Despite being a global leader in technology and innovation, Japan is a country full of consumers who are famously risk-averse, which is probably to be expected in an ageing society living with fresh memories of a post-bubble deflationary downturn.
And, nowhere is that more evident than in matters of personal finance.
Few Japanese consumers invest in instruments like stocks and bonds, preferring instead to hoard their cash in low-interest savings accounts.
Even more stark is how relatively underdeveloped the country's finance technology, aka fintech, sector is compared to other developed nations.
Japanese fintech investments account for less than a percentage point in the $14-billion global fintech industry. At 20 percent of GDP, cash use in Japan is uncharacteristically high for a developed economy, with the Japanese preferring banknotes and coins to credit cards or digital money.
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But that might be about to change, fast.
Banks caught napping
Banks and lenders around the world have been shifting to open banking models. Open banking enables third-parties to develop innovative consumer-facing products and serve them up through APIs. Third-party APIs have consistently been able to beat banks at delivering products with the highest levels of customer satisfaction.
The banking industry has been caught flat-footed by the digital technology and open banking revolution.
For decades, banks have been able to almost single-handedly dictate products and services for their customers and choose the transaction channels for them. But gradually, the power balance has shifted to the consumer, who now demands simplified interactions similar to those offered by Facebook, Google, and Amazon. Related: Bitcoin Could Find Its Footing After Tax Day
Digital banking provides an easy-to-use and frictionless platform compared to traditional banking models. Open banking offers a new way for banks to provide their customers with a wider range of personalized and customized services. Banks that fail to leverage the new model risk disintermediating from their customers.
The new normal
Japanese banks have finally woken up to this reality and are rushing to adopt open banking models before rival fintech firms beat them to the punch.
They have a catalyst though: a new banking law that will make it easier for depositors to give third-party providers (TPPs) access to their account data.
Japan enacted the Amended Banking Act in May 2017 to pave the way for enhanced collaboration between banks and Electronic Settlement Agency Service Providers, or simply TPPs.
The Japanese government is keen to wean banks and the public from their high cash use and has set an ambitious target to double cashless payments (credit cards, debit cards and e-money) to at least 40 percent over the next decade.
Even ultra-cautious Japanese banks have little option than to figure out ways to take advantage of the new open-banking drive or risk the likes of Alibaba's Ant Financial or even Apple dominating the $50-billion market for electronic settlements.
Fintechs have entered the financial services marketplace and have been giving banks a run for their money. A 2017 World Retail Banking Report says that fintechs are more likely to provide customers with positive banking experiences than traditional banks.
But it won’t be that easy. Japan's banks and fintech sector face the formidable challenge of cutting cash out of a society that has a very strong affinity for it.
The country has seen its e-money momentum recently fizzle out, with transactions growing an anemic 1 percent in 2017.
QR codes, blockchain technology and open APIs have the potential to transform an archaic Japanese banking industry. This will, however, be a digital marathon that will demand years of sweat and toil.
By Charles Benavidez for Safehaven.com
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