While Japan’s FinTech industry stumbled upon challenges of various natures – economic, cultural, regulatory – the situation is set to change with the government taking a course to facilitate the development and adoption of innovative technologies in the country. In 2016, the country took a course to relax restrictions for financial institutions to take stakes in non-financial firms, which have previously been restricted to 5-15%.
Having the advantage of a bad experience (Mt. Gox), shining legacy in the robotics industry, and historical wisdom to nurture success with limited resources, Japan has the opportunity to become an attractive market for innovation adoption. Estimates suggest that Japan’s FinTech startups could jump to over half a billion dollars by 2020 as the use of technology increases.
Japan does not intend to work alone in reaching its goals. The country’s financial watchdog has been actively forming ties with the most advanced authorities to explore cross-border opportunities.
In March 2017, for example, the Financial Services Agency (FSA) of Japan and the Monetary Authority of Singapore (MAS) announced the establishment of a Co-operation Framework to enhance FinTech linkages between both countries. According to the announcement, the Framework enables FSA and MAS to refer FinTech companies in their countries to each other’s markets. It also outlines how the referred companies can initiate discussions with the regulatory bodies in the respective jurisdictions and receive advice on their regulatory frameworks, such as required licenses.
One of the important implications of such co-operation is the opportunity to diminish regulatory uncertainty and barriers to the partner markets. In addition, the framework also sets out how the regulators plan to share and use information on financial services innovation in their respective markets.
At the end of 2017, Japan had also formed ties with the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) on the framework for co-operation to promote innovation in financial services in Japan and ADGM. It will enable FSA and FSRA to refer innovative FinTech businesses to each other for advice and support via FSA’s FinTech Support Desk and FSRA’s Regulatory Laboratory. It also provides a framework for information sharing between the two regulators. This will enable FSA and FSRA to keep abreast of regulatory and relevant economic or commercial developments in each other’s jurisdictions and help to inform domestic regulatory approaches in the context of a rapidly changing global financial environment.
Similar to previous examples, in March 2017, the UK’s Financial Conduct Authority (FCA) and the FSA exchanged letters provided a framework for cooperation and referrals between the FCA’s Innovation Hub and the FSA’s FinTech Support Desk. The authorities will be sharing the best practices to promote financial innovation, and the two regulators will provide guidance and support for FinTech businesses wishing to enter the respective markets to obtain relevant authorization.
Earlier in 2017, the FSA and Australian Securities and Investments Commission (ASIC) announced the completion of a framework for co-operation to promote innovation in financial services in Japan and Australia. This Co-operation Framework will enable JFSA and ASIC to refer innovative FinTech businesses to each other for advice and support via JFSA’s FinTech Support Desk and ASIC’s Innovation Hub. It also provides a framework for the sharing of information between the two regulators.
Cross-state efforts follow a somewhat belated step by Japan’s authorities to launch their own Regulatory Sandbox in November 2016. Following an international practice, FSRA launched the Regulatory Laboratory (RegLab) to provide a controlled environment for businesses to develop and test innovative solutions that promote efficiency & consumer choices in the financial sector, and to support the FSRA in the development of risk-appropriate and effective regulations for such innovation.
State-facilitated strides towards establishing Japan as one of the leading innovation hubs are not all the country offers. There is an outstanding variety of events and associations in the country that bring together technology professionals to share knowledge and collaborate. Business in Japan, FinTech Association of Japan, and Slush are among the communities aiming to make a difference for the country’s startup community.
Collective efforts of Japan’s financial authorities and the local networks resulted in Japan being ranked among the most connected FinTech hubs in the Interim Hub Review 2017 by Deloitte. According to the report, Tokyo was highly ranked across key indicators: government support, innovation culture, proximity to expertise, proximity to customers, foreign startups, and regulation.
According to the report, “Japan has seen strong growth in the FinTech ecosystem in the past two years, as FinTech startups, industry players, regulators, and government have collaborated to build a sustainable and scalable environment for innovation. Tokyo has a vibrant FinTech network, and the regulators have recently launched FinTech-friendly laws around blockchain and APIs, along with initiatives to support new FinTech startups. As the third-largest economy in the world, there is an opportunity for both B2C and B2B players to enter the market.”
Tokyo as a hub. Source: Connecting Global FinTech: Interim Hub Review 2017
Finally, after attending Japan FinTech Week “Fin/Sum” organized by FSA, Amit Goel, Co-founder of MEDICI, shared interesting observations, indicating the state of the financial world and the opportunities for finance and tech entrepreneurs in Japan:
Japanese are very sensitive to security and data privacy. This could be influencing their thinking about new solutions.
Among the reasons for Japan to have a less prominent entrepreneurial activity in FinTech are: 1) solid banking infrastructure/penetration with less dissatisfaction with traditional FinServ in Japan than there is in other parts of the world; 2) not many entrepreneurs have ventured out in FinTech in Japan as compared to what we have seen in other such large economies because most people would join a big company after graduation to avoid risking their career and work there for several years.
Apart from institutions like MUFG, Mizuho, SBI, SMFG, FinTech scene is dominated by large FinTech companies – NTT data, NEC, Hitachi, Fujitsu, NRI, and Sony Financials. Their participation and impact on the market are significant.
Bank-FinTech collaborations are beginning to happen in a big way. NTT DATA runs an Open Innovation Contest globally and SMFG already has innovation labs and centers in the US.
High usage of cash everywhere (small mom-and-pop shops; McDonald’s doesn’t accept credit cards but accept cash and electronic money cards like Suica). Japan has the highest level of cash usage among all developed economies.
A lack of global interoperability poses a challenge for foreign visitors as cash withdrawal is difficult and some places don’t accept Mastercard/Visa cards, so the visitors need cash.