The Journal The Authority on Global Business in Japan

Technology-enabled products and services for banking and finance transactions—or fintech—are likely to fundamentally change the economy in a way similar to the Internet dot-com boom of the late 1990s and early 2000s, predicts Marcus von Engel, a partner at global firm PwC Consulting LLC.

But, like the dot-com boom (1995–2001), the disruption yet to be caused by fintech may not be as immediate as many expect, nor will it follow a path that is easy to predict.

“It was around four years after the dot-com boom that you got companies such as and platforms such as iTunes that fundamentally changed entire industries,” recalled von Engel, “and they did it in unpredictable ways.”

During periods of technological evolution, it is often easy to overestimate the change that occurs over a year or so, and to underestimate the transformation that happens five to 10 years later; the same is true of today’s fintech boom, von Engel warns.

And he is not alone. Speaking to The Journal, players in Japan’s fintech space have similar views. While fintech start-ups in Japan are primed to disrupt the finance and banking sector, they say change may not fall into a clear pattern or timeline.

In 2008, before fintech was trending, Russell Cummer left Goldman Sachs Japan to co-found Paidy, a company with a number of business lines in the credit and online payments space.

“Paidy is a post-pay credit account that behaves like a credit card. It is linked to your phone number, but it does not require users to sign up, download an app, or install anything on their device. All you have to do is choose it when checking out.”

This is in stark contrast with services such as cash-on-delivery (COD), where a customer pays cash after each delivery and must be present during the drop-off, or a credit card, which requires forms and background checks before the card is issued.

Paidy guarantees payment to the vender and allows the user to shop online. The service consolidates transactions into a monthly bill, which the user can settle as they please.

In Japan, Paidy is looking to tap into the portion of shoppers who rely on COD or money transfers—some 45 percent of customers (compared with 10 percent in the United States).

A typical Paidy customer is a Millennial (born between early 1980s and early 2000s) or Generation X (born 1965–1976) woman buying fashion and lifestyle goods on her phone. Paidy is currently offered on more than 600,000 websites in Japan. By 2020, Cummer anticipates the payment platform will be available on the majority of e-commerce sites in Japan and across the region.

Flywire, a Boston, Mass.-based fintech company, has likewise found a niche in Japan after proving their business model in Europe, North America, and Oceania. The payment platform was initially introduced to serve educational institutions around the world, processing cross-border payments from international students.

“We looked at Japan, which hosts around 200,000 international students, and decided to expand into this market,” explained Flywire CEO Mike Massaro. Thanks to a government initiative, that number is set to grow to about 300,000 by 2020.

Since its entry in Japan in 2016, Flywire has found partnerships within institutions of higher education; vocational training; cultural and culinary centers; and Japanese language schools. Japan is also an important market for outbound students—one of the top ten in the world.

In 2015, the company expanded into international healthcare payments, an area that has seen increased demand in Japan. Then, in March of this year, it entered the B2B cross-border payment market, enabling businesses to simplify payment acceptance from international customers.

Typical of fintech companies, Paidy and Flywire seek to plug those gaps in the financial transactions and payments sectors where incumbents—banks, credit card providers, and even e-commerce sites—are inefficient, costly, or outdated.

As Paidy’s Cummer explained: “fintech, at its essence, is creating new customer experiences for financial services using modern best practices in software and user experience design and communication, while making something that feels commercial-grade and beautiful.”

Incumbents may not have the capacity for change—either due to legacy systems that are too costly to overhaul, because of dyed-in-the-wool thinking, or a lack of in-house talent and know-how, PwC’s von Engel added.

Massaro from Flywire agrees, adding: “Finding a way to innovate faster—especially where it may take legacy financial services entities decades to achieve the same result—is where we see ourselves succeeding.”

P2P international money transfer platform TransferWise is also looking to shake up the fintech ecosystem.

Headquartered in the United Kingdom, the company entered Japan in late 2016 and has found a following among the expat community—especially North Americans and Europeans—country manager Kazuma Ochi told The Journal.

Many of his customers have suffered the whims of bureaucracy, language barriers, inefficiency, and high costs—often buried in the fine print—when conducting cross-border money transfers.
What is TranferWise’s value proposition? The company seeks to reduce bureaucracy and costs when signing up to its platform, and promote transparency, Ochi explained.

When using the TransferWise app, “you can see exactly how much your recipient will get. And you can lock the fee based on the current yen–dollar mid-market rate, which is fairer than that used by incumbents in this sector, and we will deliver that exact amount.”

As of this writing, TransferWise provides a standalone platform for cross-border payments. However, it hopes to get into partnerships with incumbents in the finance and banking sector in Japan.

Moneytree is a Tokyo-based company founded by Americans Jonathan Epstein, Mark Makdad, and Ross Sharrott, and Australian Paul Chapman. Each has a long history of working with foreign and Japanese companies.

Launched in 2013 as a personal financial management app (PFM), Moneytree caused a stir in Japan when it was featured in Apple Inc.’s App Store from the day of release. It was named Best App of 2013 for iPhone, selected from among all non-gaming apps. This success was repeated for iPad in 2014.

The app helps its 1.25 million users monitor their finances by consolidating data from bank accounts, credit cards, digital money, loyalty programs, and securities on their smartphone and the web.

