Marine Guéguen (E16) and her twin sister Chloé travel the world to discover innovative FinTech start-ups that disrupt traditional systems. Here, they report on the thriving – yet atypical – Japanese Fintech scene.
Where London, New York, San Francisco, Singapore and Hong Kong are racing for the ‘FinTech hub gold medal’, Tokyo seems to be left behind. Yet, a Japanese FinTech hub has recently started to emerge, with its own specificities and growth drivers.
Hence the need for this comparative panorama, in which we have identified 6 Japanese FinTech specificities that all FinTech cheerleader with worldwide ambitions should bear in mind.
1# Japan: Over-capitalised banks with a Lilliputian focus on innovation vs. the West: Under-capitalised banks with a giant focus on innovation
Japan is the 2nd largest financial market in the OCDE with over USD 16 trillion worth of personal financial assets. Japanese customers tend to trust Japanese Megabanks – Mitsubishi UFJ, SMBC and Mizuho – and have had little incentive to switch to alternative financial solutions / Fintech. Japanese banks also have been less hit by the global financial crisis, and did not witness an exodus of financial talents toward alternatives careers such as FinTech ventures. Yet, we were surprised to find out that Japanese financial institutions have traditionally had a lower focus on innovation, with IT investments stagnating around 3% of their net incomes, a level well below their global peers. Yet recently, banks have started to look at FinTech, with Mitsubishi UFG launching its FinTech accelerator in 2015 for instance.
Western banks, on the other hand, have been more severely hit by the global financial crisis, which led to less customer trust in the overall banking system and the rise of innovative FinTech startups targeting disillusioned customers and proposing innovative financial solutions. Hence the need for banks to innovate quickly, create new revenue streams and increase their operation efficiency.
Consequences: The Japanese financial sector is still dominated by large financial institutions, and the FinTech start-up scene is pretty immature compared to the West. A win-win collaboration between start-ups and banks: while FinTech start-ups are seen as competitors in the West, Japanese banks see them as innovation facilitators and are more keen to collaborate with them.
2# Japan: A lack of entrepreneurship vs. the West: A start-up minded culture
According to the Global Entrepreneurship Monitor (GEM), Japan has the second-lowest level of early entrepreneurial activity in the world, beating out only… Suriname! What is more, none of Japan’s start-ups number among the world’s 145 ‘unicorns’, or those valued at more than $1 billion (China and the United States are home to 22 and 92, respectively). English is another issue and – as we were interviewing entrepreneurs and bankers – we were quite surprised by the limited number of people who could easily switch to English. (Yet, I have to admit that my Japanese is very poor too… Fair enough!)
On the other Asian side, India is the world fastest start-up ecosystem, with more than 3,100 start-ups in 2015, and 10,000 expected by 2020. Hence explaining the flourishing Indian FinTech start-up scene.
Consequence: Before becoming a FinTech hub, Japan will have to overcome a risk-adverse culture that prevents start-ups to emerge.
3# Japan: FinTech disruption initially started in the PFM and the Wealth Management areas vs. the West: FinTech disruption started in the lending and payment areas
In the West, disruption initially started in the lending area with P2P lending platform such as Zopa (UK) or Prosper (USA). India witnessed the same trend, with numerous Fintech startups proposing credit scoring, lending (Faircent) and payment solutions (PayU, Oxigen, Citrus, MobiKwik) to those 60% of Indians who are still unbanked.
The FinTech solutions proposed in Japan are different and we could even say that japan has leapfrogged the ‘lending’ revolution because banks’ services were already efficient in this area. Most Fintech startups have therefore emerged in the Personal Finance Management (PFM) area – with great success stories such as Money Forward, Zaim, or Freee. The PFM sector is indeed skyrocketing in Japan: with a unique situation whereby over 52% of personal financial assets (a total of $16 trillion) are composed of cash and deposits (e.g.with 0% interest) an increasing number of wealthy Japanese are looking at PFM and robot advisor services to better manage their savings. Cross-border lending platforms represent another opportunity: Since January 2016, the Central Bank has imposed a negative interest rate on deposits from commercial banks, essentially charging them for parking excess funds. Hence, the huge opportunity for cross-border P2P lending platforms, such as Crowdcredit, which connect wealthy Japanese investors (and soon commercial banks with surplus of deposits) to Western borrowers.
