Abstract : Japan is an island holding 135 banks so why SBI Holdings still wants to the fourth-largest banks following the three major Japanese banks? What is the second revolution facing Japan’s banking and financial systems? An in-depth analysis of Japan’s banking and financial systems is provided by ChainDD.
The SBI president Yoshitaka Kitao on September 3rd gave a speech during the 2019 Fintech & Regtech summit organized by the Japan Financial Service Agency. Mr. Kitao focuses on two themes—Regional Rebirth and the Formulation of the Sub-era Financial Institutions with relevant fields of international money transfer and financial trade. He also discussed in details about what digital payment and digital currency mean to the future financial system.
The most eye-catching thing was Mr. Kitao’s concept of the fourth mega bank in Japan, as this concept is considered a watershed when the banking industry is facing a significant transformation. Mr. Kitao mentioned that the establishment of the fourth bank giant can not only help banks transform but also greatly contribute to regional revenue growth in Japan.
Thanks to Mr. Kitao’s ‘all-in’ attitude, SBI Holdings has been an active player in fintech field, particularly digital currency. The company seizes the opportunity of fintech to be a pioneer in the second banking revolution in Japan.
Banking System in Japan
Finance is described as the blood of the economy in Japan. The word finance literally refers to ‘incorporating money’ in Japanese and it shows the necessity for all major financial institutions to collaborate and utilize funds in a rational manner. Moreover, banks play an essential role in the financial system as the function of banks is to gather funds via bank savings which will be later invested in areas needed. Therefore, banking business is regarded as the body of finance in Japan.
In Japan, banks are categorized in four types: special banks, mega banks, city banks and regional banks. Local bank is the only type with a clear definition while the rest are called as a custom.
In terms of quantity, there are only two special banks. At present, the only one central bank, 3 mega banks, 7 city banks and 64 regional banks in Japan together form the banking system.
There used to be two special banks in Japan, namely, Bank of Japan and Japan Post Bank. As the central bank, Bank of Japan differs from the rest of banks in the country when its main function is to maintain stability of the currency and financial system. Bank of Japan is entitled to issue and manage banknotes as well as treasury bonds, which is why it is also known as the bank of banks and the bank of the government.
Japan Post Bank was known as Japan Post and its privatization started in 2007. After Japan Post’s reorganization into Japan Post Holdings, and merger with Nippon Life Insurance Company, Japan Post Bank was established.
Mega banks derive from city banks. Japan used to have 13 large city banks in the 80s. However, financial reform was conducted by the government in 1996 to merge banks after the Bubble Economy with an aim to enhance the international compactivity of Japanese banks. The industry was transformed by the advent of three mega banks, including:
Mitsubishi UFJ Financial Group, the largest bank in the country, that formed by the merger of Bank of Tokyo, Mitsubishi Bank, UFJ Bank, Tokai Bank, Asahi Bank and Sanwa Bank.
Dai-Ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan merged to form the second largest bank–Mizuho Bank in Japan.
Mitsui Sumitomo Bank, which formed by the merger of Sumitomo Bank, Mitsui Bank and Taiyo Kobe Bank, is the third mega bank in Japan.
Mega banks are able to provide operating network across the country, widespread overseas business and mature high-end financial services. Hence, the mega banks are the choice of many individual clients and high-profile corporate clients.
In the midst of bank mergers, some city banks remain. Currently, the Resona Holdings, Shinsei Bank, Aozora Bank and Mitsui Sumitomo Bank together with the top three mega banks are considered as Japan’s seven major banks. The literal meaning of city banks is banks located in metropolitans. So the characteristics of city banks are that they are all situated in cities with business covering most parts of Japan but their sizes are smaller than mega banks regarding business scale, overseas business. Meanwhile, they are still larger in business sizes compared with regional banks.
Regional banks are clearly defined, unlike the previously mentioned three types of banks. These banks are located in prefectures of Japan with a focus on local financial business. Additionally, regional banks are responsible for supporting regional economic development.
The First Transformation of Japanese Banks
The Japanese government discussed the transformation of regional banks on June 5th 2019 at an investment summit. The summit was chaired by the Prime Minister Shinzo Abe, which implies concerns over regional banks’ restructuring. In fact, regional banks are not the only that are anxious about the future, other large city banks and mega banks are concerned about their own transformation. However, the rationales behind their anxiety are different. The transformation of regional banks is driven by social environment while that of city banks is propelled by progress in science and technology.
Regional banks in Japan mainly serve SME and individual clients which explains why they lack the ability to provide high-end financial services. The major sources of their benefits come from asset utilization just like most traditional banks. They lend bank [check a source description]. But demographic changes and sluggish economy have led to plummeting bank savings in Japan, and a serious crisis to regional banks that rely on traditional banking services. Changes in social environment force regional banks in Japan into transformation.
