How Will Waves of Digitalization Change Banks?

As digitalization continues to advance across industries, how will banks change going forward? Will fusions of IoT and financial services--or market entries by other industries--become the game changer of the financial industries?
*Excerpt from Fujitsu Research Institute's information magazine, Chisounomori, Vol. 6, 2017. (Interview date: July 6, 2017)

Ryosuke Izumida: Director, NavigatorPlatform Inc.
Izumi Nagahori: Corporate Senior Vice President, Fujitsu Research Institute

*Titles and companies are as of the date of the interview

Four Types of Banks in the Future

Nagahori: Mr. Izumida, you recently published a book entitled Ginko ha Korekara Dounarunoka ("The Future of Banking").* What drove you to write it?

Izumida: As I understand it, Fintech explains from the user's perspective how technological changes impact today's financial services. The 'key element of Fintech, I suppose, is savings. Today, in Japan, we receive almost no interest on our bank savings, same as other countries. Therefore, we must discuss how we can utilize Fintech in terms of how to manage our money in this era of low interest. It used to be difficult to compare services from different areas, but now we can compare, for example, between interest rates on savings and point reduction rates on the major reward programs. From this point, we need to discuss the fundamental issues: what is the primary value of financial institution? The value of financial institution is based on its ability to make good investment decisions. A bank cannot be considered to be a financial institution unless it can manage the risk of lending money while simultaneously exploring investment opportunities. At each bank, decisions on investments are based on individual skills. Assume a business owner visits a bank to consult about loans. A banker there will begin a conversation by saying something like, "That sounds like an interesting idea," or "How much do you need?" and then expand by asking "Do you need a funding scheme?" or "Is a conventional type of loan sufficient?" This is an example of an Investment-oriented bank, one of the four types of future banks I proposed in my book.

Izumida: Sincere communication with clients is the task of human bankers; machines cannot do it. At the same time, however, there is a limit to how much personalized communication can be offered. In the future, with technology's advancement, responsibilities handled by humans may be sorted into groups, and some may be selected to be replaced by automatic processing. Banks able to perform such automatic processing will fall into the Cloud-oriented bank category from among the four types I introduced earlier.
When we look at overseas financial institutions, the investment bank Goldman Sachs (GS) has been transforming itself into a conventional bank since the Lehman Brothers bankruptcy. GS has 20,000 to 30,000 employees, far fewer than Bank of America, which has over 200,000 employees. Using this size difference as an opportunity, GS has actively employed engineers to successfully improve management efficiency and entered into business fields that it previously could not. Outside the financial field, Amazon's strategy amazes us. Amazon is not a financial company, but it controls commercial distribution by operating its own EC site. Moreover, Amazon has data. In Japan, we sometimes come across the phrase "Amazon economic zone." Amazon is finding business opportunities and creating new businesses by increasing the number of contact points with financial businesses. In other words, Amazon's strength is that unlike a financial institution, it can collect fresh data by distributing physical products. Google has commented that "Amazon is our number one threat." Although there have been discussions within the financial field as to which financial institution will win out in the competition, regardless it will be increasingly important to include companies from various industries in the race.

Nagahori: At Fujitsu Research Institute, we have been studying the Fintech field since around 2012. We recently realized that Fintech redefines financial products and services from the user's perspective, and thus the key concept is "democratization." This means that users want financial services developed based on the real economy; Amazon has set a good example. When you purchase a product on Amazon, you receive points worth as much as 2% of the product price. Financial institutions rarely offer products with such high interest. Consumers act rationally, and it is natural for them to choose Amazon over financial institutions' low-interest services.

Learning How to Use APIs from Non-financial Companies

Nagahori: To compete against non-financial companies, financial institutions are actively using application programming interfaces (APIs) to improve their services' usability. I am a committee member of the Information-technology Promotion Agency, Japan (IPA); about the meeting, a committee member in charge of the IoT field stated that creation of mutually incompatible IoT standards was completely useless. The World Wide Web standards organization (W3C) is addressing this issue by specifying a standard for company-developed APIs, the Web of Things.

Izumida: APIs must be harnessed from the perspective of providing what consumers need or find convenient. The key is how much you can surprise customers with new capabilities. If companies like Google and Amazon that already offer their own unique services can release more useful features through APIs, more consumers will follow them.

