Old-time regulations hold Japan's fintech boom back

Japan remains an economic powerhouse globally, despite a rocky economy in the recent years. It has the world’s second largest financial market and what an Accenture report [pdf] called three “megabanks” in Mitsubishi UFJ, SMBC, and Mizuho. Even with this seemingly strong suit, Japan has been slow off the mark when it comes to investing in financial technology, or fintech.

The beleaguered and controversial bitcoin exchange Mt. Gox may spring to mind when you think about money and technology in Japan. At one point it was handling 70% of all bitcoin transactions but infamously went bust with 200,000 bitcoins unaccounted for, allegedly thanks to hackers.

The Tokyo-based exchange left a bad taste in people’s mouths when it came to the reliability of innovation and money, and fintech.

The traditional sector has been slow off the mark as well. The three megabanks are limited in the kinds of companies they can invest in. Meanwhile NTT Data, a subsidiary of Japan’s Nippon Telegraph, operates a transaction system for most banks in the country, meaning it has a monopoly of sorts on access to this data.

The biggest issue for fintech start-ups trying to break through in Japan is the old-fashioned regulatory framework, which isn’t conducive to innovation.

Japan’s Banking Act places limitations on how banks can invest in start-ups. Banks cannot own more than a 5-15% stake in a company that isn’t in the finance space. And when fintech deals with finance, the act doesn’t consider these kinds of start-ups to be financial companies. Rather, they are tech companies. As a result, Japan’s Financial Services Agency (FSA) has been lobbying for changes to the regulations in the banking sector to loosen up the rules around investments.

But if they can’t invest, the banks will find some other way. According to reports, Mitsubishi UFJ is building its own fintech research and development division, the first of its kind in Japan. Allegedly, the R&D unit will work with universities, research organisations, and fintech companies to develop new technologies for the bank but there’s no word yet on who is involved.

Mitsubishi UFJ is already working with IBM to automate its call centre operations and is testing humanoid robots in some branches, so the industry is not averse to trying innovative or risky new things. But how does the framework of regulations impact start-ups trying to get their foot in the door?

Japanese company Alpaca has developed a trading tool, powered by AI, called Capitalico that automates trading for self-directed traders. Currently the start-up is working on obtaining an Investment Advisor license, which is taking up a lot of time and racking up legal fees, says co-founder Yoshi Yokokawa, formerly of Lehman Brothers.

Costs aren’t the only issue for fintech services like Capitalico. The patchwork of regulations globally is also a problem. Capitalico is doing business development in both Japan and the US, says Yokokawa. “Because we are in trading-tech sector, we had to research a lot to figure out which asset class and trading style is common for each country,” he says.

“Most fintech start-up businesses are new and rarely clearly regulated or defined in the regulatory document. It would help if different countries gather up together to update each other to make more of global standard rules.”

Zach Taub, chief of marketing at finance management app Moneytree adds that being a fintech start-up from Japan can be an “initial hindrance” as financial service providers in other markets may not realise that Moneytree has been built for a global customer base and can used outside of Japan, which he calls a “rather unique market”.

On the flipside, loosening regulations could have serious consequences for consumers if fintech companies aren’t held to a higher standard.

“With such explosive growth in Japanese fintech, opportunistic players with murky data privacy and security models have emerged,” says Taub. “We believe that strong user privacy policies and highly secure platforms should be the absolute minimum for services that hold financial data on behalf of their users.”

One potential solution to this problem, he says, is for regulators to “validate” start-ups that implement the tightest security and privacy practices.

“That could mean limiting use of user data for marketing platforms, or preventing the sale of user data to third parties without explicit permissions,” says Taub. “Creating an environment where users can trust these emerging services would contribute to the broader growth and acceptance of [fintech].”

With the stakes getting higher, Japan has every reason to foster its fintech growth. With the 2020 Tokyo Olympics approaching, the Japanese government is keen to introduce more widespread cashless payment systems, especially for foreigners and tourists coming into the city, to make transport and shopping easier and more efficient.

The Ministry of Economy Trade and Industry is to trial biometric cashless pay points in several cities ahead of 2020 with a view towards boosting tourism in the long term but it’s still unknown if the government will turn to any of the country’s fintech start-ups for assistance. There is certainly no shortage of them.



More geographical centres for fintech:

Indonesia is priming itself for a fintech future

Can Mexico be the hub for fintech in Latin America?


More on tech in Japan:

Japan’s novice cybercriminals: isolated but learning fast

Japan’s Kii unlocks the Internet of Things


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Jonathan Keane

Jonathan Keane is a freelance journalist, living in Ireland, covering business and technology

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