Asia Society Japan hosted an interesting interview with Russell Cummer, the founder and executive chairman of Paidy. He discusses his journey building the company, eventually selling it to PayPal and why he thinks Japan is a land of opportunity for entrepreneurs and startups. Some notes are below – these are paraphrased and for personal reference only, so any mistakes in transcription are my own.
Video link: https://asiasociety.org/video/startup-nation-japan-case-study-success-paidy-founder
On his career path prior to founding Paidy: he started his career at Merrill Lynch in HK, and after grad school, worked in Tokyo for Goldman, where he was a trader on the credit and converts desk. He had this general observation that the incidence of entrepreneurship per unit of GDP in Japan was very low in the context of an economy that was so big. Also around the time of the Takefuji debacle, changes to the moneylending law – became clear to him that consumer financial services were going to change in Japan and he wanted to make a stab at building his own organization. Confluence of timing where he was in Japan and saw there was going to be this gap in the market.
On the early days: Paidy started out as a P2P lending business; that was the genesis to leave Goldman and go after that opportunity. Put together a small team (the first 4 people are still with the company). Ended up being the best at doing what they did, but it was never going to be big enough to be exciting. Really liked lending money to young women, eventually ended up doing in-store financing at aesthetic salons. Default rate was extremely low. Over time, discovered this unique aspect in Japan where even though everyone has credit cards, nearly half of e-commerce is still cash settled. And if you look at who uses these cash payment methods, it was exactly the cohort they really like – tends to skew young and female. Realized there was this unique problem they could solve: how to give this group of people that they understood better than the legacy financial institutions an experience they were looking for. Everything that they want in terms of why they are using cash on delivery, but as convenient as a higher value added service like a credit card. Investors agreed to back the strategy change away from the unsecured lending business into the transaction facilitation vision they had.
On the Paidy solution: why is nearly half of e-commerce in Japan cash settled? 3 reasons: 1) the general perception of security risk, 2) form factor – while most e-commerce has been mobile for ages, the card is in your wallet in your purse, just easier easier to do COD as it is 2 clicks and done, 3) people worry about overspending (because credit card transactions can flow through the network weeks later, there is this perception that it is more responsible to pay in cash). They wanted to create a checkout experience that was exactly the same as COD, so 2 clicks and you are done. Just enter your email and phone number and they instantly underwrite against it. Everything after has feature parity with credit cards. They will consolidate all your purchases on a calendar monthly basis, so you shop for all of January and they send you a SMS bill on February 1.
On the evolution to BNPL: layering on this solution was relatively straightforward because they already had this monthly settlement cadence with the consumer. So now you shop in January and pay in 3 equal installments in February, March and April. That business started to grow more and more. Merchant funded, zero interest – that is a fundamental value proposition for them. Allows consumers to manage their cash flow. But it also works because it solves problems for the merchant. COD sales are not always guaranteed, if the consumer is not home, for example, you have to do an outbound + return trip. You don’t get 100% of revenue because there is this breakage in the payment method. Even if it succeeds, cash payment methods are often unidirectional. If there are any issues with the product, the consumer has to call up the merchant, provide their bank account number, then the merchant has to wait for the item to arrive, then they will process the refund. Paidy can do things like subscriptions, recurring billing etc. and, from the merchant standpoint, because they have feature parity with credit cards, it makes the cash transactions card-lookalike.
On their technology, ability to hire talent: they built it all themselves. Currently have ~35 nationalities on a team of less than 300. Have people sitting in 11-12 countries. Built in a language that was cutting edge at the time they started building (Scala). Not a huge amount of talent in Japan, so they have some people in Eastern Europe and other countries. But increasingly you can get very talented people who want to live and work in Japan. They have not had visa problems in hiring highly skilled people. Depends a bit on scale, but if you get good at it, you get good at it. It also helps to work with the right consultants etc.
On licensing, dealing with the regulators: overall, he likes regulation. When you are first starting out it seems mendokusai, but everything that is an impediment in front of you, once you have surmounted it, is now something that protects you from the rear. The regulatory regime in Japan is consistent, even if there are some peculiarities. Laws are pretty clear, the goal posts are not moving. There are more creative people than you might think in the legal profession, who have been good at helping them find the right solutions. From his perspective, everything always starts from the consumer experience; the legal model is there to serve that goal. They have built experiences that make a lot of sense. Focus of regulation is often more around consumer protection and they share that philosophy.
