Deal focus: VCs back Japan’s fintech underdog

When Eight Roads Ventures began its relationship with Exchange Corporation late last year, it punctuated an intensifying sentiment in Japan that start-ups, not large institutions, would drive the next wave of financial technology innovation.

This precipitated the VC firm leading a $15 million Series B round for Exchange's cardless payment and instant credit service known as Paidy, which is still striving to reach one million users and yet is already challenging Japan's traditional online payment providers.

"People view fintech as a high potential area in Japan because legacy financial institutions are not innovating that quickly even though you have a very big, wealthy population that is purchasing online," says Russel Cummer, president at Exchange. "That creates a business chance for more nimble start-ups to differentiate themselves, not through brand or size, but through customer delight."

Eight Roads - an investment arm of Fidelity International - was joined by SBI Investment's FinTech Business Innovation Fund, adding significant financial industry networking advantages to Paidy's plans of branching into emerging digital payments segments such as downloadable services and subscription products. New strategic investor Itochu Corporation and existing backers Arbor Ventures and SIG Asia also participated in the deal.

Paidy has positioned itself at an intersection of the high volumes and growth trajectories of e-commerce and the operational leverage of fintech business models, which can support increasingly large output numbers without additional overhead costs. It provides credit accounts that allow more than 100 million consumers in Japan to shop online using only a mobile phone number and email address.

It claims to have expanded to more than 600,000 online stores and seen its checkout share grow to 20-30% with major merchants. Payments are fully guaranteed by Paidy, offering vendors the immediate revenue enhancement of credit cards, while shoppers receive a consolidated monthly bill and credit installment options using a standard 15% annual percentage rate. "All of the business logic and business operations for a credit card and Paidy are exactly the same," Cummer explains.

The differentiator for Paidy, however, is in its ease of use. There is no application to open an account and no secret numbers are required. This system works well in Japan where a pervasive skepticism about online scams has channeled 45% of all internet purchases into non-credit card payment methods such as cash-on-delivery. By comparison, only 10% of US e-commerce is conducted without a credit card.

Expansion potential has been identified anywhere reduced friction in online checkouts is in demand. These opportunities may be especially relevant as Paidy leverages its latest financial sector partnerships to explore new verticals in mobile applications and regularly billed services such as Netflix.

"We're lucky in that we're putting together a syndicate of investors who can understand about growing and scaling teams and helping identify talented people to add," Cummer says. "But the unique aspect of doing this round is gaining access to the relationships with financial institutions that can help us grow our balance sheet and expand into other credit products over time."

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• Topics
• North Asia
• Early-stage
• Technology
• Financials
• Japan
• Eight Roads
• SBI Holdings
• Susquehanna Asia Investment
• Arbor Ventures
• Financial Services