Boasting the world’s third-largest economy and a well-established reputation for its leadership in technology, one might expect Japan to have a strong financial technology (fintech) sector. The reality is actually quite different. In 2015, only $142 million was invested in Japanese fintech, compared with $1.5 billion in India, $2.7 billion in China, and $7.4 billion in the U.S. A report from Accenture found that investments in Japan made up only 0.40 percent of all global fintech funding in 2014.
Why has there been so little interest in Japanese fintech? A lack of capital certainly isn’t one of the reasons. Currently, there is an estimated $9 trillion sitting in cash deposits in Japan. The important point to note that these deposits are held in cash. The Japanese are culturally very averse to taking risks, and they show a strong preference to paying in cash over using credit cards. Accenture found that 32 percent of Japanese consumers still pay in cash upon delivery, an unusually high proportion for technologically advanced society.
The Financial Services Authority (FSA), Japan’s financial industry regulator, is hoping that the recently introduced reforms will be approved to provide a much-needed boost to the country’s fintech industry.
Raising the Stakes for Fintech Investment
One of the biggest changes being advocated by the FSA is to encourage greater fintech investment by removing existing limits. The proposed regulations will allow banks to buy up to 100 percent of non-finance companies. Japan’s megabanks – Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group – cannot hold more than 15 percent of fintech startups under current regulations and have been said to be looking at increasing their share. These banks are interested in the innovative solutions that smaller fintech companies are developing, such as robo-advisers and distributed ledger technology like blockchain.
The current market for fintech is still very small in Japan, with only an estimated 130 fintech startups in the country. One of the goals of opening up investment from financial institutions is to stimulate further growth in the Japanese fintech ecosystem.
“There is back-up from the government, but we need to see the emergence of more startups to spur the industry,” said Takeshi Goto, Managing Executive Officer at SBI Investment.
Building Confidence in Bitcoin
After the fall of Japan’s infamous bitcoin exchange, Mt. Gox, resulting in the loss of $650 million to hackers in 2014, it should come as no surprise that digital currency has lost much of its appeal in the country. The FSA is looking to address consumer concerns by recognizing bitcoin and other digital currencies as a form of property. This change would require all digital currency exchanges to register with the FSA and bring them under existing anti-money laundering (AML) and know your customer (KYC) rules. In addition, these exchanges would be required to keep client and company assets separate, providing some protection against fraudulent activity. Introducing this new regulatory framework should help to restore faith in digital currency in Japan by creating a safer environment for investors.
Banks Opening API Access
The Japanese banking industry has been heavily dependent on a small set of suppliers for their IT infrastructure. Part of the banks’ motivation in choosing only a select few vendors may be to reduce their technology-related risk. NTT Data, one of Japan’s largest IT service providers, has a dominant share of the market with close to 70 percent of the country’s private bank transactional data. Local fintech startups have been impacted due in part to a lack of financial data.
However, a new API link service announced by NTT Data in March 2016 will be a definite game-changer for Japanese fintech. Cloud accounting services like Freee and Money Forward will now be connected to one of Japan’s largest banks, Shizuoka Ginko, through NTT Data’s internet banking API.
Fintechs Paving the Way in Japan
Despite facing challenges from a lack of funding and limited resources, the Japanese fintech sector has its share of rising stars. In addition to Freee and Money Forward, there are many other fintech startups worth noting.
Spike is an online payment service focused on serving eCommerce. Its founder and CEO, Katsuaki Sato, strongly believes that the current concept of banking and payments is outdated. He foresees that all companies will provide their own internal financial services using virtual currencies.
Robo-adviser Money Design serves individuals, allowing them to invest in 35 global currencies and 11,900 stocks from 65 different countries. COO Nao Kitazawa mentioned his team has been quite pleased with the results thus far, even going so far as to invest their own money using the platform.
Bitflyer is Japan’s largest bitcoin exchange. Despite the bad reputation that the digital currency has in the country as a result of downfall of Mt. Gox, founder and CEO Yuzo Kano is grateful for the attention that the ensuing problems brought to bitcoin, and he acknowledges the need for regulation. Bitflyer goes to great lengths to build trust by carrying out official audits and issuing confirmations for every transaction through its blockchain.
Japanese society is very conservative when it comes to finance. 52 percent of all personal financial assets in Japan are held in cash, but this is likely to change since the central bank recently adopted negative interest rates. The hope is that citizens will be dissuaded from keeping large savings accounts and move their money into investments. And as bank data access continues to become more open, there will be more appealing options available to consumers that will encourage them to seriously consider fintech solutions as viable alternatives to traditional bank accounts.
What do you think the future holds for fintech in Japan?