Winners / Selection Rationale

Net Protections, Inc.

2017 17th Porter Prize Winner Deferred payment service
Net Protections is a pioneer and the leading provider of a deferred payment service. The company’s deferred payment service allows manufacturers to outsource the deferred payment service option offered to customers making purchases via their online sales channel. Net Protections’ deferred payment service also helps small online sellers increase their sales. Net Protections reduces its own risk of delinquent accounts (or more precisely, the risk of shoppers not paying their invoices) by providing small loans to a vast numbers of shoppers.
../../data/img__2017_02_p.jpgIn Japan, payment methods for non-face-to-face shopping purchases include: credit card payments, payments with prepaid cards, cash on delivery (COD), advance payment (i.e. bank transfers and payment at convenience stores), and deferred payment (i.e. bank transfers and payment at convenience stores). In addition to these methods, the growing popularity of online shopping has prompted the introduction of other new settlement services, such as the online payments system PayPal. Increased online shopping from smartphones has spawned new settlement services that involve fewer steps and often do not require typing in credit card information to check out of the shopping cart. Shoppers register as members of their service by providing their name, address, telephone number, and, so often the case, credit card information at the time of registration.

Net Protections is the pioneer of deferred payment services in Japan. The company launched its own service in 2002. Transactions on a value basis exceeded 140 billion yen, and more than 30 million people were using Net Protections' deferred payment service in fiscal year 2016. Since its start, more than 100 million people have used the company's service. As of January 2016, 62% of the top 247 (*1) online shopping companies had introduced deferred payment as one of the payment options. Net Protections' service was being utilized by 64% of Japan's online shopping companies, and Net Protections held the largest market share in the industry, according to a company survey.

(*1) From a ranking of the top 300 companies with the largest sales, reported by the newspaper Tsuhan Shinbun (August 4, 2016), "The 66th Mail-Order and Correspondence Course Sales Ranking." The 247 companies exclude companies that sell household appliances and luxury brands from the top 300 ranking.

Unique Value Proposition

It was Net Protections' vision to "build a payment settlement service that is hassle-free for all stakeholders and minimizes credit risk." The company provides two kinds of deferred payment services: (1) One service extended to mail-order companies and online shopping businesses that sell to individuals (BtoC); and (2) another service that caters to the corporate market (BtoB).

BtoC
How does Net Protections' deferred payment service work? If operators of mail-order or online shopping sites (hereafter, sellers) adopt Net Protections' deferred payment service as one of the available payment methods and shoppers select this payment option, Net Protections will extend credit to the shopper, and request only the individual's name, address, telephone number, and e-mail address. Net Protections conducts an automatic credit evaluation, based on the company's accumulated transaction data, and promptly notifies shoppers whether they have been approved for credit. (Net Protections does not rely on data provided by credit information agencies.) The company can complete its credit evaluation within 5 to 10 minutes after receiving the transaction information. Net Protections is able to conduct a credit evaluation 24 hours a day, 365 days a year. Even in the event that a more detailed credit analysis is required, the company can let the seller know the results of the in-house credit evaluation within two hours because there is an hourly cutoff time for credit evaluations every hour between 10 a.m. and 5 p.m. on business days.

Net Protections controls credit risk by extending a low credit limit to numerous shoppers. The company sets a monthly credit limit of 54,000 yen (US$490) per shopper. It is easy for shoppers to start using Net Protections' service because Net Protections is willing to provide credit up to 54,000 yen to individuals who have no history of using the company's service.

After the shopper gets approved for credit from Net Protections, the seller ships the merchandise to the shopper, and sends Net Protections the invoice number. The next day, Net Protections send an invoice to the shopper (*2). After confirming that the merchandise has been delivered to the shopper, Net Protections pays the invoice to the seller within 5 business days in the shortest case, regardless of whether the shopper has sent a payment to Net Protections. The company makes a lump-sum payment to sellers weekly, twice a month, and once a month. Within two weeks after an invoice has been issued, shoppers send their payment to Net Protections, either through a convenience store or a bank transfer. Shoppers can arrange payment to Net Protections at a convenience store free-of-charge. For bank transfers, however, they must pay the bank a transaction fee.

