How will Japanese Fintech fare in 2021?

Dr Samuel Barbosa Da Cunha, CEO & Chairman at Bar Trading Japan on what we can expect from Japanese Fintech in 2021 and beyond.

Since 2018, the Fintech sector in Japan has seen rapid growth. And we can expect to see this continue throughout the next few years. By 2022, according to the Yano Research Institute Report Present Status and Future Outlook of the Fintech Market 2019, the market will be worth around $11 billion. This represents a Compound Annual Growth Rate (CAGR) of 51%.

How has Japanese Fintech been affected by COVID-19?

And the pandemic is driving it forward ever faster. Japan has been forced into faster digitisation across all sectors due to COVID-19, and this has naturally sharply increased the urgent need for Fintech investment.

The ITR Impact Survey on Corporate IT Trends in the Time of COVID-19 shows that in Japan, remote working has jumped from 25% to 62% (before and during the pandemic). In addition, online sales have gone up to 33% compared with 13% and online sales channels have increased from 19% to 31%.

We can see evidence for this in the steady growth of investments into Japanese Fintech since 2016. Other global regions reached a peak of Fintech investment in 2015 and have been declining slowly since, while Japan continues to surge.

The Japanese Government has positioned Fintech front and centre of its national economic growth strategy. This includes a programme of regulatory changes to create the best environment for innovation, research and development to thrive. Fintech is the way forward to enable economic growth and to deal with socio-economic challenges.

Changes to regulations made by the Japanese Government

Some of the deregulation changes made in Japan include:

  1. Revised regulatory system across industries

The complexity of Japan’s licensing system along with very high regulatory costs were a major barrier to Fintech and innovation. This has been eliminated, leaving a fair competitive background for cross-industry entry.

  1. Investment restrictions lifted

Previously, there were prohibitive limits on investments from other industries. This allows insurance companies and financial services to invest more in the sector.

  1. Acceleration of data distribution

The Personal Information Protection Act has made it possible for regulated data distribution. This has accelerated the development of new Fintech services.

  1. Shift from postal to online procedural registration

Japan has always been a very traditional country in terms of business procedures. Now that accounts can be registered for and opened online with an app or smartphone, this has opened the market to achieve its full potential.

  1. New licenses for financial intermediary companies

It used to be the case that separate licenses were needed on a sector specific basis. So, any intermediation between insurance, banking and securities would be weighed down by red tape. Following the introduction of the Financial Services Intermediary license, all sectors can work together much more easily.

Japanese Fintech sector by technology trends

Tech trends that will continue to grow over the next few years in Japan are:

  1. Blockchain

This is expected to grow from 2019’s market value of $171.5 million to $1235.9 million by 2022. Applications include issuing and managing securities using DLT (or blockchain) tech, using the tech for inter-banking systems and cashless payment systems.

  1. AI

Artificial Intelligence is predicted to grow from $818.4 million in 2019 to $3.458 million by 2022. Applications and uses include stock price predictions based on data analysis, streamlining of operations, automatic document creation, robot call centre responses, detection of fraud, optimisation of financial analysis for acquisition purposes.

  1. API

Worth $8878 million in 2019, API will be worth $20644 million by 2022 and will underscore real-time integration between mobile banking and other financial industries, such as insurance, QR code payment services and cloud accounting services among others.

  1. Big Data

By 2022, the value of this tech sector will have gone from 2019’s valuation of $8848 million to $5,617 million. It will be used for instant stock price predictions, recognition of usage patterns of fraudulent transactions online, analysis of accounting processing data to create a new framework for processing, data analysis for customised customer service.

Market overviews of Japanese Fintech subsegments

Sub-segments of Japan’s Fintech sector include banking, insurance and securities. And the major tech used to develop these include Big Data, AI (artificial intelligence), automation, Big Data and application programming interfaces (APIs). Let’s look at these in more detail – all of the valuations on market size below are according to IDC Japan, Projections of FinTech-related Spending by International Financial Institutions 2019.

  1. Banking – this is the biggest fintech market sector in Japan, and includes online payment services, smartphones, apps and virtual currency trading using distributed ledger technology (DLT). This sub-segment is currently worth around $1,400 million and there is huge potential for further growth in Japan.
  2. Insurance – this includes risk assessment services using AI and Big Data and is worth $900 million as at the end of Q4 2020.
  3. Securities – including asset management and investment advice from AI advisors is worth $350 million as at the end of Q4 2020.