It has been a year since Japan moved to a new era — Reiwa — and quite a lot has happened during the past 12 months. As Japanese leading banks roll out initiatives to help consumers and small- and medium-sized enterprises cope with the fallout from the COVID-19 pandemic, they also face an urgent need for digital transformation to serve their customers digitally, improve operational efficiencies, and find new revenue streams. The shrinking profitability due to a combination of nearly negative interest rates and the specter of a deep economic recession in Japan makes this transformation as imperative as ever.
I have followed the Japanese digital banking and fintech industry for years and have recently found a few interesting trends in the market that signal, at last, an imminent digital awakening:
- Driving digital payments adoption is a first step. For Japanese banks, the transition away from cash will transform the way they attract customers, shifting the major attraction from ATM proximity to how convenient and personalized their digital experiences can be. Besides investing in digital wallets, megabanks in Japan are adopting a more open approach to push digital payments. MUFG Bank plans to launch a global open network with Akamai to make high-speed and secured digital payments globally by leveraging blockchain technologies. Sumitomo Mitsui Banking Corporation (SMBC) highlighted in its 2019 annual report its initiative to build “good cashless” solutions. It partnered with Visa and GMO and aimed to build an omnichannel digital payment platform that is interoperable with multiple payment methods and external partners.
- Digital is being elevated to the top of the hierarchy. All the “big three” banks have set up a chief digital transformation officer (CDTO). MUFG even appointed its former CDTO as the new CEO this year, which signals the priority of digital transformation and innovation. The big three also launched their innovation labs, and their CDTOs are also heading these labs and ventures.
- Banks are partnering with fintech startups. MUFG strategically invested in Moneytree, a popular personal financial management fintech. It allows MUFG’s digital app users to easily track billings and loyalty points by leveraging Moneytree’s AI-based financial infrastructure platform. In 2019, SMBC partnered with R3, a blockchain startup to develop a proof of concept utilizing Marco Polo to streamline paper-based trade document investigation and sanction check processes. These collaborations bode well for future digital transformation efforts, even though the Japanese banks’ conservative culture and bureaucratic decision-making processes will inevitably slow these projects.
- Banks are leveraging AI and automation. The current environment forces banks to cut their costs and improve their operational efficiency. Megabanks are leveraging emerging tech to achieve this goal. Mizuho Bank developed an “AOR” solution leveraging AI, optical character recognition, and robotic process automation to automatically process more than 80% of checks and documents of the bank, which streamlined its back-office operations. MUFG launched an AI-powered quick home loan credit assessment service that operates 24×7, reducing half of the required paperwork and significantly accelerating the assessment from days to minutes by replacing human credit analysts with AI.
- Regulators are encouraging digital transformation with open banking. Japan’s Financial Services Agency (FSA), the principal regulator for banks in the country, amended Japan’s Banking Act in 2017 to promote open banking. The regulator also required Japanese banks to publish their open APIs policies and to contract with at least one third-party provider (TPP) by the end of 2020. The lack of clear guidelines from the FSA, however, might waste an opportunity to be a catalyst for banks’ transformations. For instance, banks and TPPs face unresolved conflicts regarding whether TPPs should pay for fees when using the banks’ data. Thus, even with 130 chartered banks in Japan among the largest 140 planning to open up APIs by mid-2020, we have yet to see a significant announcement in that space.
Over the summer, Forrester will launch a new study about the state of open banking in Japan as part of a broader series of global open banking research to delve deeper into some burning problems that banks, TPPs, and regulators face in Japan. Please feel free to reach out to me at firstname.lastname@example.org if you are interested in participating in this research and/or have any innovative solutions to help the Japanese digital and open banking transformation journey.