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A fintech boost for Japanese banking?

Hideo Tomita
Hideo Tomita
Representative Director, Refinitiv Japan K. K.

This article is written in both English and Japanese.

Japan’s financial services industry is faced with persistent and structural challenges, not least negative interest rates. At a recent financial regulation summit, we considered whether innovation is able to deliver a fintech boost for Japanese banking.

  1. An ageing population, financial inclusion, technological innovation, and market fragmentation are seen as the most pressing issues for Japanese banking.
  2. The Refinitiv Japan Risk Management Technology Summit discussed the progress of artificial intelligence and big data and how they could serve as a fintech boost for Japanese banking.
  3. Unrealistic expectations about the impact of technology seem to have eased, allowing Japanese banking to discuss fintech potential with a degree of realism.

When I started writing this blog from my home near the sea, Super Typhoon Hagibis was approaching in one of the largest storms ever to hit the Tokyo area. The scene reminded me of the painting ‘The Storm on the Sea of Galilee’ by Rembrandt van Rijn.

Marcelo Hiratsuka from our team at Refinitiv Japan projected this painting on the big screens during the opening remarks for the afternoon session at our financial regulation summit held in Tokyo on 3 October, referring to a similar environment surrounding the current financial sector.

This was a wake-up call for the audience.

Resembling the masterpiece, fleets of financial institutions were thrown into a stormy sea by the global financial crisis. However, the efforts of many over the past decade helped to finalize the Basel III framework, preparing us to withstand tail risks, as in a sudden storm.

Yasuhiro Hayasaki, Counsellor on Global Strategy to President and the Board of Directors at The Norinchukin Bank. A fintech boost for Japanese banking?
Hideo Tomita made the opening remarks at the Japan Risk Management Technology Summit

Japanese banking challenges

We have hosted the financial regulation summit in Japan for the past five years.

Following the financial crisis, we invited experts from the public and private sectors to discuss impacts, measurements and issues surrounding a new regulatory framework.

The summit has been recognized as one of the most regarded risk management conferences in Japan. This year, we changed the name of the event to the ‘Japan Risk Management Technology Summit’ as financial institutions, especially those that took tail risk countermeasures, now face persistent and structural issues.

There are four key issues fueling these challenges:

  1. Global trends of continuous ultra-low interest rates and yield curve flattening.
  2. Other industries leveraging technology and data to penetrate into the financial sector.
  3. Conflict between globalization and protectionism in politics and commerce spreading to the financial sector.
  4. Finance is expected to play a major role in solving social issues in response to ageing and environmental degradation, as well as climate change, money laundering and counter terrorist financing.

Surrounded by these new challenges, Japan hosted and chaired the G20 Finance Ministers and Central Bank Governors in Fukuoka in June this year.

Japan’s Financial Services Agency (FSA) identified an ageing population, financial inclusion, technological innovation, and market fragmentation as important issues for the future.

For financial institutions with international exposure, the disruption of markets by protectionist regulations squeezes profits due to the diversification of optimal allocation of capital at different scales and the cost of responding to regulations that differ from one jurisdiction to another.

Managing the technology hype

In 2015, during his keynote speech at the Pan-Asian Regulatory Summit held in Hong Kong by Refinitiv (then Thomson Reuters), Mr. Nobuchika Mori, the then Commissioner of the FSA, drew international attention by pointing out the unintended consequences of over-regulation.

Regarding the response to market fragmentation, an FSA official at this year’s Japan Summit laid out the regulator’s efforts during her speech, and I hope that FSA will demonstrate its leadership in the international community again.

As a way to break through this harsh financial environment, there is an increasing expectation for innovation through fintech in Japan to create new revenue opportunities, but at present, cost reduction through operational efficiency is probably the most effective method.

Based on the Gartner Hype Cycle, which attempts to discern the technological hype from what’s commercially viable, we could argue that fintech in Japan is on the ‘slope of enlightenment’.

It’s not wrong to say that excessive excitement and unrealistic expectations have disappeared, and we are at the stage where we can discuss things with ease.

Marcelo Hiratsuka, Head of Market Development Refinitiv Japan, addresses the Japan Risk Management Technology Summit. A fintech boost for Japanese banking?
Marcelo Hiratsuka, Head of Market Development Refinitiv Japan, addresses the Japan Risk Management Technology Summit

Fintech opportunities in Japanese banking

At this year’s summit, we had practical discussions on how to use artificial intelligence and big data based on past experiences.

As a moderator on a panel discussion on the Opportunities and Pitfalls in the New Era of Financial Data and Technology, I asked panelists how to enhance possibilities to open the door to the future — whether advancing into other fields through holding companies or deepening finance.

They answered that profiting from the financial business itself would be very difficult when there is virtually no interest rate, with scant differences between long-term and short-term interest rates. Then the answer would be expanding the scope of business.

Establishing trading firms by regional banks — a topic that has frequently been discussed these days — is a step in that direction.

The day before the recent strong typhoon hit Tokyo, I visited a local specialties fair held at a department store in Ginza, Tokyo. An acquaintance, who is a regional bank employee, invited me.

I wondered where the financial business would go, watching the acquaintance selling regional products in a very natural way while his handling of bank notes for change reminded me that he was a bank employee.

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Refinitiv. A fintech boost for Japanese banking?