SoftBank's payments unicorn holds a fintech mystery

By Hudson Lockett

HONG KONG, Sept 17 (Reuters Breakingviews) - The pitch is easy to picture: Masayoshi Son's digital wallet group, manning the vanguard in Tokyo's bid to throw off the grip of king cash in the country, is eyeing what could be the biggest Japanese initial public offering on Wall Street. His SoftBank Group 9984.T has selected investment banks to list its PayPay unit as soon as the fourth quarter this year in a deal that could raise more than $2 billion, per a Reuters report last month, citing sources. But PayPay's tangle of other digital finance units could complicate matters.

The bull case is straightforward: analysts at Morningstar figure PayPay has a roughly 70% share of Japan’s QR code payments, estimated by the government at 13.5 trillion yen ($91 billion) last year. That’s almost 10% of all non-cash payments nationwide, up from next to nothing in 2018 and with room to grow as cash's share shrinks further from about 60% in 2024. The company, which turned profitable in the 2023 fiscal year, says about half of Japan's population uses its app based on total registered users of 70 million.

U.S. peer PayPal's PYPL.O enterprise trades on 9.8 times last year's EBITDA. On that metric, PayPay's could be worth $3.8 billion based on the 57.2 billion yen of consolidated EBITDA reported in 2024. That's far below the roughly $7 billion valuation implied by Indian stakeholder Paytm's PAYT.NS options deal struck last December. It's also less than half the mooted $10 billion price tag SoftBank is seeking, as reportedby Bloomberg, citing people familiar with the matter-though that figure may not include debt.

PayPay's fast growth and dominant position can help. But even that might be overegging it. Its monthly active accounts totalled 38 million at the end of June, suggesting many registered users have since ditched the app. And while Japan’s government is targeting an 80% cashless transaction rate by 2030, credit and debit cards have driven the vast majority of digital gains over the past decade and still account for 86% of non-cash payments.

The potential need for another leg up may help explain why affiliated credit card, securities and digital banking operations were restructured into subsidiaries of PayPay starting in 2022. Analysts tip margins at PayPay to improve further as transaction values grow in tandem with business at PayPay Card and PayPay Bank, with use of services at these fintech arms helping funnel users back to the payments app in a virtuous, lucrative loop.

But the lender faces an uphill battle against more established digital rivals such as Rakuten Bank 5838.T, whose first-quarter deposit balance of 11.4 trillion yen was more than quintuple that of PayPay's contender. PayPay's securities business meanwhile pales in scale against established giants like Nomura 8604.T and Mitsubishi UFJ Financial 8306.T. That's not to say these businesses can't have real synergies. But if the ultimate goal of SoftBank's payment app offering is to provide Japan's consumers with a one-stop super fintech app, then the company has yet to detail those plans to investors.

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CONTEXT NEWS

PayPay, the operator of Japan’s most popular QR-code payments application, filed a confidential application to list in the U.S. on August 14.

The SoftBank-owned business is seeking a valuation of $10 billion or more, per a Bloomberg report citing unnamed sources on August 15. PayPay could raise more than $2 billion, according to an August 10 Reuters report citing people familiar with plans for the listing, which could take place as soon as the fourth quarter.

Credit cards dominate Japan's digital payments market