Rakuten FinTech Conference 2017
The Rakuten FinTech Conference 2017 took place today at the New Otani Hotel in Tokyo. What did we learn? I am paraphrasing key points from my notes, and while aiming to accurately represent the speakers’ and panelists’ viewpoints, this is not intended to be a holistic representation of their comments, merely those I found the most noteworthy.
Keynote — Heizo Tanaka
We see the emergence of disruptive forces fighting against vested interests. “Revolution” is a term the Japanese do not understand. Regardless, the Japanese societal system might go through a sea change, there is no consensus yet when and where we might end up, but it is clear the government response is not fast enough. The 2016 revision of the Japan Growth Strategy included the term “artificial intelligence (AI)” for the first time, so Japan was late in developing an understanding. However, while we can see Japan lagging behind in AI, we are leading in robotics. Overall, there are five forces that will define our future:
- Artificial Intelligence (AI)
- Robotics, including drones
- Internet of Things (IoT)
- Big Data
- Sharing Economy
Not all of these forces will rank equally, so we have to be thoughtful about these aspects. We can predict that 50% of the work undertaken today will disappear.
As can be seen with the examples of Uber and AirBnB, infrastructure previously deemed essential is losing its existence. When we apply this to FinTech, will banks still be needed in the future for deposits? For settlement? We are currently facing a phase of self-denial by financial institutions. In fact, the FSA is more advanced, as demonstrated by allowing crypto-currencies as legal tender.
The 2017 revision of the Japan Growth Strategy included Big Data for the first time; a Center of Command for Big Data in Japan will be created; this requires architects from the private sector. Autonomous driving presents a great first use case; the roads are owned by the government, the data can be collected and made available. Medical data will be second. We also require rules for the data exchange between corporations. Japan has a leading position in cars, sensors, and cameras, so why are we not leading in autonomous driving? The reason is that Japanese law requires a person to be driving — we need to create a legal framework that allows us to experiment on public roads, the equivalent of the “regulatory sandbox” available to FinTech companies in other countries. Because those opportunities are not available in Japan, Japanese corporates (e.g., banks) are experimenting abroad.
Lastly, while we have put some good structures in place, we are at risk of being leapfrogged. The bottom line is, for FinTech to thrive, the identification of the individual is key. However, to date, there have been only about 10m “My Number” cards issued, representing a tenth of the population. In India, over 1.1bn people have been issued an Aadhar number. We are falling behind.
The Future of Payments
Kyash operates based on a virtual Visa card, payments can be affected via Facebook Messenger and Line connections; the company generates revenue through the interchange fees incurred when merchant payments are made. Tencent has build one of the largest ecosystems in China, with WeChat Pay and QQ Wallet having more than 600m users each; for Chinese New Year 2017, more than 14bn “red packets” were exchanged; the company has also developed industry solutions, e.g. a fully integrated claims process for insurance based on WeChat. Zelle is the first new payment system US banks have created since establishing Visa; founded by the seven largest banks, it debuted at Money2020 last year, and has grown substantially.
Japan is still very much a cash-based society — what type of disruption do you bring with your companies? Zelle moves money directly, and in real-time between bank accounts; we view cash and checks as our competitors, not so much other payment services providers, e.g. PayPal or Venmo. With regards to Tencent, one needs to point out that China historically has been different; there was only cash, so the transition to digital is easier; also, QR codes dominate, since they do not require point-of-sale infrastructure at merchants. We are now focused on industry solutions, e.g. in insurance, hospitals, and for small merchants. 40–50% of all retail payments are digital by now. At Kyash, we are driving the customer experience for the store of value. Previously, money transfer and payments have been separate channels. We aim to integrate these.
Is IoT an opportunity or a threat? How do you prepare? For Tencent, this is very difficult to predict. We position ourselves as a connector and drive for open solutions. So IoT is not a threat, but it requires partners, since we cannot control everything by ourselves. At Kyash, we are concerned about what will be the best physical touchpoint for the consumer; this could be a watch or anything else, at the end it is just another channel. Zelle postulates that all payments should be frictionless, and they need to be secure, which will require the identification of the parties involved, either a person or an IoT device.
What are the most important new technologies? What is your view on blockchain? For Kyash, the authorization of the person or object is the most important development; we are watching things like the recently announced Apple facial recognition closely. Blockchain represents a double risk for a startup like Kyash — a new player with new technology; we do not plan to use blockchain within Japan, but consider it an option for cross-border payments. At Zelle, we see the convergence of payments and identity; ultimately, the sender of funds does not have to be known to the receiver. Blockchain is not on our roadmap currently, but we think it might become relevant when we look at cross-border payments. Tencent breaks down the value chain into infrastructure, customer touchpoint and the consumer; security is paramount. Tencent has been researching blockchain for a while; it is not an easy solution, for maximum benefits it requires many parties to join; when we ultimately use it, it might not be in the payments space.
