Japan FinTech Outlook 2023

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.

This article is part of our Tokyo FinTech Publication, please follow us to read more from our writers, like hundreds of readers do every day. Please also register for our short weekly digest, published some Saturdays, at the link below.

Should you live in Tokyo, or just pass through, please also join our Tokyo FinTech Meetup. In any case, our YouTube channel and LinkedIn page are there for you as well.