Japan’s ailing regional banks receive a digital boost

As regular #fintechFT readers will know, the coronavirus pandemic has sped up digital banking trends for everyone from payments start-ups to Swiss wealth managers. Few sectors, however, start from as far behind when it comes to technology as Japan’s regional banks. And after years of struggling, the stakes for the $3tn sector are high. 

Even before the pandemic brought economic shutdown and the collapse of tourism, the outlook for Japan’s sprawling, technology-shy regional lenders did not look good.

Japan’s 100-plus regional lenders have more combined assets than the entire Italian banking system but were beginning to look like a chronic, unsolvable problem after dealing with two decades of ultra-low interest rates plus an ageing, shrinking population and a moribund regional economy.

The virus, which hit regional economies particularly hard and redoubled the lock on low rates, appeared only to make the situation worse.

In the longer term, however, some are hopeful that the crisis may have offered some chance of salvation by finally normalising digital transactions.

A recent report by Moody’s, the rating agency, said Covid-led acceleration was credit-positive for the sector. “Banking digitalisation will gain speed as the coronavirus outbreak leads more consumers to embrace electronic transactions,” argues analyst Tetsuya Yamamoto.

If that prediction holds true, it will be a transformation worth watching, especially as Japan’s three megabanks — MUFG, SMFG and Mizuho — have recently unveiled important partnerships with major technology companies — Grab, SBI and SoftBank respectively. 

Less than a quarter of Japanese consumer transactions were completed electronically in 2018, according to a trade ministry report. Customer resistance to digitisation has allowed regional banks to become symbols of low-tech financial services, with an emphasis on paper documents, physical stamps and services only available over the counter.

Now older people — who are more numerous in the regions — have been forced to embrace smartphones, ecommerce and other digital engagements they would not previously have considered.

For the regional banks, the first benefit would be helping to address their often bloated cost-bases, allowing them to close branches and jettison ATMs. 

Japan ranks above the US, eurozone, Hong Kong and Singapore in terms of the ratio of bank branches to population; government figures suggest that in 2018, the total cost of cash handling in Japan was ¥1.6tn. That is a significant sum, particularly when — as Moody’s points out — total operating expenses across members of the Japanese Bankers Association were around ¥6.6tn in the 2019 financial year.

Revenues, meanwhile, could be strengthened not only by new online products but also potentially by pushing local lenders to follow in the footsteps of the megabanks with technology partnerships that would previously have been impossible. 

In theory, politics provides an additional following wind. Since becoming prime minister last September, Yoshihide Suga has placed the health of the banks at the centre of his efforts to revitalise regional economies. 

Last year he suggested there were “too many” regional lenders, and the Bank of Japan has controversially offered to reward lenders that are prepared to cut costs, merge or restructure. Doing so would require an investment in fintech and other digital improvements.

Those judged to have improved would have the equivalent of 0.1 per cent per year added to the interest they receive on current account deposits with the BoJ — a big deal when its benchmark interest rate is minus 0.1 per cent.

Despite all that, both Moody’s and others sound a note of scepticism: the omens may be good, but the realities remain harsh. According to a survey by Jiji Press in December, only 44.9 per cent of regional banks had appointed a director in charge of digital transformation while 37.2 per cent said they had no plans to do so.

“Japanese banks’ digital strategies are still evolving and prone to setbacks,” Yamamoto of Moody’s cautioned. “Any benefits of digitisation will fall short of improving their profitability, given the fundamental vulnerabilities that stem from ultra-low interest rates, coupled with fierce competition among banks, and a shrinking and ageing population.”

Quick fire Q&A 

Company name: Vivid Money

When founded: 2019

Where based: Berlin

Founders: Artem Yamanov and Alexander Emeshev

What do you sell, and who do you sell it to: We’re a financial platform that combines banking and investing, allowing our customers to spend, save and invest in one app.

How did you get started: Vivid Money was founded in 2019 in Berlin and has since grown to 180 employees in four countries. 

Amount of money raised so far: double-digit million euro amount

Valuation at latest fundraising: €100m

Shareholders: Founders, TCS Holding Group (Seed-Investor), Ribbit Capital (Series A)

There are lots of fintechs out there — what makes you so special: Apart from our comprehensive cashback programme, we’re on a mission to create a culture of financial literacy in our clients.

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