Everything you ever wanted to know about Fintech in Japan

We live in a global financial system, but fintech innovation is surprisingly local.

Makoto Shibata, the head of FinoLab, has been leading financial innovation Japan for over 20 years, long before the term fintech existed. We talk about the evolution of Japan's fintech landscape, and which fintech sectors are facing consolidation and which are facing growth.

And we also explore Japan's rapid transition from a cash-based society to a cashless one and the startup opportunities that opens up.

It's a great conversation, and I think you'll enjoy it.

Show Notes

The critical role of a dedication fintech community Why corporate support is still needed to succeeded in fintech in Japan The government's push to move society away from cash The likely fate of today's e-payment startups Opportunities for fintech startups in the next five years How AI is being used in Japanese banks (you won’t like it) Advice for how startups can successfully collaborate with large financial institutions What is preventing Japanese fintech startups from going global? The kinds of foreign fintech startups with the best chance for success in Japan How to know when you are at the peak of the fintech investing cycle? What foreigners most misunderstand about Japan’s fintech markets

Links from our Guest

Everything you ever wanted to know about FinoLab The FinoLab startup community Connect with Makoto on LinkedIn Friend him on Facebook An interview with Makoto on Xtech Ergomania article on the rise of fintech in Japan Fortune innovation Forum on fintech in Japan [Video] Japan FinTech Topics YouTube playlist [Japanese]

Transcript Welcome to Disrupting Japan, Straight Talk from Japan's most innovative founders and VCs. I'm Tim Romero and thanks for joining me. FinTech is a broad and confusing startup sector. It's a sweeping category that encompasses everything from pragmatic and meticulous applications, like the optimization and risk management of consumer loan portfolios to the most hype driven and outrageously transparent crypto scams. Of course, at Disrupting Japan, we focus on Japan. And so today we'll be sitting down with Makoto Shibata, the head of FinoLab and the FinoLab Fund. Now, FinoLab has been central to Japan's FinTech community for a long time, and today we're going to take a sober look at FinTech in Japan. What's working, what's not, and what's likely to blow up in the near future. Equally important, before running FinoLab, Makoto spent 23 years at a Japanese mega bank and was in charge of their innovation activities. So, he offers some very practical advice on how FinTech startups can partner with financial institutions in Japan. He explains why such partnerships are needed and where they can go wrong. Makoto and I dig into how Japan is rapidly becoming a cashless society, the opportunities that trend presents for FinTech startups in Japan, and the importance and challenges of Japanese FinTech startups trying to go global and oh, yes, we also talk about what is perhaps the worst possible business use of generative AI ever to be deployed. But, you know, Makoto tells that story much better than I can. So, let's get right to the interview.

Interview Tim: So, we're sitting here with Makoto Shibata of FinoLab. So, thanks for sitting down with me. Makoto: Thank you for having me. Tim: So, FinoLab is a community. It's much more than just the fund, but to start things out, tell me about the fund and its thesis. Who are you investing in and why? Makoto: We started from a business community, we realized that one of the top priority startup is to raise fund. And in their early stages, they may have difficulty, and we thought that it would be good to have our own fund to support these startups. So, basically we would focus on the early stage startup in FinTech related areas. These days FinTech has become quite wide. The territory of FinTech is expanding. Tim: And the startups you're investing in, are those all startups from the FinoLab community, or is it a broader, any FinTech startups in Japan? Makoto: Basically we try to start our conversation when startup joined FinoLab as a member, but we also have some startups in the FinTech community outside of FinoLab. Tim: And FinoLab for those who don't know. So, Mitsubishi Estate actually is running a number of these kind of vertical co-working spaces, and I think FinoLab was the very first one. Makoto: Yes, it was. There were group of people running FinTech pitch contest called Financial Innovation Business Conference. Recently we changed the name to a Fino pitch. But people running this FIBC since 2012, the idea that they need certain place for FinTech startup to form a community to promote the ecosystem. In 2014, 2015, we started to see many community coming out in different parts of the world, and especially in London, particularly level 39 in Canary Wharf. Because not just the FinTech startups, but also the financial institution and also the regulatory authority got together to promote the ecosystem in FinTech area. So, we started knocking on the doors. And since then we have experienced expansion from a few members to now we have like 55 startup members and about 30 corporates and other public type of members. Tim: One thing I've noticed, especially about FinTech in Japan, the corporate support seems to be extremely important for startups to get any traction. Makoto: Right, one of the reason is that FinTech is area where you need to cope with regulation, and also you need to have certain trusts in order to get traction from end users. It is always helpful to get support from the large financial institution or existing corporate entity. Tim: So, FinoLab's been in operation in one form or another for, well, for 10 years now. And FinTech's always been a big part of the startup ecosystem here in Japan. But over the last couple of years, FinTech's really exploding in Japan. FinTech week this year was just amazing. It was huge. So, what's driving this change over the last year or two? Makoto: In the beginning, the FinTech was only for a handful of people who are interested in making innovation in financial service. But now with the expansion of digital transformation in every industry, and especially in financial service, government is putting emphasis to shift from cash society to digital payment or cashless society. I think that had big impact on the way that people started to get interested in FinTech. And also major financial institution was pursuing open innovation from early days. But now even the small financial institution or regional ones are getting pressure to digitally transform themselves. And oftentimes they are turning to FinTech startups. All these elements put together. People started to get more interest in FinTech area. Tim: Actually there's two points you brought up that I want to drill down on separately. The first is the recent uptake in electronic payments in Japan. For decades, really everyone around the world was just saying, oh, well, Japan is a cash based society. They don't like credit. Electronic payments outside of the train ticketing is almost non-existent, and that's absolutely not true anymore. What was the tipping point? Makoto: So, even before the government started to promote cashless society, we have seen uptake in, for example, contactless payment using the railway ticket. And we have seen the circulation of small coin going down from 10 years ago or so, and also small medium sized retail outlets were very reluctant to adopt digital payment. So, people had to carry around cash. And from couple of years ago, the government put pressure on industry even those small retail outlets started to adopt digital payments. Tim: What kind of government pressure was put on them? Makoto: First when they introduced this my number card, National Identity Card. They thought that this may be a good opportunity to promote cashless activities. So, they put some incentives. If you introduce my number card and if you use the digital payment, you get some rewards or points. Those who are eager to get these point programs, they applied for these incentive schemes that had impact on retail outlets because many people requested new payment methods. And that's one element. And another is introduction of QR code payment. It's interesting that QR code was invented in Japan but it was only used for supply chain management then. So, invented this QR code, but nobody in Japan thought of using this QR code for payment. But someone in the neighbor country came up with the idea of using QR code for payment. And here we saw AliPay and WeChat pay exploded in China. And looking at that, some people in Japan started to import that idea into Japanese environment. Tim: Consumer behavior doesn't change rationally. So, what I find fascinating about this is it seems to have swung almost to the other direction where five years ago I paid cash for just about everything. That was just the only option. Now most chain stores and a lot of retail stores will have, they'll accept 20 different types of e-payments, they'll have like three or four different payment acceptance devices, payment terminals… Makoto: And if you go into a convenience store, you would look at 50 different payment… Tim: Yes, exactly. So, it just seems like too big of a change to attribute to just small government incentives or seeing the success of something overseas. Is there something where e-payments have become significantly more profitable for these companies? Makoto: Not really. But one of the reason why QR code was successful in small medium outlet was that you don't need to install a fancy payment reader to accept QR code payment. You can just put the sticker, the storefront. I think that had big impact on the acceptance of QR code among small retail outlets.