Fintech has finally started spreading in Japan. Born of a combination of finance and ICT, Fintech is expected to further develop as it spreads across society and related services are enhanced. In which fields is Fintech expected to be used? When that happens, how will existing financial institutions be affected?
Informed by key persons in Japan's Fintech industry and Fujitsu consultant and researcher in Japan and the US, we will introduce the current situation of and points about Fintech's spread in Japan. We will also discuss financial institutions' responses.
[Fujitsu Forum 2017 Conference Report]
Concrete Demonstration Testing and R&D Advances in Fintech
With Jun Taguchi of Impress Corporation serving as the moderator, the conference started by introducing the current activities of four panelists: Mitsunobu Ookubo from Mizuho Financial Group, Inc., Chie Ito of FINOLAB, Izumi Nagahori of Fujitsu Research Institute, and Yoshinobu Sawano from Fujitsu Laboratories of America, Inc.
First, Mitsunobu Ookubo of Mizuho Financial Group, Inc. stated that "proactive efforts to achieve financial innovation" is one of the five basic policies of the Group's medium-term management plan prepared in 2016. He also noted that "addressing Fintech" is mapped out in the Group's business strategy.
These policy and strategic initiatives are in response to the roles of Fintech and open APIs and the approach toward blockchain technology stated in the government's growth strategy, "Japan Revitalization Strategy 2016." This indicates that a new working group established in the Japanese Bankers Association is actively involved with the security working group, compliance working group, and so forth to standardize API specifications.
Mr. Ookubo also presented a case study on collaboration with a startup as an example of the Group's open innovation initiative.
Next, Chie Ito of Information Services International-Dentsu, Ltd. explained the activities of FINOLAB, a community and space aimed at creating new businesses with Fintech startups. FINOLAB has drawn attention from many companies in and outside Japan as a Fintech-dedicated space and community linked to a global network; it conducts stringent screening of potential participants.
At present, in addition to seven leading companies with high aspirations and policies, only 38 startups and other organizations are working to provide quality financial services as social infrastructure.
Ms. Ito also described the direction of FINOLAB, which aims to encourage non-financial business corporations to participate. She noted that her current activities center around collaboration with startups, where she makes use of the skills she developed in her previous role as a project manager at a financial systems integrator.
She also stressed that FINOLAB's activities facilitate proactively conducting specific demonstration experiments and generating R&D projects rather than merely generating a new atmosphere by gathering together for an arbitrary reason.
Following Ms. Ito, Izumi Nagahori of Fujitsu Research Institute and Yoshinobu Sawano of Fujitsu Laboratories of America, Inc. also introduced the businesses they are involved in, their missions, Fintech initiatives, and so forth.
Japan's Present State of Fintech Differs from Overseas
Next, Sawano introduced two ways in which Fintech in Japan differs compared to overseas. He stated he truly realized Fintech's direction had changed when he attended Finovate, a Fintech conference held in the US in May this year. A new trend had emerged in which there were more former, mature startups than new startups participating in the conference and showing off new technologies. This suggests that Fintech is no longer something new but rather has entered the adaptation phase outside Japan, indicating a difference in enthusiasm. Sawano also noted that startups from China, India, Brazil, and other countries are attracting attention as investment targets.
In connection to this, Nagahori outlined the current situations in other countries, noting that two billion people do not have bank accounts, which nearly every Japanese has. Next, citing that many people outside Japan do not have credit cards, Nagahori emphasized the significance of Fintech gaining acceptance in such an environment.
He continued: "Demands, such as 'this should not happen like this' and 'this kind of service should be possible' from the user side forcibly redefine services, and not only in finance. Fintech is the financial version of that." He introduced the case of Uber (a car dispatch service/car allocation app) and Square (for credit card settlement between individuals) as examples.
In this relation, Ms. Ito introduced some long-established accelerators and venture capital firms in Silicon Valley that are eyeing the global market. She continued to explain the trend: "The global market, especially the Asian market, is in the spotlight."
Fintech Leads to Big Changes in Banking
Fintech already enjoys practical use overseas. What will happen to banking in Japan when the full-scale introduction of Fintech progresses?
In response to this question, Mr. Ookubo said: "We, as a financial institution, must change our business model according to environmental changes caused by technological innovation."
