Japan's Banking Act was revised in May 2016 to address the more sophisticated group management and technological innovation that have accompanied advances in IT. Although such activities will be subject to approval by authorities on a case-by-case basis, the revised Banking Act will allow banks to invest flexibly in companies harnessing information and communications technologies to offer services that are expected to contribute to more sophisticated banking and greater convenience for users (fintech companies). With the revised Banking Act set to take effect in the spring of 2017, it appears that 2017 will be the year in which the banking industry takes on fintech in earnest.
Nonetheless, concerns over this little-known industry are mounting among Japan's regional financial institutions. Such worries are not unreasonable, as the word "fintech" itself, a portmanteau of "finance" and "technology," has only entered common usage in Japan very recently.
The reality is that even the world's leading banks are still sizing up these new startups, with no clear picture of what the future holds. As one such example, in an April 2015 letter to shareholders, JPMorgan Chase & Co. Chairman and Chief Executive Officer Jamie Dimon pointed to Silicon Valley startups as competitors to be watched closely. However, in his April 2016 letter to shareholders just one year later, Dimon refers to fintech startups not as rivals but as partners. For instance, he describes how JPMorgan & Chase is working with a fintech company to pilot a working capital program for small and medium-sized businesses in which the entire process from approval to funding is completed within one day.
The basic business model for regional financial institutions consists of accepting deposits, lending them out, and turning the resulting interest margin into profit. As is widely known, over half of the financial assets of Japanese households are held in the form of cash and savings. Receiving stable deposits at a low cost has become the starting point of business for financial institutions. Let us therefore consider how the growth of fintech will affect banks in their efforts to attract depositors.
In the Public Opinion Survey on Household Financial Behavior, conducted annually by the Central Council for Financial Services Information, "close proximity of branch or ATM" topped all other selections as respondents' reason for choosing a particular financial institution. In the 2015 survey, it was selected by 63.7% of respondents (single-person households). To address this situation, many financial institutions have competed to install automated teller machines (ATMs). According to a survey by the Japanese Bankers Association, a total of 137,000 ATMs and cash dispensers (as of the end of September 2015) have been installed nationwide by banks, shinkin banks, shinkumi banks, the JA Bank, and the Japan Post Bank (Annual Report on Payment Statistics, 2015 Edition).
However, the growth of fintech threatens to make ATMs a relic of the past. In fact, even in the public opinion survey cited above, "close proximity of branch or ATM" has gradually declined as the reason for choosing a particular financial institution. For example, the rate of this response was 73.8% in the 2007 survey. The rate has therefore fallen by 10 percentage points in only eight years. In other words, change is already underway, and this trend is expected to accelerate with the emergence of fintech companies.
When a customer stands in line for an ATM, his/her purpose is not using the ATM itself, but rather withdrawing cash, of which the ATM is merely a necessary means. As a result, if charging e-money to smartphones via the Internet and using smartphones as debit cards become common practices, customers will have less need to withdraw cash from ATMs. Furthermore, if cashback services become widespread in Japan, customers will be able to use registers at supermarkets and other stores as ATMs. From this perspective, it is an inescapable fact that ATMs will be of far less use to consumers in the near future.
As fintech gains momentum, the problem that managers of financial institutions must address is therefore the following one. In the past, banks have used ATMs and branch networks to attract depositors. However, if these lose their attraction, how will banks ensure that they continue to be chosen by customers? The answer should follow naturally from the bank's reason for existing—what it can do, or what it must do for its customers. The new role of financial institution managers in the fintech era will be to partner with and invest in companies that already possess, or will develop, the technologies needed to achieve this purpose.
Innovation is taking place in nearly every field of banking. Japan, too, is seeing many fintech companies begin to offer unique services, and managers of financial institutions are eager to know with whom they should ally themselves. But unfortunately, it is still unclear which companies will climb to the top of the heap. All that is certain is that the shape of the financial industry will change fundamentally. Although there is no need for regional financial institutions to become fintech developers themselves, they must be prepared to adapt flexibly to the changes brought about by fintech.
This readiness to adapt flexibly to change ultimately means fostering human resources with the skills that the fintech era demands. IT programming, of course, is not one of those skills. For example, in the lending field, attention has recently turned to programs that collect data on small and medium-sized businesses through online accounting software and apply that data to lending. However, bank employees do not need to learn how to build these kinds of programs. That is because collecting data is meaningless unless it can be used. The area where banks should specialize is using the accounting data to support businesses. In other words, human resources that can use accumulated data to support small businesses will give banks a new reason to exist.
Management that only pursues greater lending volumes in the short term cannot foster these kinds of human resources. Although "fintech" has become a fashionable buzzword, there is little value in banks teaming up with cutting-edge fintech companies just to follow a trend. To take advantage of fintech, the management of regional financial institutions must foster human resources that can use fintech to solve challenges for their clients. 2017 will hopefully see significant progress in this direction.
December 28, 2016