Fintech has long been a buzzword amongst financial and technology circles in Japan, but over the years has for the most part failed to deliver on its considerable promise. Unlike the three biggest Fintech markets globally - China, the US and the UK - the difficulty in obtaining regulatory licensing from the local financial authority and comparatively lower levels of technological innovation, has deterred investment in the industry. As a result, many financial services firms tended to use legacy technologies and Japan-focused ‘Galapagos’ systems at detriment to both institutions and consumers who could have benefited from a faster uptake of new technologies.
However, the last two years have seen a considerable change in the industry, driven largely by the Government of Japan realizing that structural incentives are needed to spur growth in financial services as part of reforms to revitalize the Japan economy. These incentives included the tightening of regulations to make investment into this area by the traditionally risk-averse Japanese more attractive. Japan was the first country to fully confirm its legal position regarding the trading and settlement of cryptocurrencies, including the protection on offer to investors in the event of market interruptions and provider-specific incidents. As a result, the appetite for trading in cryptocurrencies remains strong, and Japan is now the largest market for bitcoin globally. Japanese crypto exchanges such as bitFlyer, Quoine, GMO and DMM are using their successes at home to fund international expansions to Asian, European and North American markets.
The promotion of Fintech via native financial institutions such as banks and areas seeking to expand beyond their traditional realms, including e-commerce, has been another change led by the Government of Japan. Changes made to the country’s Banking Act has made it easier to incorporate APIs and allows companies to provide a wider range of technology-based financial products and services. This has resulted in not only traditional financial conglomerates - the country’s three megabanks (SMBC, Mizuho and MUFG) - offering self-developed and bought-out Fintech products, but a large number of start-ups entering the field. One area that has advanced significantly is payment services, long dominated by big banks with considerable barriers to entry. Although Japan is still a cash-based economy compares to neighbouring countries South Korea and China, consumer uptake has increased due to many popular local and global e-commerce companies offering payment services with notable examples being Merpay (Mercari), LINE Pay, Pay Pay, Rakuten Pay, Apple Pay, and Google Pay.
A major growth area concerns technology used by financial institutions themselves. The changes mentioned previously were largely orchestrated by the Government of Japan, but this has caused a knock-on effect on how banks, securities firms, asset management, hedge funds and insurance companies use technology for their business operations. Japanese financial firms have long resisted the move towards the utilization of Cloud, Big Data, Artificial Intelligence, Robotic Automation and other modern technology practices compared to counterparts in Europe and North America and relied on legacy systems such as mainframes for internal processes. However, many major institutions have changed their mindset in the past 18 months. Spearheaded by smaller firms but now replicated by larger organisations such as megabanks, major players are undertaking digital transformation by developing and incorporating new technologies in-house or procuring ready-made systems from local or multinational Fintech vendors.
The past two years have seen a surge in the popularity and uptake of Fintech solutions in Japan, and this trend is set to accelerate in coming years. Local industry bodies such as the Fintech Association of Japan, set up only in 2015, now counts 130 start-up and 275 established corporate members with more players regularly entering the market. Greater openness to new technologies by both service providers and users, in combination with a government that increasingly sees technology as a means to reinvigorate a stagnant economy, means that the next few years should be an exciting time in this industry.