The Bank of Japan (BoJ) this month published a paper reviewing how the use of supply chain and payments data is accelerated through FinTech. This is a continuation of the theme presented at the 8th Bank of Japan FinTech Forum in June. The BoJ makes the point that if access to supply chain and payment information by FinTech companies becomes easier, there will be more opportunities to replace and supplement the bank’s credit function, and in fact unbundle it.
Interestingly, the number of financial institutions per company has been increasing since 2005 at a national level. However, there are different underlying trends for small and medium enterprises (SMEs) and large corporates.
There is a lack of successors for SMEs due to the aging population, and the population decline has led to a lowering of the expected growth rate of the economy, ultimately resulting in the number of business closures exceeding that of new business starts. At the same time, the number of financial institutions has not changed significantly, so that an increase in sales & marketing activity per remaining SME has led to additional bank relationships being established.
This contrasts sharply with large corporates, which have been reducing the number of banks and consolidating transactions into the mega banks through bundled services. The remainder of this article focuses on the SMEs, their banking relationships and the potential for disruption.
For SMEs, the payment information that each bank can grasp independently becomes more fragmented. Previously, the main bank was well able to monitor the financial health of an SME client, but with the use of multiple bank accounts, a holistic picture of the company’s financial health is increasingly difficult to form.
Also, more of the sales has moved to electronic platforms, so that both account aggregators (consolidating information across multiple banks) and electronic commerce platformers have better access to the supply chain and payments information of their clients.
This observation fully confirms the business approach that Taiga Sawamura, Founder & Chief Executive Officer of Emerada, described in a recent presentation: “So what we are doing now is to ask SMEs, to open up their data in each different bank. We will aggregate it,and we will provide you a better lending experience. We will also provide you with accurate forecasts of the cash flow going forward. And we will help you do cash management. Because running out of money is always the biggest risk for small companies. We provide all this data across banks and accounts (with the approval of the account holder) to any bank so that they can provide a better service. That is game changing. It is highly, highly disruptive.”
One can divide a bank’s credit functions into two parts, namely (1) information production (customer review, post-loan monitoring), and (2) funding. The information production function for SMEs are increasingly moving towards the roles of account aggregators and FinTech companies, while the bank retains the role in providing funds.
Since loan interest income will then be split between FinTech companies and banks, banks will become less profitable for the same size of their balance sheets. This would also lead to a decline in ROA and ROE. Therefore, in order to develop a sustainable banking business model, it is necessary to devise a cooperative approach with the FinTech companies.
In conclusion, the BoJ states that funding for short-term needs and working capital is different than for long-term capital projects, which cannot be judged on the basis of supply chain and payments data. It is therefore expected that banks will continue to play an important role in the information production and funding functions with regard to long-term capital projects. One might disagree with this optimistic view as quite a few FinTech players are looking to make direct access to capital markets significantly easier and less costly for SMEs as well, putting another nail in the coffin for regional banks.
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