The waves of digitalization are sweeping across the financial industry. As new industries enter the market and transform traditional financial institutions into comprehensive information providers by digitalizing their services, seizing the advantages of ICT, the old power structures are shifting dramatically. In this article, panelists from four financial institutions striving to expand their business, and taking digitalization as an opportunity, discuss their efforts to date and future prospects.
[Fujitsu Forum 2018 Conference Report]
At the beginning of the conference, moderator Masahiro Kumamoto of Fujitsu Research Institute outlined the financial industry's current state under the influence of digitalization and raised talking points. Four panelists―Kenichi Nagayoshi (iBank Marketing), Shinichiro Nishimura (AEON Credit Service), Kenji Takeda (Sony Bank), and Masato Kaneda (Mizuho Financial Group)―then discussed the impact of digitalization and their company's endeavors.
Fintech Brings Financial Market Reform
At the beginning of the conference, moderator Kumamoto outlined structural changes that digitalization has delivered to the financial industry.
In the financial industry, the fintech (combining finance and technology) tsunami has washed away the breakwater protecting existing companies. This is allowing a variety of businesses to enter the market as startups. A 2015 survey targeting global company executives and conducted by the Global Center for Digital Business Transformation, a research institution jointly established by Swiss business school IMD and US networking company Cisco, posed the following question: "How many of the top 10 financial companies will be replaced in five years due to digitalization?" Respondents estimated about four. And to the question, "Do you think there is a risk that your company will be driven out of business due to digitalization?" more than 40% of respondents agreed that such a risk exists. It is therefore clear that digitalization is highly likely to affect the financial sector.
Blurring the line between the financial and nonfinancial sectors has been the entry of IT giants into the financial market in recent years. Namely, the US IT majors collectively called GAFA (Google, Apple, Facebook, and Amazon), Alibaba in China, and Sony and AEON in Japan have staked their place. In addition, the US company PayPal has expanded its business to loan services, creating credit information from the data it has accumulated as an online payment business. In the movement to differentiate, companies have become active in creating new platforms by starting with a single function and expanding services while differentiating through mechanisms such as unbundling (*) and rebundling (**).
New services and platforms have also emerged, such as "neobanks" that exclusively provide front-end services that involve direct interactions with customers. "Banking as a Service," on the other hand, is a platform for efficient processing of back-end (back-office) operations. In addition, the financial sector is providing services in a wide range of forms, such as cross-sector services through open API and services requiring advanced expertise, such as private and investment banking services. Discussions at finance-related conferences often feature terms such as "digitalization," "servicization," and "platformization" that cover a broader scope, rather than "fintech" focusing only on the financial sector. This indicates significant shifts in the industry structure that digitalization has brought about.
- *: A method to break down products and services into parts so only necessary parts can be provided according to need. For example, unbundling makes it possible to provide a limited scope of services, such as payments and loans, instead of providing all banking services including payments, deposits, loans, and asset management all together.
- **: A method to unbundle financial products provided by different companies, and select and combine only the services consumers need, offering them as a new financial product.
Digitalizing Financial Services: Threat or Opportunity?
At the conference, panelists from four financial institutions discussed their understanding of the waves of digitalization and the impact of digitalization on their businesses.
Mizuho Financial Group: Taking Advantage of Lowered Market Entry Hurdles and Using Accumulated Know-how for New Business Development
Mizuho Financial Group's Mr. Kaneda said that digitalization is a threat for traditional financial institutions.
"The essence of banking business is to collect information on companies through various business opportunities, independently verify their credibility, and generate profits through loans and brokerage services. However, the growth of Amazon and similar companies that have their own marketplace and develop their own matching services based on information collected through B2C payments means that credit creation and financial intermediation are no longer the sole domain of banks. Consequently, banks are losing their advantages due to information asymmetry.
"On the other hand, digitalization is an opportunity. One example is that even when these new players tried to develop retail business overseas, it has so far been difficult to build branch networks on their own; they had to acquire a local bank or form a capital alliance with a local partner. In the age of digitalization, however, all they need are an application, a network, and a server, which may lower hurdles for new entrants. In one example, Mizuho Financial Group has formed an alliance with Airbnb in developing a private accommodation business in the US. Airbnb's business model is similar to banking in terms of brokering idle assets, opening an opportunity for Mizuho Financial Group to take advantage of its accumulated know-how in the new business."
Sony Bank: Open Banking Accelerates New Business Value Creation
Mr. Takeda of Sony Bank said that digitalization is still a threat for Sony Bank even though it is a pioneer entrant from the IT sector.
