How to Win Over Japanese Regulators – Jonathan Epstein – PayPal

FinTech is one of the hottest startup sectors right now, but if you've been in the industry for a while, you know that FinTech is always one of the hottest startup sectors. And yet FinTech companies seem strangely local. Very few succeed outside their home markets. A complex web of regulations and local sensibilities almost always results in these firms struggling in overseas markets. PayPal wanted to make sure that did not happen to them in Japan. In this podcast, Jonathan Epstein explains how he brought PayPal into Japan. He talks in detail about how he got the Japanese regulators to sign-off on PayPal's innovative products, and also how he and his team had to throw out the US playbook and cooperate with other overseas divisions to build new retail and online markets from scratch here in Japan. Jonathan and I also talk about the exacting demands of Japanese consumers, and how those sensibilities convinced him to decide to start a project that drastically increased short-term costs, but might have saved the business in the long run. It's a fascinating discussion, and I think you'll enjoy it. [shareaholic app="share_buttons" id="7994466"] Leave a comment Partial Transcript If you read the news, you know that Fintech is one of the hottest start-up sectors right now and if you’ve got a long memory, you’ll also know that Fintech is always one of the hottest start-up sectors. Yet, Fintech companies seem to be strangely local. Very few succeed outside of their home markets. A complex web of regulations and local market sensibilities almost always ensures their failure. PayPal wanted to make sure that did not happen to them in Japan and today, Jonathan Epstein explains how he brought PayPal into Japan. He explains not only how he got the Japanese regulators to sign off on PayPal, but how he and his team had to throw out the U.S. playbook and build a new retail and online market from scratch in Japan. Jonathan also explains how the exacting demands of Japanese consumers forced him and PayPal to make a decision that dramatically increased costs in the short run, but saved the business in the long run. But Jonathan tells that story much better than I can, so let’s get right to the interview. If you’re a start-up thinking about Japan, you’ll never really understand the opportunities here until you start to take a serious look at what’s happening outside of Tokyo. Osaka in particular deserves your attention and this is especially true if you and your team are involved in smart cities’ technologies. Now Hankyu’s GVH#5 project is Osaka’s start-up central and it’s a great place for you to get started. They offer co-working space, bilingual business support, venture investment, and they’re at the center of a great international start-up and community. Now Hankyu’s GHV#5 in Osaka really deserves your attention, so pay them a visit at www.GVH-5.com/EN. You’ll be glad you did. [pro_ad_display_adzone id="1411" info_text="Sponsored by" font_color="grey" ] [Interview] Tim: So I’m sitting here with Jonathan Epstein, who led PayPal’s market entry into Japan. And you’ve done a lot since then but today we’re going to talk about PayPal and how all that came together. So thanks for sitting down with us. Jonathan: Thanks for having me. Tim: Delighted. Well, let’s get right into it. When PayPal was looking at the Japanese market, what was headquarters’ main motivation for coming into Japan? What did they see here? Jonathan: PayPal has actually been in Japan for several years and what they wanted to do was to expand their presence dramatically. Basically, the entire focus of their mission in Japan has just been on their existing internet based business. And that’s been driven by a lot of natural—people signing up for PayPal because they want to buy something at a shop that offers PayPal, they learn about it. Originally it’s been driven a lot by foreigners who came to Japan, and then it took off in Japan and reached a sort of critical mass, and has grown, has continued to grow. Actually grew quite well while I was at PayPal here, but not to the size or to the rate of some of the other— Tim: Okay. But when headquarters was deciding to put a little muscle behind this, when they were deciding to really focus on Japan, at any multisided market, the challenge is you need customers on both sides. In the U.S., eBay was originally the killer app for PayPal, but eBay never really took off here in Japan so what was the Japan strategy to get these initial users? Jonathan: eBay did not take off here, and really, the reason is because Yahoo Japan expanded so quickly as soon as it found the idea of what eBay could do. As a result, PayPal knew that it couldn’t rely on Yahoo Japan to achieve that same growth, and looked for other ways of doing it. PayPal has had a tough time in a lot of regions in developing beyond that original