Japanese banks, long content to foster the nation’s love for cash, are now diving into digital payments thanks to a regulatory change that threatens to usher in new rivals.
In recent months, lenders around the country have announced a flurry of initiatives designed to grab a slice of the $50 billion (¥5.35 trillion) market for electronic settlements. Projects are under way to develop platforms using everything from QR codes to blockchain technology and digital currencies.
The catalyst: a law change being phased in over the next two years that will make it easier for depositors to give third parties access to their accounts and data. Part of a government effort to reduce Japan’s high cash use, the amendment could spur competition from financial-technology giants such as Ant Financial and Apple Inc., as well as startups like Ripple Labs Inc. and Origami Inc.
“Releasing their own coins and payment methods is what the banks need to be doing,” said Eiichiro Yanagawa, a senior technology and banking analyst for consulting firm Celent. “Banks that move too slowly will have their tastiest business eaten up.”
Last month, banks submitted draft policies on the so-called application programming interfaces, or APIs, that will open up their systems to fintech firms seeking to do everything from payments and remittances to budget planning. The Financial Services Agency expects most lenders to have open APIs in place by 2020.
Lenders worldwide are shifting to open banking models, urged on by regulators including the FSA that want them to adapt as technological innovation shakes up the industry.
Japan’s banks need to make sure they “have the area covered” before startups and established technology firms join the market, said James Lloyd, a Hong Kong-based fintech specialist at consultancy EY. “Open banking is about as big an infrastructure regulatory change as you’re going to get in retail banking.”
Digital payments also provide opportunities, according to Celent’s Yanagawa. As well as tackling Japan’s costly love affair with physical money, the shift to open banking will allow lenders to add services and build up information on customers’ spending patterns. Tapping transaction records can help banks learn more about their clients’ credit and investment needs, for example.
“Payments is really the access point to acquire customers, to acquire customer data, especially transaction data, through which you can then market, up-sell, cross-sell — you name it,” Lloyd said.
Until recently, banks have largely sat on the sidelines while other firms developed e-payment services in Japan. Ant Financial’s Alipay has been catering to Chinese tourists with its QR code-based system since 2015. Rail companies like East Japan Railway Co. (JR East) and retailers such as Seven & i Holdings Co. have for years offered prepaid e-money cards based on Sony Corp.’s contactless FeliCa chip. In 2016, Apple made the chip available in its iPhones in Japan.
The government last year set a target of doubling cashless settlements — defined as credit cards, debit cards and e-money — to 40 percent of transactions over 10 years, as part of its “Society 5.0” future investment strategy. Going cashless would save banks about ¥1 trillion ($9.4 billion) a year, Mizuho Financial Group Inc. has estimated.
Lenders are willing to work with fintech firms on creating new services, Japanese Bankers Association Chairman Koji Fujiwara said of the law change at a briefing this week.
Yet lenders will have their work cut out to end the nation’s affinity for bank notes and coins. Cash in circulation amounts to about 20 percent of Japan’s gross domestic product, by far the most in the world, a Bank for International Settlements report showed in March.
There are also signs that e-money growth is losing momentum. Transactions, which had been expanding at a double-digit pace for years, rose just 1 percent to ¥5.2 trillion in 2017, Bank of Japan data show.
One challenge for banks will be to ensure their payment systems are compatible. The sheer number of initiatives has raised concerns that a lack of coordination may undermine convenience.
“At some point there is going to have to be consolidation,” said Kaori Nishizawa, a director for financial institutions at Fitch Ratings Ltd. in Tokyo. “Everyone competing with each other will lead nowhere.”
While the big banks start from a strong position given their significant customer bases, Yanagawa said it will take time for relationships among the consumers, merchants and payment providers to take root in Japan.
Open APIs “have the potential to change the entire value chain in the finance industry,” he said. “But it’s a marathon, not a 100-meter dash. Being the first mover doesn’t necessarily determine the winner.”
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