How does innovation open up the future?
What are the major developments in FinTech? McLaughlin: With FinTech, there is exceptionally broad and profound change coming, I describe it as the “third wave”, driven by connected devices. It all starts with the consumer, everything needs to be better, simpler, easier. Every device will be used for commerce, automobiles, games, houses. Mikitani: The next hypothesis is the “cashless economy”. Who will be dis-intermediated as a result? I suspect personal and corporate finance will be; we will not need plastic cards in ten years; and AI will be much better at credit ratings and finance decisions. Mahadevan: I predict that the pace of change in the next five years will be much greater than in the last 15–20 years. We have closely studied seven countries in Asia Pacific, and we noted a shift from financial inclusion to financial health, which we define as (i) fulfilling our financial obligation, (ii) withstanding financial shock, and (iii) taking advantage of financial opportunities. Second, we have become an impatient group of people who do not want to line up anymore, so we need fast commerce. Third, we see all merchants moving into social, and actually selling through social channels.
What about digital payments? McLaughlin: The pace of change in China is truly astounding. Also, we expect the Nordic European countries to be cashless in ten years. We operate in 210 countries, and we see an acceleration of digital payments everywhere. Mikitani: Five or six years ago, Japan was ahead in many areas, we have Suica, Rakuten Edi, and — not to forget — wire transfers, which we take for granted. This advantage has turned into a disadvantage. We now have four e-money platforms competing in our market, the platform is too old, but still “good enough”, so there is limited incentive for change. Japan is not big, but also not too small, so market players can operate profitably, and they do not have appetite to grow.
Apple Pay, AliPay, Bitcoin are all here? Mikitani: Apple Pay is not a great success in my opinion. The consumer has too many alternatives; we need standards, and open platforms — Suica is not open to others. Mahadevan: Japan’s market is massive, there are lots of opportunities. Technology is just a means, not a long-term competitive advantage. We view PayPal as a risk management company that uses cutting-edge technology to process payments. One needs to be willing to get anybody into the system to be successful. Apple Pay is just a pass-through. McLaughlin: Apple Pay is a secure enablement system. We want to make it as easy as possibly for any consumer, but the consumer dictates what channel to use. There is too much emphasis on “who owns the customer” — as customers, do we really feel owned? The reality is, nobody focuses on payments, it always comes with something else. Mikitani: Digital payments identify the consumer; what we want to do is to connect marketing & payments, this is not possible with cash. That is why Rakuten is excited about digital payments.
Please give us your view on crypto-currencies? McLaughlin: Bitcoin is being used as a speculative asset class, not a store of value. Bitcoin is good for low volume, and limited trust scenarios. If you look back in history, whenever there were lots of currency sub-systems, they could not be sustained, and ultimately converged towards a few global currencies. Also, many studies of blockchain technology for real-time gross settlements (RTGS) have concluded that it is not quite suitable, but we will continue to evaluate. Mikitani: We have issued more than JPY 1trn in Rakuten Points to date. In addition, we focus on gamification. Maybe in the future one can convert Rakuten Points into crypto-currencies? Maybe bitcoin will become a third world currency? More likely, a smaller country will be the first to issue a completely digital currency.
What will the paradigm in 2040 be? Will there be singularity? Mahadevan: Regulation needs to change to allow new technologies into the system; passwords will be obsolete; biometrics and behavorial analysis will be common. McLaughlin: We have recently acquired a “Nudata Security”, a company focusing on behavioral tracking. AI overall is at the same time over-hyped and very profound. Using AI, we will eliminate toil, augment work, and allow for work that could never be done before. Mikitani: In 2040, everything will be digitized, kids are not going to school anymore, many diseases have been cured, and people will become 120 years old.
How about privacy? Mikitani: We require unified rules that apply to everyone. Japan has very strict rules, but they only apply to Japanese players. We clearly comply with all the rules to maintain our licenses. McLaughlin: Principles should be global, practices should be left to the private sector. Principles should apply to everyone, and that also includes startup companies.
What does Japan need to prosper? Mahadevan: Allow anyone to accept payments, i.e. absorb the risk. Embrace change, do not fight it. McLaughlin: Have the ability to embrace global standards, digital has no borders, and we need inter-operability. Mikitani: The government needs to push for the digitization of payments. We need to adopt global standards, we are too small a country to have many different standards.