FinTech In Japan: a Case Study Of Kaizen?

Japan presents a model of incremental integration of financial technology into existing business models.

The two-day Fintech Japan 2016 event in Tokyo held by the Fintech Association of Japan was a series of lively discussions on trends in the FinTech space, with speakers coming from megabanks, start-ups and government bodies alike. Speakers presented their perspectives from their areas of expertise – banking, finance, insurance, investment, regulations, technology, AI, machine learning and robotics etc.

Although the majority of attendees seemed to be local participants, the event nonetheless tried to project an international image by having bilingual capabilities to accommodate attendees from overseas. The Tokyo Metropolitan Government even had a booth at the event to explain to foreign companies the merits of setting up their Asian hub in Tokyo, including various procedural assistance and monetary incentives for doing so.

Among other things at the event, one could find information about the MUFG Digital Accelerator programme held by Mitsubishi UFJ Financial Group and the Bank of Tokyo Mitsubishi UFJ, in which they pledge support to entrepreneurs and start-up companies to take their ideas to the next proof-of-concept level. Eligible participants would be invited to join a four month programme where they would receive mentoring from seasoned professionals from Mitsubishi and be introduced to opportunities of alliances, partnerships and investments.

The Bank of Tokyo Mitsubishi UFJ, one of Japan’s three megabanks which boasts of historical roots going back to 1880, has been at the forefront of embracing new financial technologies. They have been developing their own digital currency called MUFG Coin. One MUFG coin is said to be equivalent to one yen, and this digital currency is currently being tested by their own employees internally. The bank’s relationship with start-ups would seem to be one of mutual cooperation – which in turn seems to fit in our overall impression that start-ups in Japan tend to play an enhancer role where they work closely with incumbents, rather than a disruptive role whereby they seek to overturn the existing business model.

This is understandable given the Mt. Gox scandal in Japan back in 2014. The bitcoin exchange company had been hacked, lost $390 million worth of bitcoins and had to declare bankruptcy. The repercussion of the scandal is that it reinforces the trust and faith people have in traditional banking institutions, and makes it harder for start-ups to venture alone without support from and partnerships with the established players.

According to Natalie Fleming from the Fintech Association of Japan (the organiser of the Fintech Japan 2016 event), “There is less dissatisfaction with traditional financial services than in the US and the UK.”[1] This could mean that banking customers are less likely to look for alternative providers to meet their banking needs. This too may be one of the drivers as to why start-ups are motivated to work closely with the existing players than to disrupt the whole apple cart.

Partnerships between traditional banking institutions and start-ups, however, are not without difficulties, especially at regional banks with fewer resources than the megabanks. Eikou Hagiwara, one of Japan’s leading technology and security writers, once remarked[2] that the problem with FinTech is that it is both very broad and deep, and when management at a regional Japanese banking institution taps the brains of their own IT staff and third-party providers to get a better understanding of what FinTech can do to their institution, they only get fragmentised representations, because these specialists tend to only speak from the perspective of their own specialities. Precisely because of this fragmentation of knowledge, when they come together to form a focus group on FinTech, they tend not to manage to reach a consensus as to what FinTech is and what the implications are for the bank as a whole. In addition, because there is so much management attention on this area and pressure to deliver results, the focus group somehow ended up being an off-topic forum for things like reviving the regional countryside, improving profitability margin and even enhancing contributions towards the Tokyo 2020 Olympics. If they manage to stay focused on FinTech issues, the results tend to be only marginal improvements such as cost cutting and profitability enhancement, rather than something ground-breaking and revolutionary.

It is unclear if the seemingly cosy relationship between start-ups and the establishment could potentially change in the future. Ginkou-banare is a Japanese buzzword meaning “disengagement from banks” that belongs to a series of other buzzwords with the suffix -banare that describe trends among the younger population in Japan (among them, katsuji-banare meaning “disengagement from printed words,” terebi-banare meaning “disengagement from TV” and sake-banare meaning “disengagement from sake/alcoholic drinks”). However, even if people were disengaged from traditional banking services, the alternative solutions they opt for could be a step backwards instead of a step forward in terms of technological progress. For example, a study from Deutsche Bank Research indicates that the sale of steel fire-proof safes has soared in Japan since the Bank of Japan rolled out negative rates policy, and the Japanese seem to be spending more on these safes than at any point since the financial crisis.[3]

Overall, we expect the megabanks to continue to be the main sponsors of innovative initiatives in the near future, and we expect to see gradual change rather than disruptive change in Japan as a whole. Kaizen – the Japanese business concept of continuous and incremental improvement – would seem to be the keyword that describes this market. It remains to be seen if this preference for gradual and cautious change is enough to propel Japan into a formidable regional or global player in the FinTech space outside of Japan, and we shall report further developments on this blog in the future.