This week, we presented our Japan FinTech Outlook for 2023, a rundown of the current state and what is in store for next year, from the macroeconomic picture, through sector-specific themes across Banking, Payments and Digital Assets.
While the full recording is available on the Tokyo FinTech YouTube channel, this article extracts key highlights in bullet points.
Macro
- Having re-opened the economy late, the OECD has pegged Japan’s 2023 growth forecast at the highest level among G7 countries.
- Despite this rather positive outlook, the Japanese consumer good whacked by price increases, and it shows in consumer confidence surveys.
- The BOJ will see a change of guard, with Governor Kuroda’s term expiring March 2023. Any radical shift in BOJ policy would risk upsetting the markets.
- Kishida’s “New Capitalism”, published in July, sets out a couple of pages for the “Trusted Web”, which includes every buzzword the FinTech heart desires: Web3, NFTs, DAOs, Blockchain, Metaverse, Digital Securities, Crypto Assets, Payments.
- The FSA has translated this framework into its own action plan, which includes some helpful adjustments to the regulatory framework, as we have reported previously.
- The “Five-Year Startup Development Plan” is extremely ambitious, with a goal of 100,000 startups and 100 unicorns by 2027. The lack of a track record in execution does not make us too optimistic, and we highlight core components of the 2018 METI J-Startup initiative to show what to expect.
Banking
- Digital banks have captured around 3% of balances in Japan, up from 1.7% in FY2016, as the Nikkei reported recently.
- Japan has been the only shrinking banking market from 2017 to 2021, and it making up only have that it lost until 2022; North America, Latin America and Emerging Asia are the high growth regions.
- MUFG has left retail banking in the US with the Union Bank sale to US Bank and focuses on South East Asia, where it has built a presence over the last decade; expect more acquisitions next year.
- SMFG is going in the opposite direction, launching a digital bank in the US in 2023; it does own a bank in Indonesia, but otherwise is not very active; it holds 10% stakes in SBI Holdings and PayPay Bank domestically.
- Mizuho has built a strong investment banking franchise in the US; in South East Asia, it has made key acquisitions of a digital bank in the Philippines and a payment app in Vietnam.
- There are two neobank IPOs coming up, SBI Sumishin Net Bank and Rakuten Bank; both are relatively small (USD 2–3bn market cap) compared to international IPOs (Nu in Brazil at ~USD 20bn currently, KakaoBank in Korea at ~USD 10bn), but there price/book ratio at around 2 dwarfs that of the megabanks, who are generally rate at 0.5/0.6.
- Banking-as-a-Service has developed nicely, with more to come in 2023; SBI Sumishin Net Bank is a key player, Minna Bank and Kiraboshi Bank, among others, are also getting into the game; the latter two have built/acquired new core banking engines in their digital bank deployments.
- Being late adopters to the cloud, the lines have been drawn among the megabanks, with clear alliances for MUFG (AWS), SMFG (Microsoft), and Mizuho (Google); with international conversations tilting to multi-cloud and hybrid cloud environments, hopefully the Japanese players can learn from that and not risk a single vendor relationship.
Payments
- Cashless payments, at 32% in 2021, are on track for the 2025 METI target of 40%; while globally, that adoption rate still ranks low, Japan had the highest velocity (coming from a low base) from 2018 to 2020.
- BNPL adoption to date has been negligible; B2C BNPL will grow steadily as ecommerce growth further, and moves from Web to Mobile; B2B BNPL (supply chain financing) sees some triggers in the digitalization of invoices for consumption tax credits, and the phasing out of promissory notes that will make it a very interesting market over the coming years.
- Account-to-account payments, recently hyped in the US with a JPMorgan & Mastercard announcement, will also start to be put in place in Japan in 2023; Minna Bank has announced such an initiative with a Kyushu-based supermarket chain
- Cash-on-delivery is an under-appreciated market opportunity, at JPY 2–3trn, approximately a third of current QR code payments.
- The FSA has put out a regulatory framework for stablecoins that allows banks, money transmitters and trust banks to operate such schemes fully backed by legal tender.
- The BOJ’s CBDC proof-of-concept is in Phase 2 until March 2023; while a July paper still was ambiguous around the continuation of the program, recent news indicated a full pilot, with megabank participation, starting in April 2023 and running for two years.
Digital Assets
- The JVCEA has 33 members, which together have 6.5m accounts; while at the end of the year, the whole Japanese cryptocurrency industry held assets about 1/3 of those of the Coinbase global exchange, given the avoidance of $hitcoins, this gap has narrowed to about half.
- Early year acquisitions of Liquid by FTX and DeCurret by Amber are seemingly in trouble; Coincheck’s US SPAC deal is still on track based on parent Monex’s last quarterly results.
- FTX Japan is now under business suspension and business improvement orders (just extended to March 9, 2023), and Exia Digital Assets is under such orders for December; the latter look unlikly to recover in the current environment; that makes it 31 exchanges, with more consolidation expected for 2023.
- The Osaka Digital Exchange, a joint venture of SBI, SMFG, Nomura & Daiwa, started operating as a PTS this year; the launch of a security token trading venue is postponed until the end of 2023.
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