Seventy-five percent of the Net Protections BtoC service customers are female. In terms of age, customers 35-45 comprise the largest share (27%). Next are customers aged 45-55 (25%), followed by those who are 25-35 (18%). In terms of online shopping device usage, 51% used PCs, while 49% used smartphones and tablets (2016). Net Protections has three target customers. The first is customers who want to pay after receiving their merchandise. The majority of these customers are female shoppers in their 50s and above. The second is customers who would rather not use a credit card for online shopping due to security concerns. Especially when buying from new sellers, shoppers prefer to use the deferred payment option rather than their credit card. According to a survey conducted by Net Protections, one out of five shoppers (or 20.4% of respondents) preferred deferred payment. (*3) The third is individuals who do not have a credit card, are too young, or have had their credit card suspended. Net Protections makes it possible for these customers to do online shopping after completing a few easy steps. Shoppers can enjoy Net Protections' service for free, and they even receive points that can be exchanged for merchandise from a specified website or can be used to enroll in a competition for prizes. Compare this with the cash-on-delivery (COD) payment option, which often comes with a service fee and the psychological burden of having to prepare cash and be at home at the time of delivery.

BtoB
Net Protections' other main customer is sellers (i.e. mail-order and e-commerce site operators). The first value proposition is the reduction of costs for deferred payment services. Net Protections eliminates the risk of delinquent accounts for sellers because it takes over the entire credit risk once it has approved a shopper for credit. The sellers are freed from all activities related to deferred payments, such as credit evaluations, the issuance of invoices and the collection of payments.

The second value proposition to sellers is an increase in sales. Introduction of the deferred payment option contributes to a seller's acquisition of new customers. It has already been said that one out of five shoppers prefers deferred payments when buying from new sellers. In the same survey, respondents indicated that if the deferred payment option is not available, 30% said that they would refrain from shopping, while 46% said they would go to other e-commerce sites.

The third is service quality. The main customers of Net Protections' deferred payment service are manufacturers who operate e-commerce sites to sell their own products and brick-and-mortar retailers who are expanding their online sales. Some have begun outsourcing the deferred payment service, while others are newly adding deferred payment as an option. Manufacturers and retailers who outsource deferred payment services often ask that the service be customized. They make many very specific requests so as not to inconvenience shoppers. Net Protections can satisfy such customers.

The fourth is the service's ease of introduction and ease of use. Sellers can start using Net Protections' service without much effort. Sellers have to notify Net Protections of the shopper's personal information (name, addresses, telephone number, and e-mail address), the merchandise that has been purchased, and the invoice number. In most cases, however, it is not necessary for sellers to develop new IT systems to automate these processes because Net Protections' service can operate with the 90+ systems that e-commerce operators use (e.g. the shopping cart, order management, and e-commerce construction package systems). Sellers can start using Net Protections' service in as soon as ten business days after Net Protections has received the application. Net Protections' fee structure is: (1) an invoice issuance charge; (2) a fixed monthly service charge; and (3) a commission (calculated as a percentage of seller's proceeds from monthly transactions). These fees are packaged in various combinations, taking into account the size of the seller's business.

Net Protections' BtoB service provides high value in industries where numerous customers exist. One of the examples is Japan's ramen noodle restaurants industry, where self-employed restaurant owners with only one shop form the majority. Sellers to this industry, which include noodle manufacturers and frozen food manufacturers, had been handling the accounts receivable owed from numerous customers by themselves. Net Protections' service can deal with face-to-face, online, mail-order, auto-renewable subscriptions, and pay-per-use transactions. After receiving the name of the buyer's company, the address, the telephone number, the e-mail address, and the transaction information, Net Protections will approve the extension of credit within 5 or 10 minutes. In the case that a more detailed credit analysis is required, Net Protections notifies the applicant (the seller) about the results of the credit evaluation within two hours if the application is made during business hours. Buyers do not need to take any additional actions. After receiving a monthly invoice issued by the seller, which has actually been prepared by Net Protections, the buyer is asked to pay the invoice within 30 days. The monthly credit limit per buyer is between 300,000 yen and 3 million yen. The value proposition in the BtoB segment is the same as the one in the BtoC segment, as explained above: control credit risk by providing small loans to numerous buyers; ensure the ease-of-use for buyers; make sure that sellers do not need to develop a new system to start using Net Protections' service; transfer the entire credit risk to Net Protections; entrust all the activities related to the deferred payment service to Net Protections. The profit model is also the same: charge only the sellers. The sellers are asked to pay a fixed monthly fee, a service fee that is proportional to the monthly transaction value, and an invoice issuance fee.