On the availability of capital: they raised ~US$385m in rounds back and forth between domestic and international investors. Mix of financial and strategic investors (e.g. the relationship with Itochu was very important for them). They run a balance sheet business. Even though settlement is fairly quick, they do have to carry risk for certain period of time. Was a huge advantage being in Japan. They have a fairly efficient and low cost balance sheet, even from their early days. But at some point, it became clear that being public would be helpful if they wanted to have an even bigger balance sheet of access to bank lines, credit facilities. Their customer acquisition was merchant-led so didn’t have to spend money acquiring customers. But needed money as infrastructure, more cash against credit lines to run a larger and larger business. Paidy is a closed loop, network cannot go down. They are also the issuer so have to take credit risk, underwrite against customers. And they also act as acquirers, face and pay the merchants while waiting to collect from customers. Need a strong balance sheet.
On merchant acquisition: their early wins were with merchants in the fashion and apparel industry. The first publicly listed Japanese company they had as a merchant – it wasn’t management who wanted the Paidy solution, it was the people in the logistics center who wanted it. They can sell this business in a bunch of different ways. They can problem solve for logistics, marketers and general management. The diversity of their team also helped a lot, because they can interact in different ways with different folks. Biggest customers are Amazon, Apple and PayPal. But they also have a strong relationship with Japan Inc. They learned from their P2P lending days that you have to have a differentiated customer experience to win. Checking out with your email and phone number is magic. They have an internal mantra about “attacking” mendokusai – go and problem solve for their customers and merchant partners.
On starting the business in Japan: this goes back to his earlier point about the low incidence rate of entrepreneurship in Japan. When he lived in California, he observed that in Silicon Valley, every good idea seemed to have 10 well-funded teams going after it. In Japan, seems like only 1 out of 10 good ideas has anyone even trying. Unlikely to encounter as much competition. In addition, the domestic market is so big and you have well developed capital markets, so the cost of capital is much lower, which is a global competitive advantage. Made sense to start in Japan and then go into other markets. But they always wanted to win at home.
On how the exit to PayPal came about: the emphasis has always been on building as robust a business as possible. They were also preparing to go public, which has a long lead time. Competitive pressure on both processes by pursuing both options. He thinks the diversity of their team made them interesting from an acquisition perspective – international acquirers looking to plug gaps in their offering, accelerate what they are trying to do in Japan, looking at Japanese assets more. Myth that it’s hard to deals in Japan. Why didn’t one of the Japanese financial institutions buy you? Unfair to speak on their behalf. Marriage with PayPal is a very good one, spiritually the perfect home for what they want to keep doing. They did have Japanese financial institutions who were shareholders of Paidy but they may not have been as good a home for the assets and the team, not as complementary given the global and domain expertise that PayPal have.
On his top 3 lessons for entrepreneurs. 1) surround yourself with people who have the best interest of the business at heart; 2) have the right team around you who can challenge you and each other. As a growing startup, you will get access to better and better talent, and sometimes you will get the wrong people. Don’t be too hard on yourself, even now feels like his hiring is 50/50; 3) if he was obsessed with being the CEO forever, the company would have been less effective. A change in your own role and title as a founder can sometimes makes the most sense for the business, if you have someone really talented and committed who can step up. Founder has to do 3 things: be a custodian of the vision, make sure the business never runs out of money and build the team.
On the company’s future: PayPal’s pitch to them was continue to be yourself, dream bigger (more you can do without worrying about quarterly visibility as a public company), and think about what they can leverage jointly with PayPal’s global scale of hundreds of millions of account holders. They have big ambitions in Japan, looking to do more from a product innovation standpoint and going deeper on merchant/consumer services. There is stuff that PayPal does globally that they can do in Japan too.
On which industries he would focus on if he was starting a business in Japan today: he likes crypto, insurtech, real estate tech. Big market, lots of opportunities, not that many people chasing those opportunities. Japan is big enough can build a big enough domestic business in those areas.