Mr. Ookubo continued: "Previously, banks developed services for customers as they desired. However, now financial institutions can understand trends and consumer needs thanks to technological advances, such as IoT, big data, and AI. So, customers may not use our services if we do not use these technologies to create the best possible products and services for them."
He then introduced a financial service called GAFA (Google, Apple, Facebook, Amazon) Bank, in which overseas IT companies participate. Mr. Ookubo expressed a sense of crisis: "These companies have a great deal of data on users, and they have already started to provide financial services."
Then, Sawano noted the changing positions of financial institutions overseas, mentioning the appearance of many retailers as keynote presenters at the 2016 "Money 20/20." He added: "Since the flow of money is equivalent to the payment of consideration for purchased goods and services, retailers who can trigger such flows have more power."
In response, Mr. Ookubo presented one direction that banks should pursue: "We also created by trial and error a scheme for distribution operations in which the process up to payment can be carried out at the time of order placement using the blockchain. It is very important for financial institutions to create the business models for such payment schemes by going beyond industry boundaries."
Expecting New Services Using Bank Creditworthiness
Next, Nagahori introduced a new business model for banking services in which a bank provides its various functions (settlement, authentication, campaign management, etc.) to non-financial companies as services: "I believe creditworthiness is the core of financial institutions. There are many companies that wish to use banks' functions for authorization because of their creditworthiness."
Next, Mr. Ookubo explained how the Financial Services Agency and the Japanese Bankers Association have formulated roles and policies for open APIs, and each bank participates in such efforts. Then, he introduced Mizuho Bank's API-related initiatives: "APIs are essential for external startups and services to use banks' functions. When banks disclose APIs to startups, startups can then create services using the various functions offered by banks."
Touching on this subject, Ms. Ito talked about the situation in which startups are also turning their attention to APIs: "At present, financial institutions offer comprehensive financial functions. In the future, various players, including startups, will provide financial functions. So, it is important for each financial institution to strategically determine which functions it should continue to offer and which it should outsource."
Ms. Ito further noted: "From the standpoint of startups, provision of APIs from banks is much appreciated." She stressed the fact that startups can only create new services with APIs that banks provide.
In addition, Mr. Ookubo indicated that the banking industry is preparing an environment for disclosing APIs by mentioning the open innovation cases at Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group. He also noted application information collected by banks when opening accounts for customers as one of banks' advantages. Specifically, by using such information, banks can provide a platform that is less likely to lead to fraud.
Providing Bank Functions as Services
Next, Sawano presented a case study on Radius Bank in Boston. Radius Bank had six branches; it made a massive transition into a Fintech bank all at once by closing five of these.
Sawano said: "Traditional financial institutions had to do every job by themselves. However, once they switch their services to APIs or unbundle services, they would get extreme agility of their system and service development. Such cases have already existed. I think that in the US and Europe, people are no longer arguing whether Fintech companies will put banks or financial institutions out of business. There, Fintech startups are already used by financial institutions to achieve transformation, and I believe the same thing will happen in Japan, too."
Along these lines, Nagahori noted differences in the banking it systems of the two countries to argue as follows: "Financial institutions in the US have backbone systems that are classified as "independent by business unit" type system. Meanwhile, the core systems of Japanese banks are more like "bundle" computing for real-time processing with priority placed on reliability. We must address this issue."
From his point of view, decisions on the next direction should be based on what to do with the core systems on the backend, not the frontend, and this may be a bottleneck. He concluded by saying that the future direction points to core system Fintech and that we are expected to follow that. Lastly, Nagahori offered the viewpoint in which finance comes first as the next direction based on today's discussion. Then, to conclude the conference, he explained Fujitsu's concept of an open banking ecosystem and "cross industry" as key concepts.
Mitsunobu Ookubo Senior Digital Strategist
Open Innovation Team & IoT Big Data Business Team
Digital Innovation Department
Mizuho Financial Group, Inc.
Mizuho Bank, Ltd.
Chie Ito Head of FINOLAB
FINOVATORS Co-Founder and
General Manager, Business Development Department,
DX Business Unit, Financial Industry Business Operations
Information Services International-Dentsu, Ltd.
Izumi Nagahori Corporate Senior Vice President,
Fujitsu Research Institute
Yoshinobu Sawano Research Manager,
Fujitsu Laboratories of America, Inc.
Jun Taguchi IT Leaders