"Sony Bank was established in 2001 as an Internet-specialized bank. While ensuring fair business practices, the Bank has expanded its business scale successfully by redefining traditional financial services. We are cautious about the overwhelming speed of service development and cost competitiveness of digital companies, like German-based Fidor Bank, that specialize in back-end services by forming alliances with front-end service providers.
"Seventeen years after its establishment, Sony Bank is often regarded in the same way as traditional financial institutions. However, the Internet consistently remains our core business area. And even taking into account the Japanese people's strong preference for cash, we believe that there is still room for growth in Japan's Internet banking market. In that sense, Sony Bank, which has offered basic banking services, such as housing loans, foreign currency deposits, and investment trusts in the digital world can take the financial reform and market expansion by new digital entrants as an opportunity for further growth. With the advancement of open banking such as API, new value creation is expected to accelerate through alliances with external companies, allowing unbundling and white labelling (***). We'll be placing high expectations on financial markets in the future."
- ***: A mechanism to incorporate financial products developed by one company into another company's financial services or to provide them to customers under the brand name of another company. Customers purchase products or services trusting the brand name of the distributor without knowing the manufacturer. White labelling is similar to the OEM or original equipment manufacturer system in the manufacturing industry.
AEON Credit Service: Providing Convenient, Secure, Safe, and Dynamic Services Using Community-based Data
AEON Credit Service's Mr. Nishimura understands the entry of digital companies into financial areas as a business opportunity from a slightly different point of view.
"The company has participated in a consortium for community development promoted by a city in the Kanto region since last year. The aim is to create a model of 'how regional data can be used to benefit the regional community.' In the future, we would like to launch a data banking business by linking data held by AEON and external companies, including regional ones, to collect data more closely related to local customers.
"In addition, under our concept of 'Data Bank Business (tentative name)' where we keep information from medical institutions and public transportation companies, including the AEON Group, at the free will of consumers, we plan to return benefits obtained from the information as interest to consumers as well as to provide convenient, secure, safe, and dynamic services for consumers. If digital currencies are used as means of payment, this will realize a safer and low-cost cashless society, bringing about a society where 'data enriches humans' advocated by the government."
iBank: Leading the Entire Group's Digitalization by Promoting Cross-Sector Collaboration, Including Financial and Nonfinancial Sectors
Mr. Nagayoshi of iBank Marketing, a group company of Fukuoka Financial Group, understands the advancement of GAFA as an opportunity with the spirit of "converting a crisis into an opportunity" from the perspective of a financial institution rooted in the community.
"Digitalization is delayed in local areas compared to metropolitan areas due to a declining and aging population, but right now we are working on promoting digitalization without resting, taking the threat of GAFA as an opportunity. Services provided by digital-based businesses, such as GAFA, are essentially intermediary services. In that sense, their services are the same type as financial intermediary services provided by banks. Even if GAFA develop financial services as an extension of their existing services, we can successfully compete with them in local markets. For that purpose as well, we are promoting digitalization, seeing the threat of GAFA as a boost for local digitalization.
"iBank Marketing is a startup spin out of Fukuoka Financial Group (FFG). Since its establishment in 2016, iBank Marketing has served as a pilot base for FFG to promote collaboration with different sectors, including financial and nonfinancial sectors. Proactively identifying a shift from fintech to digitalization, iBank Marketing is leading the digitalization of the entire group to respond flexibly to rapid market changes."
Case Studies of Financial Institutions' Digitalization
Next, each company talked about their specific initiatives aimed at digitalization, co-creation with Fujitsu, and future prospects.
Sony Bank: Aiming to Provide Financial Services for Individuals Personalized by the Sony Group's Unique UX
Mr. Takeda of Sony Bank introduced its world view under the title of "Banking and Design."
"As an example, 'Sony Bank WALLET,' a multi-currency debit card solution, takes advantage of the Sony Group's unique design capabilities. As a bank that excels at handling foreign currencies, Sony Bank launched a debit card that can be used overseas with a unique design inspired by the overlapping banknotes of different countries. This card, providing high UX (user experience), won the world's prestigious iF Design Award 2017. In addition to its outstanding design, Sony Bank WALLET is the first card in Japan with a multi-currency debit function that can be used with 11 currencies.
"As it provides the convenience of using foreign currencies deposited as they are, Sony Bank WALLET has won strong support from customers who often go on business trips and stay abroad. The foreign-currency deposit balance reached over 400 billion yen, which is the next highest level after the megabanks, representing the company's strength. In addition, by linking the debit card to a smartphone app, it has become possible to log in with biometric authentication, check the account balance, manage usage details, and so on. The latest version provides improved UX features, including a card control function that allow users to freely control overseas card use and enable/disable Internet transactions using the card.