The fifth value proposition is the support that the service provides as a social infrastructure. Net Protections' deferred payment service helps small companies and self-employed individuals, both as buyers and sellers, deal with credit, which is the first obstacle encountered at the start of any new trading transaction.

(*2) Sellers can choose to enclose the invoice prepared by Net Protections in the package with the merchandise.
(*3) Net Protections conducted online research, surveying 2,065 people nationwide. (Respondents ranged from teenagers to people in their 50s.) The survey was conducted on March 25 and March 26, 2016.

Unique Value Chain

Net Protections designs its value chain based on the corporate philosophy: "Aim to develop a payment system that is hassle-free for all stakeholders and minimizes credit risk" and provide "the most versatile settlement service with the highest service quality." Unique human resources management activities support the entire value chain. Below is an explanation about the value chain for a BtoC service, NP Atobarai, the company's deferred payment system with the largest contribution to sales. The value chain for NP Kakebarai, a BtoB service, is designed in accordance with the same philosophy, and is similar to the value chain for NP Atobarai.

Credit evaluations
Net Protections' credit policy is "to give the benefit of the doubt." The company extends credit based on limited information--the shopper's name, address, telephone number, email address, and the merchandise purchased. When a shopper does not have a credit record with Net Protections, the company always extends credit. Only those shoppers who hit the credit ceiling and anyone who has an overdue bill will be rejected. In this way, Net Protections aggressively takes on credit risk and accumulates credit information. By keeping only those shoppers who make their payments on time, the company reduces its long-term credit risk. (Net Protections calls this process "data cleansing.") The company also evens out its credit risk and operating costs by increasing the volume and value of transactions for the vast number of small loans extended.

Net Protections primarily conducts automatic credit evaluations using a computerized system that operates 24 hours a day, 365 days a year. A small percentage of these credit evaluations (about 5,000 cases a day) require a more detailed credit analysis, which is conducted manually. The more shoppers that can be provided with credit, the larger the number of shoppers will who be able to take advantage of this deferred payment service. The result is increased sales for both the sellers and Net Protections.

Invoice issuance and payment collection
Net Protections has an automatic system for reissuing invoices and sending polite reminder emails. The communication takes a soft approach. By not giving a bad impression, the company is able to consistently achieve a high recovery rate. Net Protection rarely makes telephone calls or personal visits to customers for the collection of overdue payments.

Call center
Net Protections outsources call center operations, where inquiries from shoppers and sellers are answered. A response manual is provided to the call center's staff members. However, when unusual inquiries are made, callers will be transferred to a Net Protections' employee, who will provide a response that is consistent with the company's policies, the knowledge of which employees already share. The center has ten or fewer employees, who are assigned to handle the more than 30,000 inquiries for 3 million transactions.

Sales and marketing
In order to reach potential customers (sellers), Net Protections uses both online marketing (web-based advertisements) and offline marketing (exhibitions). These operations are outsourced to advertising agencies and event planning companies. Net Protections' employees focus on plan development and the management of these outside vendors. In order to cultivate potential customers, the company uses marketing automation tools to send emails and alerts about customers that are ready to be approached. The actual operations are handled by an outside marketing service provider who works in-house. Business negotiations with small and medium-sized customers are undertaken by the resident marketing service provider. Meanwhile, Net Protections' employees focus on large customers; address their more complicated requests; manage the advertising agencies and event planning companies; and systematize the sales process, which consists of the development and standardization of sales tools and educational programs.

System design, development, and maintenance
Net Protections has its employees focus on the planning and development of information systems for services such as credit evaluations and invoice management; as well as systems for improving operational efficiency, such as sales support tools and the customer relationship management systems that are used for sales and call center activities. Activities other than planning are outsourced to system integrators.

General management
Net Protections' corporate philosophy is to "create innovations that will become the norm in the future." The company's mission is "to be the kind of company that can think outside the box, one that can conceive of and provide new ubiquitous systems for Society."

The purpose of Net Protections' general management is to "develop an organization that can design services from a holistic perspective, not a functional perspective." For example, if its sales force were to optimize its function (by single-mindedly pursuing its own goals), this could increase the company's credit risk and costs. If too much customization is accepted for the sake of customer satisfaction, this could result in an increase in inquiries at the service department and deterioration in the quality of operations. If operations division adopts a stance on credit evaluations that is too strict (with the aim of reducing credit risk), it may reduce the number of corporate customers who can introduce the company's service or decrease the number of shoppers who can get credit. This would make the service less convenient for shoppers, and would not help to increase the number of shoppers who use the company's service. It would work against the company's risk management policy of diffusing credit risk over a vast number of small risks. In order to prevent functional optimization, Net Protections makes sure that all employees understand the overall structure of the business, and promotes a policy of human resources management that encourages the development of staff who can work to optimize the whole company rather than only one part of the company.

