Norbert Gehrke of Tokyo FinTech elaborates on the most important fintech trends in Japan, while highlighting the possible impact of the coronavirus pandemic on the financial services sector
Japan is the world’s third-largest economy, with the Tokyo metropolitan region contributing approximately 20% to Japan’s GDP, and thus placing itself among the top 20 national economies globally, ahead of countries like the Netherlands, Switzerland, Taiwan, and Sweden. Japan’s population peaked in 2010, at just over 128 million people, and is forecast to steadily decrease for the foreseeable future, with around 125 million people in 2020; this shrinking market also sees a rapidly ageing population. At the same time, the migration from rural Japan into the cities will not peak until 2025 – many smaller towns and villages have already become depopulated, some estimations showing that one in six houses are abandoned in Japan.
1. Cashless Payments
Among industrialized nations, only Germany has a higher utilisation of cash for payments than Japan. The Japanese government launched an initiative to double cashless payments to 40% by 2025. With the increase of the consumption tax from 8% to 10% on October 1, 2019, several discount schemes were implemented, subsidizing the installation of cashless payment terminals for merchants, and providing 2% or 5% discounts for consumers when purchasing from registered SMEs or franchise stores (national chains are excluded from the scheme). In addition to providing relief for consumers, the initiative was intended to get the Japanese hospitality industry ready for the Olympics, when more than 40 million visitors were expected.
2. Open Banking
Through amendments of the Banking Act in 2017, a framework for regulating electronic payment service providers (covering both payment initiation service providers, or PISPs, and account information service providers, or AISPs) was established, along with a registry for such service providers. Banks were required to publish their affiliation and cooperation with PISPs & AISPs, and a deadline for the conclusion of commercial contracts between the parties and implementation of Open Banking services was set as May 31, 2020.
While European Open Banking rules include provisions to allow limited free use of the compulsory APIs (up to five calls per account per day, while premium services can be charged for extra), the Financial Services Agency (FSA) had taken a hands-off approach and left commercial terms up to negotiation between the parties. Naturally, the banks wish to recoup the cost of the Open Banking implementation, which might make the fees prohibitive for startups, especially if it is based upon costly and inflexible legacy architecture.
With the progress towards the deadline worryingly slow, the regulator has taken advantage of the pandemic and extended the deadline to the end of September 2020, at the same time permitting the use of screen scraping. We expect that over time, digital-only banks (branchless banking is allowed under the Japanese banking license) with modern technology infrastructure will distinguish themselves by opening without restrictions, thus creating the platforms the regulation intended. From there, the market will decide, with customers naturally migrating to the services they perceive value in. Beyond the retail world, there is significant value to be captured by Open APIs in the SME funding space, which is something companies like Emerada are laser-focused on.
3. Crypto Assets
Japan had been at the vanguard of cryptocurrency regulation when it established Bitcoin as legal tender and created a licensing regime for cryptocurrency exchanges in April 2017. Currently, there are 23 licensed exchange operators in Japan. In March 2019, the FSA proposed amendments to the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA) to strengthen the protections for investors in crypto assets. After a public comment period, these updated rules went into effect largely unchanged on May 1, 2020.
The amendments are quite comprehensive, with room for interpretation, and hence the industry expects that several months and some approvals will be required until the full scope and intention becomes clear. Regardless, the now effective rules draw a clear line between crypto assets covered under the PSA (with the new addition of crypto asset custody), and crypto asset derivatives and security tokens covered under the FIEA.
In practice, this means that regulation for cryptocurrency exchanges has become even stricter (aforementioned custody rules, segregation of customer assets, 100% cold wallet requirement for customer asset, exchange assets to at least match hot wallet holdings) while at the same time restricting the business further – leverage on margin transaction has been limited to 2x, while the JVCEA as self-regulatory body had proposed 4x. Expect some exchange consolidation to set in.
Generally, security tokens transferable trough a blockchain will be deemed ‘Type I Securities’ – equivalent to highly liquid securities like stocks, bonds, investment unit trusts – under the FIEA, and their purchase, sale and intermediation will require the corresponding ‘Type I Financial Instruments Business Operator (FIBO)’ license, putting the established brokers firmly in charge.
4. Pandemic Impact
The financial services sector in Japan is highly paper-based, and many transactions require physical stamping with a personal or corporate seal. 90% of insurance policies get sold through agents, and it is not uncommon, in particular in rural Japan, that the insurance agents fill in the lengthy application forms together with the customer, and then faxes it to head-office, where someone re-keys the information in the policy administration system.
While Japan’s Ministry of Economy, Trade & Industry (METI) was already predicting a ‘2025 Digital Cliff’ due to the ageing system infrastructure and retirement of IT industry workers, it is fair to assume that the current pandemic will be a catalyst for digital transformation (or DX, as it is referred to in Japan). In fact, the Cabinet Office recently published a self-assessment on digital channels to access pandemic subsidies and support programs. Across offline applications, seal requirements, and the need to submit physical documentation, the challenge was illustrated well. However, acceptance is the first step to change.
In addition, SBI Holdings’ CEO Kitao-san promulgated the strategy of a ‘Fourth Megabank’ by rolling up under-performing regional banks last year. With many SME businesses facing bankruptcy, and the level of non-performing loans expected to rise quickly, now would be a great opportunity to accelerate execution of that strategy, creating a viable challenger for the first time.
About Norbert Gehrke
Norbert is the Founder & Representative Director of Tokyo FinTech, focused on community-driven innovation in the financial services sector in Japan. Norbert spent most of his career as a Managing Director in Goldman Sachs’ Technology Division, Barclays Investment Bank, and as a consultant. He has led several greenfield broker/dealer implementations around the globe, innovation & transformation initiatives, as well as new product launches. In insurance, he previously developed a five-year post-merger strategy for AIG Japan. Through eXponential Finance, he invests in and advises several FinTech companies on strategy & operations and facilitates Asia market entry.
About Tokyo FinTech
Tokyo FinTech is a not-for-profit organisation registered in Japan, committed to educating 3.200+ individual members on new business models and technologies, creating sustainable professional networks, and advancing innovation in financial services domestically, and regionally. Through our global community partnerships, we source exciting ideas, and advise on the applicability for our markets. Our presence includes regular meetups, a Medium publication, and a podcast followed in 50+ countries.