"Sony Bank aims to provide financial services for individuals personalized with unique UXs, taking advantage of the Sony Group's strengths, without regard to conventional financial services."
AEON Credit Service: Exploring New Business Models Using Personal Data
Mr. Nishimura of AEON Credit Service introduced a field trial for an Information Bank using personal data, conducted by Fujitsu and AEON Financial Service in the summer of 2017.
"In the trial, about 500 Fujitsu employees entrusted the Fujitsu Information Bank with their own personal data, such as everyday activities, moods, hobbies, and values, by answering dedicated questionnaires via smartphones over about two months. AEON received information accumulated at the Information Bank as anonymous data or real-name data by obtaining disclosure consent. The company provided information that matched each individual's hobbies and behaviors. For example, AEON distributed coupons for nearby restaurants, AEON Housekeeping Service coupons especially for tired female employees, or encouraged those who needed loans to visit AEON Bank branches for financial consultations.
"The field trial administration office received many unexpected reactions, and we felt the importance of 'becoming aware.' We will continue to explore new business models through co-creation with Fujitsu, such as a convenient payment method using credit cards and our electronic money WAON, and a mechanism to make payments only with smartphones."
iBank: Promoting New Services beyond the Boundary between the Financial and Nonfinancial Sectors
Mr. Nagayoshi of iBank Marketing Co., Ltd. introduced the functions of "Wallet+," a money service app released at Fujitsu Forum 2016.
"Wallet+ is a smartphone app that enables users to earn points by payment of a debit card issued by Fukuoka Financial Group, Inc. (FFG), check payment records, and transfer monthly surplus funds into their special-purpose savings accounts with a single tap. In addition to these financial services, this card has a mechanism to distribute non-financial information, such as information on things users want to do or purchase. For example, users who saw information on a trip or car can open an account to fund their travel or car purchase with a single tap. This mechanism is not only convenient for users, but at the same time it converts 'colorless' deposits into data 'colored by usage.' That data can be used as a source of value for financial institutions to propose different financial services. These are functions already realized at the time of Fujitsu Forum 2016.
"In the following two years, Wallet+ has collaborated with the robot advisor THEO+, which can transfer a surplus into investment, not savings accounts. It has also added a mechanism to provide loans to users who want to go on a trip immediately, even if they are in deficit or lacking funds. We will continue to promote the development of more sophisticated services beyond the boundary between the financial and nonfinancial sectors."
Mizuho Financial Group: "Development of a Cashless Payment Platform" and "Approach through Big Data"
Mr. Kaneda of Mizuho Financial Group pointed out two directions.
"One is the direction towards cashless banking. Fintech also has an effect of increasing top-line revenues and boosting bottom-line profitability by reducing fixed costs. For example, if cashless banking advances and ATMs decrease in number by 20%, megabanks will be able to slash costs by tens of billions of yen. The savings will derive from costs associated with ATMs themselves, cash stored in ATMs, cash replenishment, as well as installation space. Furthermore, if the cashless payment platform can be monetized, it will have a positive impact on the top line.
"The other is an approach through big data. As a traditional financial institution, we collect data from all kinds of sources, including stores, the Internet, call centers, customer data, and SNSs, and accumulate, search, and analyze the data to create and suggest models. By applying AI to the process, we aim to achieve optimal marketing, risk management, and new business development. The original experience of bank employees' work began with investigation and review. People with such experience are inherently suitable for businesses related to big data. However, there are limits to the data that banks alone can collect. This means banks and other industries may collaborate to develop data banks."
Lastly, Kumamoto concluded the conference with these words: "The approach to digitalization differs from company to company. However, given that the financial sector has traditionally worked to produce information, we share a common understanding that the trend of digitalization will lead to new business opportunities. We would like to contribute to providing better financial services in Japan together with our panelists' companies, customer financial institutions, and IT vendors here with us today."
- Nagayoshi Kenichi
CEO, iBank Marketing Co., Ltd.
General Manager of iBank Business Group, Digital Strategy Division
Fukuoka Financial Group, Inc.
- Shinichiro Nishimura
Head of Innovation Division
AEON Credit Service Co., Ltd.
- Kenji Takeda
Deputy General Manager of Corporate Planning Department
Head of Digital Strategy Office
Sony Bank Incorporated
- Masato Kaneda
Deputy General Manager,
Open Innovation Team
Digital Innovation Department
Mizuho Financial Group, Inc.
- Masahiro Kumamoto
Head of Financial Consulting Group, Consulting Unit
Fujitsu Research Institute