The framework was intended to encourage information sharing between the agencies and support the entry of innovative fintech businesses into each other's markets; recognition financial innovation is a global endeavour.
" “[In Japan] would-be disruptors are increasingly working with the establishment rather than trying to tear it down."
Instrumental in the arrangement was Junichi Kanda who had been seconded out of Japan’s central bank to work with the JFSA on fintech.
He left the agency not much later to join a fintech – Money Forward, Japan’s leading personal-finance management and cloud-based accounting app, designed to aggregate all accounts and financial assets.
After 23 years at the Bank of Japan, Kanda’s shift to the private sector was something of a cause celebre in Japanese business. While it is common for government officials to join private sector boards on retirement, it is almost unheard of for one to shift mid-career – and to a company almost unheard of.
“It was a great surprise for people,” Kanda told bluenotes during a recent visit with ANZ’s Japan head of compliance, Mamoru Koutaka.
So why? Kanda’s answer was straightforward: his career at the BoJ had focussed on supervision but his secondment to the FSA to nurture fintechs made him realise the future sustainability of financial services in Japan – as it is globally – hinged on innovation.
“It was a very interesting project but it also made me accept financial services needs innovation and for that to happen it is necessary for the fintech eco-system to thrive,” he said.
Japan may not be the highest-profile market in the world for fintech but it is a particularly interesting one.
By value, Accenture calculated $US154 million was invested in Japanese fintechs in 2016, more than double the $US63 million invested in 2015 (and roughly the same amount as Australia and New Zealand.)
However it is the nature of the fintech ecosystem in Japan which is more telling than the size. It’s a cliché Japan is an harmonious society and one whose corporate sector has long been dominated by close relationships – be that the many operating entities of parent holding companies (typically with a bank at the centre), the ‘convoy’ behaviour of rival companies in a sector or the tight links with regulators.
Historically the ‘iron triangle’ of politics, the public service and the corporate world, where the three realms cooperated for the common good, is credited with contributing to the post-war economic boom in Japan.
But such relationships also deliver rigidity: the ‘convoy’ system in banking, where no bank was allowed to fail following the collapse of the bubble economy in the early 90s, contributed to a much greater crisis in the late 90s.
The rigidities delivered some perverse outcomes. Arriving in Japan as a foreign correspondent in the late 90s I was amazed to find how an economy which had produced the highest of high-tech companies like Sony was still overwhelmingly paper and cash-based.
The statistic which stood out was in 1998 Japan had more electronic toilet seats than personal computers.
From the fintech perspective however the less adversarial nature of corporate Japan has meant the country has moved more quickly to a state where it is likely the rest of the fintech world will follow: would-be disruptors increasingly working with the establishment rather than trying to tear it down.
“When I was with the JFSA, and we were reviewing the fintech sector, it was from the perspective that it should not be disruption for its own sake but collaboration,” Kanda said.
That meant the JFSA – the banking supervisor – reviewed its regulation to allow such collaboration. Financial groups can invest in finance-related IT companies more easily and there is a legal framework for virtual currency and Open API.
The central bank is also behind the push. Speaking at the 2nd Japan FinTech Forum , BoJ executive director Shigehiro Kuwabara said traditionally “Japanese companies tend to adhere to a ‘principle of self-sufficiency’ not only on the technology side but also in the human resources that support the technology”.
“We need to fully recognise the turning point where we now stand. Coupled with today’s rapid advances in hardware processing speeds and baud rates, a number of innovative technologies and internet-based services will change the structure of the industry significantly,” he said.
“Now is the time to change our way of thinking and see our position as a good opportunity to promote open innovation.”
Money Forward is a text book example. Not only is Kanda ex-BoJ, its platform works across the Japanese financial services universe and is institution agnostic. Moreover, several financial institutions were key investors in the fintech’s initial public offering – the first for a Japanese fintech - in September.
“I think the BoJ sees it as very important to change the conservative culture of Japanese banking and the senior executives in Japanese fintechs are very credible people – and many have worked at foreign institutions,” Kanda said.
“But I think also we believe – and BoJ and FSA believes – we have to move faster in Japan.”
That point was reinforced in a report by UBS Japan called “Japan Bank Revolution: Open APIs to bring a new world”.
APIs – application programming interfaces – are a set of functions and procedures which enable apps to access data or other services. In this context, “open APIs” are a mechanism for non-banks, fintechs or otherwise, to integrate with a bank or a bank’s data or services on behalf of a customer.
In many markets, including Japan, regulators are forcing banks to accept open API protocols. According to UBS, future scenarios for banking business models could include a shift to 'dumb pipe' status, locking in, and re-bundling.
“Of these, we think re-bundling will look attractive to many banks. We note though that in any of these scenarios operations would need to be made more efficient through far-reaching revision of existing channels,” UBS said.
It may be though Japan’s particular corporate culture may be an advantage in the next phase of deeper cooperation between would-be disruptors and the potentially disrupted.
There are natural complementarities between fintechs which offer innovation but lack scale, data and public confidence; and incumbent institutions which have these attributes but are to various degrees entrenched in legacy systems and processes.
Model of cooperation
A really interesting perspective comes from Australian Paul Chapman, chief executive and founder of Moneytree, a Tokyo-based fintech which offers personal financial management, a financial data API platform and small/medium business financial data management.
Like Money Forward, enterprise clients include the major Japanese banking groups and MasterCard. It is also expanding in Australia.
In a presentation to the recent Australia Japan Business Cooperation Committee conference, Chapman argued “an API service obviates the need to develop existing functionality from scratch. This reduces development time and costs significantly and also makes it possible to incorporate features you otherwise do not have the resources or expertise to develop”.
Speaking to bluenotes Chapman expanded on the theme saying Moneytree was already working closely with all the major Japanese banks, some regionals and a total of nine financial institutions.
“I think, looking ahead, the model of cooperation will work everywhere – but particularly in Japan,” he said.
“Banks have all the customers and have all the trust. For a fintech, these are very expensive things to acquire. The challenge is banks are actually not that close to their customers and that’s where innovation and fintechs come in with highly mobile, very customer-focused solutions.”
Chapman said banks globally are becoming more aware of this but there is clearly a variation between banks which think it might be enough to hire more technology experts or set up innovation labs and those who are comfortable with deeper partnerships.
“Fintechs are faster and fintechs are cheaper and no one company can do everything,” he said.
Chapman said Japan has actually stolen a march on many markets with regulators actively pushing the traditional industry towards innovative partnerships – something the UBS report supports.
Japan actually does have an economic history of rapid advancement followed by stasis – even ossification – and there are many now who believe the country is actually suited to leapfrogging other advanced markets in monetising the cooperation of innovators like fintechs with data and customer-rich incumbents.
Perhaps the major challenge for Japan will be turning the domestic opportunity into a global one.
After all, another lesson of history is while Sony, Toyota and Uniqlo are major global brands, the vast majority of Japanese companies – and the most inefficient – are simply focussed on the domestic market. One large but isolated - and shrinking.
Andrew Cornell is managing editor at bluenotes