eBay franchise connection. It’s a great demand pull for a service like PayPal. Tim: So what was the key strategy to do that? Was the timing such that you thought eBay was going to be successful in Japan or did you know that that ship had kind of sailed? Jonathan: No, it was pretty clear that ship had sailed, and sunk. But at the same time, there were a number of different initiatives. First of all, it’s called the natural growth, which tended to be very unpredictable. That did very well and there were also technology-driven enhancements to the tools that we could offer merchants, that really didn’t exist in the market in Japan. The existence of those and the continual offering of those new products, like one-click and some of the latest best practices that teach retailers how to improve their flow through and decrease the number of people who drop off, that has done extremely well. The other piece of that was the PayPal Here device, which was basically a similar device to the square checkout device. Tim: That’s sort of a retail solution, right? Jonathan: That’s right. So they could do retail sales. So just as I was joining the organization, the thought was to launch that in Japan. Tim: How did that do? Jonathan: It didn’t do well. It launched to great fanfare but as it turned out, Rakuten beat us to the punch and also turned out that Rakuten had enormous sales resources that PayPal just didn’t have, unfortunately. Tim: Right. I think Japan must be one of the most competitive markets in the world for electronic payments. Even when you’re talking about on-site, JR, Japan Railways, has their own on-site solution, the Suica. Rokuten has got into the game, so it’s an incredibly tough market. Jonathan: It is. It is incredibly tough; that’s the right word. And very fragmented, so that makes it very difficult for a solution provider, or even for an individual merchant to decide what he should accept and what the best solution is. So price, inevitably, is one of the most important criteria, but price is only seen as—the whole added in price is not something people tend to look at. Tim: Right. It’s the first thing everyone asks about though. But I guess even an on-site solution—you’ve got the same multisided market problem you have online, where you need enough people with PayPal wallets who will spend it at the supported stores and you need enough stores to support the device that people will actually think to use it. Jonathan: Well, actually, with PayPal here or a square type device, you can use any credit card. It will accept absolutely any credit card, so you just stick it into the back of your phone and then swipe it. All you need is the software; it’s $20, and then a registration process to get going. Tim: That makes sense. So why you? Why did they select you to lead the company at this point? Jonathan: Well, I think you should ask them that. Tim: I’m sure it didn’t come as a complete surprise. Jonathan: I had come out of a heavily quantitative insurance background and had launched a very large, unique insurance product that’s cell phone insurance. It’s not the same market but there are fairly few people—at least who I can point a finger at—who have sort of the combination of Japanese language ability, plus strong enough English skills, and familiarity with how things work in the valley to be able to bridge that difference and sort of give some direction to a mixed team here. Tim: Okay. Well, as well as, introducing any new kind of financial product or financial service in Japan is, shall we say, non-trivial. Jonathan: Yeah, to say the least. Tim: So was PayPal up against some regulatory hurdles as well? Jonathan: The regularity situation was complicated and fascinating, and frankly, I learned a lot throughout the process. PayPal is, in many ways, more than just a product. It’s a toolkit; a variety of different services that you can offer to consumers and to businesses to help with transactions. It cut across legislation in almost every country that it works in, so depending on the regulatory structure of the country, that would be either a great thing for PayPal or a very difficult thing for PayPal. Tim: So in Japan, who has some kind of regulatory authority over PayPal? Jonathan: So in Japan, it was the FSA. And the word is—and I have no idea whether this is exactly true or not—the FSA actually designed this piece of legislation, the money transfer license, for PayPal. Not for it particularly, but as a result of the types of questions that PayPal was asking. Tim: Okay, so they designed this legislation before you went through the process or after? Jonathan: This legislation was designed. It had been rolled out with several other companies, but in very specific and limited ways, generally for transfer organizations like Western Union. So like a Western Union. Tim: What were the services that kind of put you under the jurisdiction of different agencies?