Yesterday I was unexpectedly invited to join a live broadcast at the Tokyo Bankers Association discussing Fintech. It appears that many of the market dynamics affecting the financial sector in Europe are similar in Japan, so I touched on these.
While one could argue that the landscape for European Fintech startups has reached saturation levels (hence the differentiation of SPEND on April 28), in Japan it feels like things are just getting started.
There are a handful of underlying phenomena in Japan that I suspect are spurring innovation around financial services.
- A culture of savings, which incidentally, is very similar to many Western European countries (and in stark contrast to the U.S.)
- A low (even negative) interest rate environment. The typical liquid savings account in Japan earns only ~ 0.01% in annual interest. A retail banker I spoke with said they’re offering primary residence mortgage loans at 0.32% interest.
- A deflationary mindset, which alleviates any perceived burden of keeping assets in cash
- A mid-life step function in household savings
It took me a while to wrap my head around this last point. For the typical upper middle-class Japanese household, savings averages around $100k until about the age of 50. After around 50, however, most living expenses plunge to zero (children become self-sufficient, house is paid off, etc.), while at the same time income and related benefits from long-term employment have risen steadily, so an inflection point occurs. The average household savings purse leaps dramatically from around $100k into the $500k range (again, using rough estimates).
This somewhat abrupt windfall has two consequences. For one, the typical household suddenly finds itself with an extra $400k envelope to invest (or squander, which is less common in Japan). Secondly, the investment experience of that same household is more likely than not to be relatively narrow in breadth: limited for example to secure savings accounts, time deposits, and perhaps a bit of passive long-term buy-and-hold equity investing.
Last but not least, the Japanese government has recently taken measures to loosen some regulations which affect Fintech startups. For a thorough review of these measures, I encourage you to read this excellent piece in TechInAsia. Some of the elements I find most interesting are:
- Since 2014, the fiscal authority grants a tax shelter on capital gains up to approximately $9k under the NISA program.
- Personal financial assets in Japan exceed $14 trillion in value, and 52% is held in cash.
- New legislation will help open up bank APIs. For instance in a pilot program, NTT Data (who dominates in the funds transfer infrastructure) will open its internet banking API to connect Fintech startups.
- A rumoured amendment will also facilitate investment from banks into innovative startups (currently capped at a 5% stake).
Yes, it feels like things are just getting started in Fintech innovation in Japan. I may consider breaking my “no-Fintech” rule and explore some potential investments in the space…