11 Sep The Japanese Fintech sector is still strong despite COVID19
The global banking system is under prolonged stress because of COVID-19. Keeping businesses and economies going is the priority for every country dealing with the pandemic. As well as strong leadership, a visionary outlook, flexible stance and a strong foundation, digital solutions are more important than ever.
This is why Fintech is vital to ensure financial systems keep working throughout the cycle of lockdowns we’ve seen so far this year. But while the negative impact of the virus on banking and financial services is given a lot of attention, the impact on the Fintech sector shouldn’t be overlooked. Japan is holding its own as a Fintech hub growing in popularity due to its financial and regulatory strength in the face of the virus. Here’s why.
Japanese Fintech sector gaining more VC investment
Funding has fallen for new Fintech start-ups and organisations already up and running are dealing with reduced revenues. KPMG International’s Pulse of Fintech H1 2020 report shows that global Fintech investment fell by $25.6 billion. This is likely down to a significant fall in mergers & acquisition (M&A) deals.
M&A investment in Fintech reached $85.7 billion in H2 2019. Compare this with just $4 billion of investment in H1 2020 and COVID-19’s impact is stark. Of course, the slowdown in M&A is down to general reluctance from investors to power ahead with their major deals. The risks of the virus are too high.
Venture capitalist (VC) investment is still strong around the world. The report shows that investment could end up surpassing more than the norm, depending on the last half of 2020. VC investment from America is still the largest at $9.3 billion, with Asia at $6.7 billion and EMEA $4 billion.
ASPAC (Asia-Pacific region, including Japan) clocked up a significantly high amount of Fintech investment over the first six months of the year. Fintechs in Singapore, India, Indonesia and Japan are leading. A significant contributor to the success of Japan and other ASPAC countries in achieving Fintech funding is because of regulatory changes.
Japan has a strong economy and solid regulatory system
Japan is, of course, home to the third biggest economy in the world. In addition, Tokyo represents the top 20 national economy globally, well ahead of countries including Sweden, Taiwan, Switzerland and the Netherlands. However, it’s important to recognise that Japan is also dealing with a steady decline in population. In 2010, Japan’s population peaked at 128 million people. Over the last ten years this has dropped to 125 million with experts predicting a further steady decline due to an aging population. Urbanisation adds to the pressures, with rural areas emptying as cities fill up.
That’s the backdrop against which COVID-19 hit. The impact of the virus can be seen in Japan with a surge in the currency trading market. In other words, people who are forced to work from home are looking for – and finding – new ways to make money from their investments. In just two months, the individual foreign exchange market soared to 1,015.6 trillion yen ($9.4 trillion) from just 403 million yen ($3.8 million).
And the facilitator for the availability of the services that allow Japanese investors to work like this is Fintech. Fintech companies are leading the use of blockchain technology and without their ingenuity, innovation and technical skill, this wouldn’t have been able to happen.
Fintech trends in Japan that boost the sector for investor interest
- A shift towards a cashless society in Japan
There was already a move by the Japanese Government to promote cashless payments and encourage people to drop cash as their main way of paying for services. To move towards this, the Government increased consumption tax on 1 October 2019 from 8% to 10%. Discount schemes were also introduced to offer subsidisations to merchants who use cashless payment systems. These kinds of measures are only possible through Fintech companies coming up with solutions that work.
- Currency trading
Japan has more than 800,000 active forex (FX) accounts and is responsible for 35% of the entire volume traded in the world. This has more than doubled since 2010, thanks in part to traders choosing to trade on highly volatile but highly profitable currencies like Mexican Peso, as well as USD and the Euro.
Most traders in Japan are middle-aged males, although young people are entering the market through beginner-friendly platforms from brokerage firms that show them how to get the most out of the FX market.
- Cryptocurrency assets
Japan was ahead of the curve with cryptocurrencies. In April 2017 Japan was one of the first countries globally to bring in regulation regarding Bitcoin, effectively to make it legal tender. Licences for crypto exchanges have been legal since then, which has led to Japan establishing more than 23 crypto exchange operators around the country. Protections have been strengthened since then for investors using cryptocurrency assets, including the Financial Instruments and Exchange Act (FIEA) and the Payment Services Act (PSA).
- Digitisation of paper-based services
Japan’s financial services pre-pandemic were slower to move to digitisation than in other countries. For example, insurance policies are mostly sold by agents. In rural areas, this can mean agents fill the paperwork in on behalf of the client and fax it to head office.
This ageing system was already under scrutiny before COVID-19. For example, the Ministry of Economy, Trade & Industry (METI) flagged up what they call a “2025 Digital Cliff”. The need to digitise quickly was therefore already understood before COVID-19. However, the pandemic is acting as a catalyst for profound, swift change.
Future of Fintech for Japan and the rest of the world
The pandemic has created a world that is clamouring for digitisation. This is fuelling the already existent trend of innovative Fintech solutions. Contactless payments will become more prevalent as the virus continues, with cash becoming less in favour. These will in turn boost Fintech investment that will increase innovative solutions.
This was already happening before COVID-19, but to a lesser extent. And certainly for Japan, the virus has increased investment in this sector enormously. Added to regulatory changes brought in before the virus and strong Government support for the sector, Japan’s strength in Fintech will only grow more and more.