Nagahori: Google and Amazon are quick to offer specific products and services to enable users to experience such products' and services' utility. Behind the scenes, they effectively employ the latest technologies. What I mean here is that it is important to directly stimulate the real economy. Japanese IT suppliers prioritize technology such as the cloud and AI, which somewhat concerns me. Doing so is like trying to sell a restaurant kitchen to a person who is looking for a good place to eat. IT suppliers will not survive unless they make approaches aimed at the real economy.

Ryosuke Izumida,
Longine Editor in Chief
Director, NavigatorPlatform Inc.

Izumida: Besides IT suppliers, companies such as automobile and distribution companies may be able to make a difference in the future if they take the lead in and promote the use of APIs.

Misjudgments of Traditional Companies Believing Portfolio Management Brings Stability

Nagahori: Amazon was said to be in the red for a long time after its establishment; it finally moved into the black quite recently. Though sales had been high, the company re-invested most its profits. I feel Japanese companies are resistant to such a management strategy.

Izumida: While I worked for an insurance company, my clients included Internet-based companies such as Amazon and Yahoo. My senior fund manager used to say that Amazon was not a viable investment because it was always in the red. I believe the same thing happened to Tesla Motors, which has been working on self-driving technology. These companies stand out as unique entities in the capital market because they make investors believe in the CEOs and their visions, thinking "I want to see the world that this person (CEO) will create" despite the companies' corporate finances.

Nagahori: Traditional companies draw a sharp contrast to Amazon and Tesla Motors because they place importance on portfolio management. They may not experience pressure because even if one of their businesses fails, the remaining businesses can compensate for that.

Izumida: Stable management is excellent, but traditional companies will have problems when a company with an overwhelming scale of business emerges outside their fields. For example, the largest beer company in the world is currently Anheuser-Busch InBev N.V., which produces Budweiser. Assuming that Budweiser production is 100, production by Kirin and Suntory combined is 5 or so. Beer consumption in Japan is predicted to decrease due to the aging society. I believe this has powerful implications for the financial industry. When Japanese financial institutions explore overseas expansion strategies because the Japanese market can no longer generate sufficient profits, how will they compete against global financial institutions (e.g., Citigroup and JP Morgan) or against non-financial companies that provide financial services (e.g., Amazon and Alibaba)? I see this happening in 10 or 20 years.

The Fusion of IoT and Financial Services

Nagahori: We talked about IoT and financial services a couple minutes ago. What do you think will happen?

Izumida: Although it depends on how you define IoT, I suspect rapid fusion in the B2B area. I am closely watching the automobile and distribution industries, where self-driving technology is attracting a lot of attention for example. When self-driving cars become widely available, my prediction is that cars will be sold primarily to self-driving car operators instead of individual users. In other words, consumers will no longer own a vehicle; they will rent it from an operator. If this becomes reality, sensors will be installed in vehicles owned by operators and an instant payment system will be created. This will enable consumers to pay for the gas they use and also insurance quickly and easily. Service providers must collect data on whether vehicles are self-driving safely as well as the relationship between drivers and driving behavior. This will motivate service providers to learn about and use IoT.

For the distribution industry, we should focus on physical B2B distribution. Service providers must use the network instead of paper forms to exchange information and track payment records including payers, payment dates, and who processed payments. These efforts should prove fruitful for service providers because connecting packages to their information guarantees distribution.

Non-financial Companies as Game Changers

Izumida: Returning to the topic of the financial industry, financial institutions must explore what they can offer based on their main business, deposits. Some may wonder about the benefits of increasing the number of bank accounts and individual savings amounts now in Japan, but having a large number of accounts increases future business potential. For example, this enables financial institutions to collaborate with companies in the service industry.

Nagahori: In such a case, financial institutions must lower the cost of mission-critical systems used for deposits. For Japanese financial institutions, these systems often cost at least a few billion yen due to efforts to create robust systems. The most important question regarding the future of Fintech is how to use technology to lower the cost of mission-critical systems.

Izumida: The rules of the game may change completely if non-financial companies opt to enter the financial field who are willing to continue to do business even while in the red for an extended period of time.

Izumi Nagahori
General Manager, Consulting Unit,
Corporate Senior Vice President,
Fujitsu Research Institute

Nagahori: At the Fujitsu Research Institute Forum 2016, Professor Kazuhiro Mishina of Kobe University said, "American businesspeople change their company positions completely and suddenly." For example, while Japanese automobile companies defeated GM and Ford, American car companies used their cars to sell gasoline and ended up making much more than they did with car sales. The Japanese were proud that they had become the best in the world, but in fact the Americans had already changed the competitive arena. I think the ability to make this kind of change is the essence of Fintech.

