Around the world, the banking and financial services industry is undergoing a period of enormous change, as digital banking practices become more common and new players enter the market with a range of innovative, cloud-based banking products. The COVID-19 pandemic has also accelerated the adoption of digital banking in many countries, as people minimize cash transactions and adhere to ‘stay at home’ requests.
Japan, known for high-tech innovation in almost every field, is surprisingly yet to embrace the digital banking revolution that is underway in so many other countries across the Asia-Pacific region and Europe. This reluctance to digitize can be attributed to two reasons: firstly, Japan remains a largely cash-based society, and secondly, traditional legacy Japanese banking systems are relatively antiquated.
However, change is on the horizon, with the Japanese regulator confirming it will offer digital banking licenses "sometime in the future." This puts the Japanese financial services industry in an exciting position, with regulatory changes potentially just around the corner which will see the market completely transformed. At the same time it’s impossible to ignore the impact – both known and unknown – that the COVID-19 pandemic will have on the Japanese economy, and indeed the world’s. With the Japanese economy shrinking for the second consecutive quarter in the three months to March and the country slipping into recession, it is clear that Japanese policymakers are facing a very serious challenge ahead.
While it is impossible to know what the world will look like on the other side of the COVID-19 crisis, what we do know is that the post-COVID world will very likely be far more digitized than it currently is, particularly in terms of financial systems. The use of cash was falling even prior to the COVID-19 pandemic, and this trend has been accelerating rapidly of late due to a fear of infection from banknotes and coins. With ‘contactless’ payment methods now being actively encouraged, it is more important than ever for financial institutions to be able to offer digital services that customers can access without leaving their homes.
At Mambu, we expect to see Japan eventually emulate the successful – and somewhat aggressive - approach taken by Hong Kong, where the Hong Kong Monetary Authority (HKMA) moved very quickly to approve and issue digital banking licenses to a range of incumbent banks as well as a selection of "disruptive" fintechs. It will be interesting to see whether the recession brought about by the COVID-19 crisis encourages Japanese regulators to move even faster on the issuance of licenses, or if they will take a ‘wait and see’ approach and assess the pandemic’s economic impact first. But with Japan’s track record in digital innovation in other areas, we anticipate the country’s transition to a more cloud-based, digital banking industry will be an enormous success.
Once Japanese regulators give the green light for digital banking to proceed in Japan, those organizations that remain reluctant to change will quickly find themselves left behind by competitors and customers, particularly in a post-COVID world.
Myles Bertrand is the Managing Director, APAC, at Mambu, the market-leading cloud-native banking platform.© Japan Today