Human resources management
Net Protections hires mostly new graduates, and during their training impresses upon them the need to optimize the company as a whole. The management encourages them to create new services and improve current services by thinking outside of the box. In the case of mid-career hires, the company gives priority to individuals who can think about what is best for the company as a whole when viewing a given situation.

Net Protections' organization has a functional structure as its base. However, the company allows its employees to request work assignments in other functional areas. Employees can be assigned to multiple departments if they wish. People can be assigned to different departments within the same year. All the employees can volunteer to join a Working Group taskforce. Members of this taskforce are involved in the company's core operations, such as the hiring and training of new graduates, and the development of medium-term business plans. Employees can create a new Working Group if they think one is necessary.

Net Protections puts effort into sharing company-wide its philosophy: "Aim to develop a payment system that is hassle-free for all stakeholders and minimizes credit risk." The company's top management wants to ensure that all decisions will be made in line with this philosophy. (However, the company does encourages individual employees to act on their own initiative.) This philosophy is shared through the company magazine, issued by the Working Group, and through the workshops conducted for new graduates. The philosophy is also incorporated into the design of the recruitment and selection process.

Fit among Activities

Net Protections has made three decisions that are central to its competitive strategy. The first one is its service concept: "Build a payment system that is hassle-free for all stakeholders and minimizes credit risk." The second concept is its credit policy: "Diffuse credit risk over a vast number of small loans." The third is the company's long-term direction: "Improve service quality to ensure sustainability over the long term, and achieve optimization of the whole." All these choices were selected in accordance with the company's philosophy, which is to "create innovations that will become the norm in the future." (Please refer to Net Protections, Inc.'s activity system map, which appears at the end of this report.)

Below, the NP Atobarai's activity system for the BtoC segment is explained as follows. The goal of the company's activity system for its deferred payment service is to realize "a payment system that is hassle-free for all stakeholders and minimizes credit risk." Net Protections undertakes all the activities itself, everything from the issuance of invoices to the collection of overdue payments. It is the company's policy to: (1) Assume the entire credit risk. (2) Extend credit based only on limited information. (3) Conduct credit evaluations quickly and extend credit easily, giving shoppers "the benefit of the doubt." (4) Conduct credit evaluations using a computerized system. Undertaken credit analysis manually to investigate ambiguous cases, and make a quick decision about whether to extend credit. (5) Assure a high probability that credit will be extended. (6) Do not request membership registration. (7) Do not impose any financial burden on shoppers (other than the bank transfer fee that must be paid to banks).

In order to diffuse credit risk over a vast number of small loans, Net Protections has set a monthly credit limit of 54,000 yen per shopper. To increase the number of users and the transaction volume, the company makes it easy for shoppers to start using Net Protections services by: (1) choosing to give credit to first-time users; (2) assuring a high probability that credit will be extended; (3) eliminating membership registration as a requirement for shoppers to use the service; and (4) refraining from imposing a financial burden on shoppers.

In order to realize an improvement of service quality that is sustainable over the long term and achieve overall optimization, Net Protections undertakes the following activities: (1) Automate and use business process outsourcing (BPO) for operations; (2) have employees focus on planning and management; (3) cultivate a workforce of individuals who can work independently and work across functions for long-term optimization; and (4) invest in system improvements and marketing strategy implementation.

Innovation that Enabled Strategy

  • A service concept that involves the company aggressively taking over the credit risk of small loans to a vast number of buyers. By improving the ease of use, the company has increased the number of buyers and sellers who use the company's service. (The company improved the ease of use by not requiring membership registration, by giving credit to first-time users up to the credit ceiling, and by extending credit to shoppers again after they have paid off their delinquent accounts.)
  • Using machine learning for credit evaluations.
  • Develop an IT system that handles nearly all of the settlement service operations.
  • Use business process outsourcing (BPO) aggressively. The company designs operations by process rather than function, which has made possible the outsourcing of operations. Consequently, the company outsources sales activities, systems development, and call center operations.

