hat is the “DX strategy?

The financial industry has faced various challenges such as ultra-low interest rates, an aging population, and labor shortages.

In addition, due to the impact of COVID-19, financial institutions with old systems have adopted telework for the first time, and as the implementation of digital tools increases, new issues have emerged.

Precisely because of this uncertain era, it is necessary to have the conceptual power to create a new management vision from the future by thinking backwards, and to think about a “survival strategy in a period of change” in the financial industry.

In this article, I will explain the current situation of the financial industry and the countermeasures against the problems.

Current state of the financial industry

The problem of non-performing loans at financial institutions, which was exacerbated by the effects of the bursting of the bubble economy and the financial crisis, has finally returned to normal as a result of strict efforts by financial institutions to reduce non-performing loans.

However, while the financial strength of financial institutions has recovered, their profitability remains at a low level by international standards. In the midst of measures such as negative interest rates and consumption tax hikes, I will explain the current situation in Japan’s financial industry.

negative interest rate

In 2016, the Bank of Japan introduced a negative interest rate policy of -0.1% for some of the current accounts deposited by financial institutions with the Bank of Japan in order to revitalize the economy and combat deflation.

Under the negative interest rate policy, financial institutions will be required to pay interest on deposits with the Bank of Japan, so they are expected to actively lend to companies.

However, due to the prolonged ultra-low interest rates, banks’ profit margins continue to shrink, and side effects such as worsening bank profits are increasing. The decline in government bond yields has deepened investment difficulties for life insurance companies and pension funds, casting a shadow over individuals’ post-retirement lives.

Consumption tax hike

On October 1, 2019, Japan raised the consumption tax from 8% to 10%. What is worrisome about the consumption tax hike is the movement of consumers to rush to purchase products before the tax hike (last-minute demand) and the drop in consumption after the tax hike (reactionary decline).

According to the November 2019 household budget survey released by the Ministry of Internal Affairs and Communications, consumption expenditure per household consisting of two or more people was 278,765 yen, down 2.0% year-on-year (in real terms).

In response to the drop in consumption, there were measures such as cashless payment point rewards, and it was thought that it would recover relatively quickly, but the spread of the new coronavirus infection resulted in a decline in consumption again.

Utilization of Fintech

Fintech, which creates new value by fusing finance and IT technology, is currently creating a big wave in the financial world.

Fintech is a coined word that combines finance and technology, and stands for finance technology. Generally, it refers to various innovative movements that combine financial services and information technology.

Here are three examples of how Finech is being used in our everyday lives.

smart payment

Smart payments are electronic payment methods that do not require cash or procedures at financial institutions. Smart payments currently used in Japan can be broadly divided into two types: card payments and QR code payments.

By using smart payment, the hassle of managing cash and processing time at financial institutions will be eliminated, and fees will be reduced. It also helps expand the range of payment options available to consumers.

Typical smart payment services in Japan: PayPay, Merpay, LinePay, etc.

Investment/asset management/robo-advisor

Fintech is also used for investment and asset management, and it is now possible to manage assets such as stock investment and FX on apps and the web.

There are also robo-advisors that automatically select and manage financial products based on AI technology and statistics. In Japan, there are two types of robo-advisors: the discretionary investment type that manages and trades based on investment algorithms, and the advice type that diagnoses and advises on asset management.

Representative services of investment, asset management, and robo-advisors in Japan: Wealth Navi, THEO, etc.

virtual currency

Virtual currency is a currency that can store transaction records such as deposits and withdrawals by utilizing blockchain technology, even if there is no central management institution such as a bank. Unlike legal currencies such as yen and dollars, it is attracting attention as a new currency that does not take the form of bills or coins.

Virtual currency prevents spoofing by a third party with “public key cryptography”, prevents double payments by parties with “blockchain”, and miners who have contributed to the operation of the blockchain with “mining”. It is a mechanism to provide economic incentives called mining rewards.

Currently, the cryptocurrency market has stabilized, and it is expected that the market will continue to expand steadily in the future.

Major virtual currencies: Bitcoin, Ethereum, Ripple, Bitcoin Cash, etc.

In summary, with the declining birthrate, aging population, and declining population, ICT technology is evolving even more rapidly, and the international financial environment is undergoing major changes. Similarly, constant evolution is required in the financial business.

Financial industry challenges

Aging financial system

In September 2018, the Ministry of Economy, Trade and Industry announced ” DX Report: Overcoming the IT System ‘2025 Cliff’ and Full-scale Development of DX ” (abbreviation: DX Report).

The announcement said, “The legacy systems that companies have been using up to now are no longer compatible with the new era, and it is becoming a heavy burden to continue.If they do not switch to new systems, Japanese companies will be losers in the digital competition compared to overseas companies. In order to avoid this, each company and industry must consciously promote digital transformation . ”

While it is necessary to promote digital transformation in order to maintain and strengthen competitiveness in all industries, legacy systems that have become complicated, obsolete, and black boxes are a hindrance.

In all industries, 80% of companies answered that they have legacy systems, but 100% of companies in financial institutions say that they have some kind of legacy system, which is a hindrance to digital transformation. increase.

Countermeasures: Rebuilding the financial system

Financial institutions have been using the same systems for 30 years, making it difficult to pass on knowledge, replace engineers, and introduce new technologies such as digitization.

Solving this problem requires two approaches.

• Approach 1 Approach
  to building and expanding core systems by improving or adding functions to existing systems
• Approach 2
  An approach that emphasizes the idea of ​​building a new system rather than the premise of using existing infrastructure

Existing systems can be utilized while continuously reducing costs, while at the same time building new systems that make full use of the most effective and efficient technologies will facilitate the introduction of new technologies such as digitization. .

This approach of creating a flow for the inheritance of knowledge and skills is needed more than ever.

