be a hard slog to prize Japanese hands from their beloved yen notes and coins. Many now are beginning to suspect it may be the same elsewhere in the world.