How foreign fintechs will buoy Japan's banking sector

They might introduce new business models and solve overcapacity, says a former central bank deputy governor.

Foreign fintech companies are expected to help solve the failing profitability of Japanese banks and guide them to shift away from traditional business models, according to the Hiroshi Nakaso, former deputy governor of the Bank of Japan (BoJ).

Nakaso, who served under BoJ for 39 years, shared hopes that inviting overseas fintech players into the market will introduce new business models and strategies, such as open APIs.

Local banks are faced with tight competition in lending rates as the traditional business models they follow rely on deposit rates. Regional banks are also burdened with tight competition as a result of overcapacity and lack of access to global markets.

"I believe one way to address this situation is to invite more fintech companies which will introduce highly new business models. This is what is happening in any major market, which allows fintech companies to directly access the banks platform. I think a collaboration of fintech companies with the banking sector will open new frontiers for the banking business," Nakaso told foreign media during a panel at the Tokyo Fintech Showcase for Global Media that was hosted by the Tokyo Metropolitan Government (TMG).

Local banks have employed a business model that rely on taking deposits, but with deposit rates at zero, they have to compete almost constantly with lending rates. This leads to lower lending rates and narrower interest margins.

Nakaso added that regional banks are also being dragged by the problem of overcapacity. Whilst they survived the financial crisis two decades ago that saw 20 big banks consolidate to three mega banks and smaller credit cooperatives go bust, the number of midscale banks are putting pressure on the interest rate market, causing rates to shrink. The entry of more overseas fintech will reportedly aid in opening the global market to regional banks.

"This is one reason why we want more fintech companies to come over to Japan and enter into the traditional banking industry," said Nakaso, referring to TMG's plan to turn Tokyo into Asia's leading financial hub by attracting more foreign asset managers and fintech companies.

He added that regional banks can help Tokyo turn into a domestic hub by serving as a channel to pool surplus funds towards Tokyo, and then helping Tokyo redistribute these across local economies that require more funding.

Nakaso serves as the chairman of FinCity.Tokyo, an organization founded by TMG along with public agencies and private organizations to transform Tokyo into a leading financial hub.