Consequence: Japan might lead the way in robot advisory and wealth management. 8 Securities, a leading mobile investing start-up originally based in Hong Kong has caught this trend, by opening its second office in Tokyo.
#4 Japan: Low scalability with heterogeneous market, regulation and infrastructure vs. the West: High scalability with homogeneous market, regulation and infrastructures
Unlike the US and European markets that are more homogenous in their composition, the Asia markets remain very fragmented, limiting the rapid scalability of FinTech businesses. Yet, Singapore and Hong Kong have managed to shine as ‘sub-regional hubs’ for FinTech startups looking to expand their products to South-East Asia (from Singapore) or Mainland China (From Hong-Kong).
The Japanese situation is different. With its insular geography, its hermetic markets, its strong regulatory requirements and its specific customer behaviours, Japan is not an easy market for Asian or Western start-ups willing to expand their products oversees.
=>Consequences: Japanese customers’ needs are completely different from Chinese, Indian, Malaysian or Singaporeans’ ones, and FinTech startups looking to enter this market will have to adapt their offering accordingly.
#5 Japan: A shy regulator, neglecting FinTech vs. the West Proactive regulators keeping a close eye on FinTech
In the UK, the FCA has demonstrated its support to the FinTech industry, providing transparency and creating a level playing field with initiatives such as ‘Project Innovate’, tax incentivess (Seed Enterprise Investment Scheme, R&D Tax Credit, ISA Scheme etc) or even trade missions from the UKTI ‘Business is Great’. On the Asian side, the Monetary Authority of Singapore (MAS) has set up in August 2015 a FinTech and Innovation Group to promote the industry and committed S$225 million (US$167 million) over five years in FinTech projects. While deliberately allowing grey zone to foster FinTech innovation, the MAS has however recently announced it will start regulating FinTech startups that ‘pose risks to the wider financial system’. Similarly in Hong Kong, the Securities and Futures Commission (SFC) is keeping a close eye on FinTech.
On the other hand, Japan regulators have traditionally neglecting FinTech, preventing banks to invest in technology subsidiaries for instance. Yet, The Japanese Financial Services Agency (JFSA) has recently started to discuss revisions of the Banking Act to enable banks to invest in IT ventures such as e-commerce, or online payment.
Consequence: The Japanese regulation is less ‘FinTech-friendly’ compared to Western or other Asian regulations. Yet, the JFSA has recently changed its attitude toward FinTech and started to benchmark British best practices by welcoming the ‘FinTech is GREAT Trade Mission’ in late December 2015.
#6 Japan: A FinTech ecosystem still working in silos vs. the West: A connected FinTech ecosystem, bringing together start-ups, banks, tech- giants, VC funds, universities, incubators and regulators
FinTech centers such as Level 39 (in London), CyberPort or FinTech Hong Kong (in Hong Kong), Stone & Chalk and Tyro FinTech Hub (in Asutralia) – just to name some of them – have proven their ability to encourage thriving FinTech ecosystems.
The Japanese Fintech ecosystem, on the other hand, is still at a very early stage, and has just started to organise itself with initiatives such as the FinoLab, launched in early 2016. Interestingly in Japan, FinTech has been more ‘Tech’ than ‘Fin’-oriented: Tech giants such as IBM Japan, NTT Data, Rakuten (the e-commerce giant) have been quicker to cooperate with start-ups than Japanese banks and seem to lead the race for FinTech talents.Hence it seems that Japanese ‘MegaTech’ will be key actors in this FinTech competition… Toward a 2020 Tokyo (FinTech) Olympics?
Read the full study and more on TWIN$'s blog.
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