In addition, by migrating the system infrastructure from on-premises to the cloud, you can obtain a flexible and highly scalable system infrastructure and easily build a development environment. Since infrastructure can be procured in the shortest time and at the lowest cost, it has the great advantage of being able to quickly respond to changes in business needs.

Inability to meet customer needs

With the emergence of the concept of Fintech, the relationship between financial service providers and customers has changed significantly, and issues such as lagging behind customer needs have emerged.

Conventional bank branches have been required to accurately handle the large number of requests for administrative procedures brought in by customers who visit the branch.

Currently, by expanding channels such as ATMs and Internet banking that allow customers to complete their own procedures, we are reducing the amount of paperwork at branches and shifting the role of bank employees from clerical work to sales.

However, in the world of retail banking, it is not possible to innovate to create a new market based solely on values ​​from the company’s perspective, such as profit expansion, cost reduction, and risk management.

This is because customer perceptions are changing. At the same time as the diversification of customer contact points and payment methods, customers are now able to easily select and obtain the financial service company that suits them, in addition to the products they need, anytime, anywhere.

Companies that provide financial services must be aware of “how to be chosen by customers” in this fiercely competitive environment.

The environment surrounding financial institutions is undergoing major changes due to the entry of other types of businesses into the financial industry and the development of IT.

Countermeasures: Digital platform/AI

In order to provide financial services that make customers feel that they are close to them, it is important for banks to anticipate customer needs and quickly provide information and proposals that meet those customer needs.

In order to draw out the needs of customers, it is necessary to connect the diverse needs of consumers online with the suppliers of various goods and services through the “matching economy” and “sharing economy.”

Specifically, we will build a platform through the synergistic effect of financial intermediary functions and information production functions. Therefore, by presenting the “optimal proposal” to “each customer” at the “optimal timing,” it becomes possible to quickly respond to customer needs.

Difficult to promote Fintech

New entrants, including those from other industries that utilize new technologies such as Fintech, are expected to improve convenience because they will invigorate competition among businesses and lead to the creation of new services and the promotion of innovation.

However, in Japan, the environment for promoting the FinTech field to the market is not yet in place.

security issue

Security is a major obstacle in promoting Fintech.

Recently, personal wealth management services (PFM) have expanded.

PFM is a Fintech service that enables one-stop acquisition of information distributed among financial institutions such as banks, securities companies, and credit card companies. You can access institutional accounts, etc., and obtain information such as accounts using a technique called web scraping.

It has been pointed out as a security problem that users other than financial institutions handle user IDs and passwords in such areas.

As a countermeasure, it is effective to first strictly demand the stability and security of financial institutions’ systems, and to have the skills to provide data security and stable operation of services.

Legal development

While Fintech services are gaining momentum, the legal aspects are still lagging behind, and many gray areas remain.

As a countermeasure, the government should create a system that enables operations related to all financial products/services, and ultimately organize the system related to each business law and prepare legal arrangements. is valid. .

A report compiled by the Japan Fair Trade Commission in April 2020 states that it will promote open APIs that open bank systems to FinTech companies.

Efforts are needed to provide the data held by banks to companies that provide online banking and smartphone services via APIs.

Banks have even warned that if they recklessly refuse to connect to APIs to provide information, they may be in violation of the Antimonopoly Act.

Improving financial literacy

Various FinTech services are provided in individual areas, but because many consumers do not grasp the overall picture, it is difficult for better financial products to spread.

As a countermeasure, consumers should first acquire financial literacy as life skills such as household budget management and life planning, and then acquire the knowledge to appropriately use and select financial products that match their life plans. can be mentioned.

It is important for companies to conduct regular satisfaction surveys on FinTech services, and for consumers themselves to understand changes in their attitudes and attitudes toward finance, which will lead to continued use of services.

Financial Industry Future Outlook

Japanese financial institutions, which have rewritten the industry map through the integration of major banks, will explain what measures they must take to survive in the new era amid continuing deflation and economic stagnation.

Look for new revenue streams

We need to find new sources of revenue by combining the unique business models and technology of companies in other industries with the reliability and security of the services provided by existing banks.

In this way, we aim to generate profits based on the creation of new customer value by effectively matching knowledge from different industries and linking with core systems.

Here is a specific example.

Sumitomo Mitsui Financial Group President Jun Ota responded to an interview with the Sankei Shimbun on December 21, 2020, and revealed plans to enter the advertising business in the 3rd year of Reiwa.

The company plans to use cashless payment data such as credit cards to develop an advertising business aimed at specific customers. As the low interest rate environment becomes prolonged and it becomes difficult to make money with interest rates, we believe that the data business will be strengthened as a new source of earnings.

Sophistication of finance using IT

Against the backdrop of sophistication of IT, financial services will merge with information technology, and the business model of financial institutions will undergo a major transformation.

Under these circumstances, as the number of new entrants to develop unprecedented business models using new digital technologies is increasing, financial institutions are also adopting DX (digital transformation) in order to maintain and strengthen their competitiveness. We are required to move forward at a speedy pace.

In addition, the earnings environment for financial institutions is becoming increasingly severe. Under these circumstances, we must reduce costs by further improving operational efficiency and raise the top line.

For example, by achieving both increased compatibility with the Internet and security, and by realizing both the use of big data and the protection of privacy, we will be able to
create an environment that will speed up the sophistication of finance through the use of IT.

summary

Against the backdrop of negative interest rates and other factors, the financial industry was undergoing major changes. And now, the financial industry is about to be transformed by the introduction of technology.

With the rise of Fintech, financial institutions can reduce costs and improve operational efficiency, so it is expected to be incorporated into more services and systems in the future.

After reviewing the profit model in the financial industry, it is necessary to understand the needs of each individual user and provide services that meet those needs.