Trade-offs

  • Does not require shoppers to register as members. Not requiring membership makes it easier for shoppers to start using Net Protections' service, although this does make it more difficult to identify each shopper, which works against minimizing credit risk. By adding more shoppers to its service, Net Protections can quickly expand its accumulation of credit and shopping data.
  • Does not rely on the credit agencies for credit evaluations. Using the data from credit agencies Net Protections would enable Net Protections to lower its credit risk from the outset. However, this would not help the company to accumulate shopping and payment data. Also, reliance the data from credit agencies would make it difficult to extend credit to individuals with lower credit ratings.
  • Does not allow shoppers to defer payment beyond two weeks. By extending the lending period, Net Protections would be able to provide additional value (i.e. the postponement of the payment), but this would increase the credit risk because it would encourage people to shop without cash on hand. Net Protections aims to provide "a worry-free, safe and comfortable shopping experience." The company is not interested in extending loans.
  • Does not conduct credit evaluations relying solely on a computerized system to provide real-time credit authorization. Indeed, relying 100% on an electronic system to immediately provide the results of the credit evaluation would improve the efficiency of operations for both sellers and Net Protections. However, relying exclusively on an automatic credit evaluation process would result in all ambiguous cases being accepted or rejected. There would always be a percentage of cases that are ambiguous, and an across-the-board decision to accept all such cases would increase the company's credit risk. If all ambiguous cases were to be rejected, this would cause some shoppers to form a negative impression of Net Protections' deferred payment service. For this reason, Net Protections has the credit analysis conducted manually, after which a quick decision is made about whether to extend credit for each individual ambiguous case.
  • Does not fall into a function-based organization. Too strong an orientation toward functions gets in the way of a holistic view, which is necessary for the payment settlement services.
  • Does not focus solely on skill sets in the recruitment of mid-career hires. Does not hire individuals who cannot work with people engaged in other functions, or who do not possess a long-term perspective, or whose mindset and behavior are restricted to a single function, even if that person has a high-level skill set.
  • Does not pursue shoppers who are happy to pay with credit cards. People who shop with credit cards most likely do not have a strong desire to make deferred payments, as they are already enjoying the convenience of real-time settlement. For this reason, they are less likely to start using the deferred payment option.
  • Does not introduce a new service brand for the provision of OEM services in principle. The provision of OEM services would grow the business, but it would also require separate user touchpoints, such as invoices and call centers. This would increase the company's operational costs.

Consistency of Strategy over Time

Net Protections was founded in January 2000. The company introduced "NP Atobarai," a deferred payment service for mail-order shoppers that did not require membership registration. In April 2011, the company launched "NP Kigyokan Kessai," a deferred payment service for the BtoB segment. Like NP Atobarai, this service had no membership registration requirement. In July 2015, the company debuted "NP Atobarai air," a BtoC deferred payment service for service providers who visit customers at their homes (i.e. like moving companies and food home delivery services). In June 2017, the company introduced "atone" (pronounced a-to-ne), a new BtoC deferred payment service that requires membership registration, but allows shoppers to settle the bill with a lump-sum payment every month. The once-a-month settlement of payments makes the deferred payment service more convenient for both sellers and shoppers.

Since the service was launched in the year 2000, Net Protections has consistently maintained the core of its competitive strategy--starting with NP Atobarai, and continuing with the introduction of NP Kakebarai (its BtoB deferred payment service). The core components of this strategy are: (1) Aggressively take on all the credit risk, and simultaneously accumulate credit information. Reduce the company's credit risk over the long term by having shoppers with a history of delinquent payments leave the system. (2) Diffuse credit risk and level operating costs by increasing both the volume and value of transactions for the vast number of small loans that constitute the company's credit obligation. (3) Undertake all the activities involved in the settlement service. In other words, do not outsource collections, credit guarantees or any other activities.

Net Protections included both the BtoB and BtoC segments in its growth plan. The company started with the BtoC segment, because there was an evident need for a deferred payments option, especially among customers who had previously used deferred payments for their mail-order purchases and clearly preferred this method of payment. Net Protections knew that taking market share away from credit cards would be difficult. However, recognizing the evident need for such a system, the company decided to focus on demonstrating the feasibility of its service concept and developing its operations. Net Protections entered the BtoB segment next, which proved more difficult. The credit risk in this segment is larger, as the value of each transaction is higher. The operation of such a system is more complicated because customization is required.

Profitability

Both the five-year average return on invested capital and the return on sales exceed the industry average by a wide margin. (Profitability analysis was conducted by PwC Japan.)

Activity System Map

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