Japan has long enjoyed a reputation as one of the world’s major centres of innovation. Home to iconic and respected consumer electronics brands such as Sony & Panasonic, as well as telecoms providers NTT-Docomo, KDDI and global wave-maker SoftBank, you may be forgiven for thinking that the country that invented the Bullet Train and the Compact Disc would be equally ahead of the curve when it comes to development and adoption of Fintech services. But is this really the case?
To understand the market and opportunities in a little more detail, I sat down with Noel Pritchard, Business Development Director, APAC at Intralink, a fluent Japanese-speaker who has lived and worked in Japan for over 15 years.
Alex: To an outside business, how would you describe Japan’s financial services and adoption of Fintech?
Noel: Driven by significant innovation and prowess in transport and consumer electronics, the common perception of Japan is one of a country ahead of its time. In many respects this is true, you only have to look at their advances in electronics, or the aggressive deregulation in areas such as regenerative medicine to reinforce that vision of a country incredibly at ease with, and actively adopting, the latest technology.
With that in mind, it often comes as a great surprise when businesses discover that, in the world of Fintech, Japan is still playing catch-up. Whereas mobile payments in China, for example, have completely stormed ahead and become a primary method of payment for many people, Japan is still a primarily cash-based economy, which reflects the overall slower advancement in some areas of financial services compared to their neighbours.
Alex: Why is Japan still predominantly cash-based?
Noel: There are many reasons and theories behind this. For me, I see it mainly as a cultural issue. Japanese people, in general, are very frugal and have a cautious attitude to personal debt, hence it took credit cards much longer to become a mainstream form of payment here compared to the other advanced countries.
Interestingly though, in some areas, Japan was dramatically ahead of the curve. For example, Suica is a contactless card that can be topped up and used to pay for rail fares on Japan’s rail network. It was launched in 2001 and uses RFID (radio frequency identification) technology, much like London’s Underground rail network. In 2006, Mobile Suica was developed and included on mobiles phones, before the advent of modern smartphones and the proliferation of apps.
The usage of Suica subsequently snowballed, becoming a real pioneering force in its day. Today, Suica now supports Apple and Android pay and is widely used across a variety of smart devices.
Fortunately, the pace of change is now starting to accelerate in Japan, with Fintech a hot item on the government’s agenda.
Alex: What’s changing in the Fintech space to enable development?
Noel: I believe the short answer is ‘gaiatsu’, or ‘foreign pressure’.
During the Edo period, the Tokugawa shogunate dramatically restricted the amount of interaction allowed with foreign entities, a policy known as ‘sakoku’ or ‘national isolation’.
It was the arrival of Commodore Perry’s black ships and the shock of Western Naval superiority that started a wave of ‘gaiatsu’, triggering rapid internal change and sparking the remarkably rapid modernisation of Japan in subsequent decades.
Though Japan is a dynamic modern nation, in many ways, it is still a relatively closed system. For example, it is only in the last 5-10 years that foreign credit cards and cash cards started to be accepted here. The Japanese retail banking industry is arguably stuck in a time warp with many antiquated ‘analogue’ processes still in usage and very little service flexibility.
Against that backdrop, the arrival of Blockchain, with its potential to disrupt the entire banking industry was the latest black ship that demanded a rapid response. And true to style, the Japanese banking sector and its IT partners quickly took action.
Government legislation was hastily amended, relaxing rules that previously restricted bank ownership and investment. These relaxations are specifically aimed towards the use of funds directed toward ‘enhancing financial services through the use of information technology’. This has driven Japanese megabanks such as the Mitsubishi UFJ Financial Group to establish dedicated divisions and launch contests to find promising start-up businesses in this space.
Partnerships are becoming more and more common, with Sumitomo Mitsui Banking Corp, for example, joining forces with US Venture Capital firm, 'Entrepreneurs Roundtable Accelerator', to establish a funding vehicle to make long term investments into innovative Fintech start-ups.
In parallel, there has been a great reaching out from the Japanese financial services industry to disruptive start-ups across the globe. This can be seen, for example, in the Tokyo Metropolitan Government’s launching of a new program called ‘Fintech Business Camp Tokyo’, chiefly designed to enable established overseas businesses to enter the local financial services market.
And now even the high street is getting in on the act - renowned electronics retail giant Bic Camera announced last month that they had started accepting payments in Bitcoin. The is just the latest ‘rapid modernisation’ in response to foreign pressure or ‘gaiatsu’. In just a few years, Japan has begun to embrace Fintech (albeit on its own terms), making it an exciting market for foreign entrants in this space.
Alex: With this desire to bring in new Fintech businesses and talent to the country, where are the key areas of opportunity for foreign businesses?
Noel: I think there are a number of interesting areas.
Backed by government policy, Japan is looking to double cashless payments in the next ten years. Given that it is still largely a cash culture, there is a vast blue ocean to play in for any companies providing innovative payment technologies, or related security or authentication solutions. The appetite for cashless is here, but there is still a lot to learn from other countries that have a significant head start.
There is also an increased interest in lending, where the potential of AI and big data technologies to bring more data to bear on credit checking and reduction of default rates. Fraud prevention is a related area that can also benefit.
That said, it is not all plain sailing. The financial services industry in Japan is still very much its own animal with idiosyncratic practices and shifting tides of so-called ‘coopetition’ that need to be navigated. Choosing the right local partner is also crucial to the success of an outside player.
The Japan team at Intralink has supported many western businesses, helping them take advantage of the market opportunities, utilising our local relationships and market expertise to deliver growth. One such business we are supporting in this manner is UK firm, Wirex.
The Wirex personal banking platform offers bitcoin debit cards, remittances, and mobile banking and lets users link Bitcoin wallets to Visa and MasterCard debit cards in regular (fiat) currencies, which will soon include Japanese Yen. Wirex has already secured investment from a major Japanese financial institution and on the back of that, we are working closely with them to ensure a successful launch of their business through the establishment of strategic partnerships with Japanese credit card issuers and banks.
The real winners will be those who can develop the right local relationships, navigate the regulatory framework, and work effectively with local partners. That a British Bitcoin start-up has secured capital investment from a major Japanese financial institution is yet another interesting example of the desire of Japanese firms to be at the forefront of the Fintech revolution and an indication of their willingness to be readier to work with western technologies than ever before.