Izumida: In Silicon Valley, the home of venture businesses, entrepreneurs launch businesses in a legal gray area but turn them into legal industries through the use of technology and lobbying. This means they completely change the business landscape.

Nagahori: Companies must consider in which business areas they need to drive creative destruction and understand the fact that consumers feel inconvenienced by the status quo. Fujitsu Research Institute conducts an annual Fintech service survey of Japanese consumers; the survey results often indicate that consumers in fact do not have a strong need for Fintech. They usually want to keep using their current banks and ATMs. When business rules change, however, the environment undergoes dramatic changes. For example, when convenience stores began to process electricity and mobile phone bill payments more than ten years ago, banks did not do anything about it. Most of these small payments are now made at convenience stores. Combining such bill data with other types of data possessed by banks will create new, useful services.

Bank Transformation Needs Lifestyle Innovation

Nagahori: In your book, you categorized banks into four types from the consumer's perspective. Among these four, human resources are the key for two, the "Private banking" and "Investment-oriented bank" categories. I think some parts of their operations can be replaced by technology. Am I right to suspect that technology will to some degree penetrate business models that rely on human resource capabilities?

Izumida: According to a private banker based in an overseas city, more affluent people tend to seek more stable asset management. Although it depends on their desired stability, bankers may be replaced by technology (e.g., robot advisers) in some aspects of management, and face-to-face communication will remain only for entertainment. Private banking and technology are related. Consumers daily talk to smart speakers like Amazon Echo, which is popular in the US. For example, they tell their speakers they made some money from an inheritance or stocks. If these conversations are stored and analyzed as data and then used to give consumers advice on inheritance tax strategies or financial products, what used to be done manually may be automated by machines.

Nagahori: I think that in the future, banks will need innovation to change. What do you think?

Izumida: In my opinion, innovation is a trend that will continue for approximately 20 years. Consider smartphones as an example. It has only been about 10 years since the iPhone was first released, but the number of smartphone manufacturers has already been reduced to but a few globally. In the case of smartphones, people maintain an image of the end product and think in terms of current smartphones even when they come up with something similar. In other words, I am trying to say that innovation does not occur so easily.

Nagahori: In that case, the banking business seems very safe and stable.

Izumida: Banks will gain a new perspective when they explore how to use technology to strengthen their main operations; they may create new lifestyle-oriented services using their deposit service. For example, Chinese people very frequently buy and sell items. Alipay spread because people who did not know each other wanted to make payments smoothly. WeChatPay also spread due to the necessity of easy remittances and exchanges of money because of China's game-like custom in which people share New Year's gift money. Users must open a bank account to make remittances, but the ability to receive cash works as an incentive. As a result, people do not feel troubled to open a bank account.

Nagahori: Changing culture takes a long time. Therefore, we must think about offering services that match the culture. In this regard, financial institutions should work with non-financial companies while placing importance on their core financial business; they should use Fintech to accurately assess businesses, take risks, and improve the efficiency of their actions.

Izumida: The Japanese market is predicted to shrink in the future. Some companies have already given up on domestic demand and expanded their businesses overseas; financial institutions may need to learn from them. For example, companies in the beer and maternity industries are cataloging their own strengths to use to compete in the global market. Financial institutions may have to review their own businesses from the same perspective.

Nagahori: Thank you very much for the interesting conversation today.

  • *: Izumida, Ryosuke. Ginko ha Korekara Dounarunoka ("The Future of Banking"). CrossMedia Publishing (Impress), 2017.
Ryosuke Izumida (left) and Izumi Nagahori (right)
Ryosuke Izumida
Longine Editor in Chief,
NavigatorPlatform Inc.
Ryosuke Izumida graduated from the Faculty of Business and Commerce at Keio University, where he also completed his master's course at the Graduate School of System Design and Management. Thereafter, from 2000 to 2002, he worked as a foreign stock portfolio manager in the International Investment Division of Nippon Life Insurance Company. After working as a securities analysist primarily for the technology sector at the Research Division of FIL Investments (Japan) Limited from 2002 to 2012, he established a joint company, NavigatorPlatform Inc., in 2013. At his company, he launched Longine, a finance and economy website for private investors, where he serves as the Editor in Chief. His major publications include Ginko ha Korekara Dounarunoka ("The Future of Banking," CrossMedia Publishing), Google vs. Toyota (KADOKAWA), and Nihon no Denki Sangyo ("The Electric Industry in Japan," Nikkei Publishing). At present, he also lectures part-time at the Tokyo Institute of Technology.