Comment on “Why Fintech Is Not Changing Japanese Banking”

Although the term “fintech” has now filtered down into everyday language, fintech services have not yet been fully integrated into everyday life, at least in Japan. Iwashita (2022) overviews the current disappointing state of fintech in Japan, assesses which conditions keep fintech services from taking off, and discusses potential “game changers” that would pave the way for fintech services to gain wider acceptance in the coming decade.

Iwashita (2022) points out two major hindrances to which he attributes the low acceptance of fintech services in Japan; one is related to consumers' attitudes to digital devices and the other is related to corporations' readiness for digital technologies.

The first hindrance is the hesitation of older people to use digital devices such as personal computers and smartphones. Unlike the younger people who have been using such devices from their childhood, the older people still favor face-to-face communication. Given that the older retired people tend to accumulate more savings than younger working-age people, Japanese banks have an incentive to accommodate those older customers with traditional face-to-face services.

The second is the unpreparedness or unwillingness of Japanese companies to adopt new digital technologies. Iwashita's (2022) Table 3 compares Japan with three other developed countries (USA, UK, and Germany) in terms of business information and communication technology (ICT) tool usage, which shows that Japanese companies use ICT tools far less than the others in all respects. This does not necessarily mean that Japanese companies did nothing about information technology (IT) investment. Iwashita states that they did reasonably invest in their IT systems for financial accounting, billing, payments, and other accounting tasks, but their systems are mostly for internal use and have little interoperability with the internet. In addition, national and municipal governments face the same problem of legacy IT systems. As a result, Japanese banks need to maintain their traditional channels of financial transactions for the continuation of business relations with private companies as well as government agencies.

Iwashita (2022), however, claims that the inertia can be broken and fintech services will become more widely accepted in Japan for the following five reasons. First, the global expansion of digital finance. Fintech services are rapidly expanding in emerging economies, and this trend will put pressure on Japanese financial service users. Second, the digitization of government services. Japan's Digital Agency was established on September 1, 2021. It is designed to oversee the digitization of government services at both national and municipal levels, which may ease the Japanese people's fears of the internet, in general, and breaches of privacy, in particular. Third, the shifts in strategic goals of financial institutions. Negative interest rates and a shrinking population are forcing Japanese financial institutions to change their traditional “size matters” strategy. Fourth, the generational shift. The older people who abhor digital devices will be superseded by the next generation who actively use the internet. Fifth, the introduction of mandatory invoices. All businesses will be required to issue invoices for paying the consumption tax in 2023, which will promote electric information exchange among business partners.

In relation to these reasons, I have several comments and questions on whether and how they will affect the acceptance of fintech services in Japan.

First, in my opinion, Japan's national identification number, My Number, is the key to the success of the digitization of government services. The Japanese government tries to tag it on health insurance cards, driver's licenses, bank accounts among other items. How widely will the My Number be accepted by the Japanese people? Will it be as ubiquitous as Aadhaar in India? What kind of initiatives must be implemented to achieve this goal?

Second, Japanese regional banks are struggling for their survival, but it seems that they cannot afford to invest in new IT systems due to a lack of resources. To strengthen the operational foundations of the regional banks, the Japanese government encourages consolidations among them by exempting them from anti-monopoly regulations. Will this policy work?

Finally, if all transactions among companies are made online, accounting tasks such as billing, payments, and taxation could be fully automated through artificial intelligence, robotic process automation, and other digital technologies in theory. If such a future is coming to Japan, will traditional financial institutions become obsolete and be superseded by digital finance? Can they adapt themselves to those new technologies fast enough?