Compared with regional banks, city banks are larger in business size and higher in operating profits of high-end financial service industry. But city banks also face the problems of decreasing population and glooming local economy. What’s more, the development fintech imposes another challenge to city banks.
Disrupting Fintech Frightens Japan’s Major Banks
Global tech giants and financial institutions have been working on fintech related R&D after the advent of this concept. The most influential disruptive technologies are no doubts AI and big data which makes automation possible for simple advisory and operational services. Some experts predicted that a trend of unemployment will occur in banking industry.
In October 2017, MUFG Bank, Sumitomo Mitsui Banking Corporation and Mizuho Bank had downsizing plans. In total, three banks will fire 33, 000 employees: Mizuho Bank will lay off 19, 000 employees, MUFG 9500 employees and Sumitomo Mitsui Bank 4000 employees. According to the Mainichi Newspapers, RPA will be a key in the next stage of mega banks development.
The Second Banking Revolution: New Forms of Banks in Spotlight
New classifications are being made in Japan’s banking industry and currently there are five types of banks: central bank, city bank, trust bank and a novel form of banks and the previously mentioned regional banks.
Bank of Japan is the nation’s central bank. Resona Holdings and Saitama Resona Bank are city banks. Mega banks are categorized under trust banks; an increase in number of regional banks to 104: 21 regional banks in Kyushu and 12 in Kanto. Of course, banks from other regions also have branches in other parts of Japan and do not limit themselves within a small place.
It is worth paying attention to online banking. Japan Net Bank, Seven Bank, Rakuten Bank, AEON Bank and Sony Bank are recently applying for licenses due to active offline C-terminal user direct transactions.
The online SBI bank is the so-called fourth mega bank in Japan promoted by Mr. Kitao in this summit. Kuroda Haruhiko, the current Governor of the Bank of Japan, said on September 4th that banks should incorporate with Fintech start-ups to realize the function of big bankers.
Hence, we can see that regional banks face more hurdles than bigger banks in transformation. Although the Japanese government discussed the transformation of regional banks on the future investment summit, the results were not favorable as the discussion was less related to structural reform according to the Nikkei, more relevant to business development strategy. Restructuring is still an arduous journey to Japanese bank.
The Concept of the Fourth Mega Bank
Mr. Kitao’s concept of the fourth mega bank in Japan is considered a watershed in the banking history mainly because if it came true, regional banks would be benefited.
This idea helps to combine regional banks together to form a holding company and provide a huge platform for regional banks to have active business. This holding company will be so big that it will become the fourth mega bank in Japan. We learned that the main challenges facing Japanese regional banks are reduced population, decrease in savings caused by the slumping economy and dependency on traditional bank services. Merely forming a holding company is not a convincing solution.
However, Mr. Kitao mentioned another keyword—digital currency which will be fundamental to regional banks’ transformation.
The fourth mega bank can benefit from digital currency in two ways: new customers and establishment of a global transaction network, both of which can instill fresh blood in an aging society.
Firstly, SBI holdings believed that zero-commission, as an essential of further securitization, is very likely in the future. That also means zero charge in digital currency transaction. In order to promote this plan, population aged 20-30 are important potential clients. At present, SBI Holdings is vigorously developing online securitization and online banking to reach these clients.
Not long ago, Robinhood, the stock trading app in the US, introduced cryptocurrency trading service on its platform. Tsutaya, the second largest point card company in Japan, launched digital currency trading service via T points. Mr. Kitao said that they will try to flow with this trend and endeavor to realize zero commission in order to help enterprises to attract customers aged between 20 to 30 who will be essential clients to the future banking services. The new reassured regional banks that need new clients desperately.
What’s more, SBI Holdings mentioned that a global transaction network based on XRP for regional banks to get involved in foreign business platforms and to activate the local economy. Regional banks will conduct international transactions with XRP. SBI Remit, SBI Ripple Asia and partners of SBI are all working on relevant system development.
It is predicted that a sub-era global translation network will be launched in the near future. Ripple, one of the largest digital payment companies in the US, is going to buy into the network and provide technical support. The American company is preparing for the establishment of digital currency asset foundation and will officially launch the project after the amendment of the Financial Instruments and Exchange Act comes into effect in next April. Meanwhile, expansion in international business will help regional banks to tackle the challenge of relying too much on traditional bank services with more diverse business to eventually realize transformation successfully.
At present, SBI Holdings are partnering with over 30 regional banks. With the concept of “the fourth mega bank”, we can image tremendous changes in Japan’s future banking system. And it is also worth expecting the role digital currency will play in the fourth mega bank.