In recent years, the company has entered numerous partnerships with incumbents in Japan, including large retail banks, for which it has created application program interfaces (APIs) for a data-sharing platform based on user permissions.

Epstein, who is also the company’s chairman, noted: “In the early days, we found resistance from traditional financial institutions. The industry warmed to us as we became recognized and established. In 2015, we closed a funding round that included participation from the venture capital arms of Japan’s three megabanks, and we’ve continued building those relationships. Today, we count Mizuho Bank, Ltd. and Sumitomo Mitsui Banking Corporation among our customers.”

These relationships extend to the regulatory space; Moneytree is a founding member of Fintech Association Japan, and Makdad is the chair of the API and Security committee.

“From its earliest days, Moneytree cut across gender boundaries, equally popular with males and females, aged 20 to 35,” Chapman pointed out. This is unusual for a space typically the domain of housewives and middle-aged men.

While the app is available in English and Japanese, for now, the main target is the Japan market; Australia is next, starting this year.

Established in 2012, Tokyo-based Money Forward, Inc. is also in the PFM market. Some 4.5 million users—mainly men in their 30s and 40s—use the company’s money management app.

Since 2013, Money Forward has provided a software-as-a-service (SaaS) product that automates accounting. A year later, the company’s founder and CEO Yosuke Tsuji won the US Embassy’s Award, a prize that recognizes Japanese entrepreneurs with a risk-embracing spirit.

Like other players in the PFM market, Money Forward’s API consolidates user accounts and allows the company to package targeted products and services.

As co-founder and head of fintech research at the company, Toshio Taki explained: “What people really want to know is: ‘Of the thousands of ways to manage my finances, what are the three best choices I have?’ We condense a lot of data from a customer’s database and provide a platform that is easy to use.”

To date, Money Forward collaborates with nine banks in Japan, with whom they have created co-branded apps. The company is also developing relationships with municipal authorities and chambers of commerce, especially for use of its SaaS back-office platform.

A common thread that runs through fintech start-ups in Japan is the desire to establish partnerships with incumbents in the corporate world as well as with metropolitan, regional, and prefectural governments.

As venture capitalist and Japan government advisor William Saito said: “It will be very tough without a partner. You have to come in with a product or service that is really strong, auction it between two large potential partners, and then try to still have some independence.”

For inbound companies such as Flywire, seeking the support of government agencies has been vital. In their case, it came in the form of the Japan External Trade Organization (JETRO), a nonprofit government-funded organization that supports market-entry firms.

“Much of the time we spend in Japan is devoted to answering questions that are often asked of inbound firms because the domestic market is not familiar with [your firm]. JETRO has played a great role in advising and putting our local partners at ease,” noted Peter Butterfield, the chief compliance officer and general counsel at Flywire.

Government ministries and regulatory bodies, such as the Financial Services Authority (FSA), also have strategic roles in shaping the fintech ecosystem.

As Money Forward’s Taki notes, the Ministry of Economy, Trade and Industry (METI) sees fintech as a new sector for innovation, economic growth, and job creation.

Indeed, Taki is a member of the FSA’s Panel of Experts on FinTech Start-ups as well as a member of METI’s Study Group on FinTech. Both panels seek to coordinate the efforts of fintechs, government, and other industries.

Conversely, incumbents and government are also creating spaces where they can work more closely with start-ups and venture capitalists. TransferWise, Money Forward, and Moneytree are all members of Finolab, an innovation hub in central Tokyo that connects start-ups with mentors known as Finovators who bring expertise from a range of fields, including legal, financial, investment, technology, and consultancy.

In a place such as Finolab, the investors from the private and public sectors are also much closer to innovators. This allows investors to ask questions such as, “How exactly is this idea going to make money?” These questions mean smarter investors, who know how a product or service works and how it can be monetized. They eventually make smarter bets, PwC’s von Engel explained.

In the past 10 to 15 years, there are a lot of smart investors and a much broader ecosystem, leading to “smarter money chasing smarter opportunities.”

But it is not just payments, PFMs, SaaS, or cross-border transfers that are ripe for disruption. Insurance, fund management, and services that will rely on the Internet of Things, Artificial Intelligence, blockchains, digital currencies such as Bitcoin, and more will experience change.

As cross-border investors Triple A Partners Japan President Frank Packard noted, “Fintech will probably make the biggest inroads in public markets, such as securities trading, exchange-traded funds, financial spreadsheet analysis, and other tasks where one of the main client criteria will be cost-effective execution.”

Triple A Partners Japan’s portfolio of services includes private-market transactions, corporate and investment advisory, and corporate finance.

If there is a concern about the prospects for fintech in Japan, it may lie in the country’s lagging ICT infrastructure. Saito, who is also a cybersecurity expert, said: “My concern with fintech in Japan is that there is not a lot of ICT integration or publicly available data compared with other parts of the world where fintech is taking hold.” Platforms such as blockchain, he noted, rely on such data being readily available.

That said, if Packard and others are correct, and the analogy with the dot-com boom holds, then we can expect fintech to cause massive disruption in many industries. All that remains is to work out where—and when—it will happen; and to what extent.

John Amari is a writer and editor from the UK who specializes in articles on startups, entrepreneurs, science, tech, and business.