Tokyo: Asia’s next FinTech hub, with Morris Iwai
Japan is an uncommon blend of known and unknown: I drive a Nissan, you might drive a Toyota, my TV is a Sony, and since my time in Hong Kong, my go-to beer on hot days is an ice-cold pint of Asahi... but I know little about their FinTech scene. So, to set that right, I sat down with Morris Iwai, a seasoned business executive with 20+ years of experience in the credit card, consumer lending, and payments industries of the US, Taiwan, Singapore, and, of course, Japan.
Morris shares that experience - and some hard numbers - as we cover:
An overview of the credit card and payments markets in Japan
Tokyo, the new Fintech Hub in Asia
Digital Payment trends and the push towards cashless
Insight on the Japanese consumer mindset
The rise of BNPL and leading players in Japan
Acceleration of e-commerce spend
Challenges with the credit underwriting process
The state of Open Banking in Japan
The impact of Digital Wallets and QR payment providers
Future of payments in Japan and new opportunities
You can find Morris on LinkedIn at https://www.linkedin.com/in/morris-iwai/
And while you're there, come and find and connect at https://www.linkedin.com/in/brendanlegrange
Or see this all happening in the flesh by attending one of these great upcoming events: Japan Fintech Festival, Sushi Tech Tokyo, or Fintech Summit
Meanwhile, my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is discussed at https://confirmu.com/ and on episode 24 of this show https://www.howtolendmoneytostrangers.show/episodes/episode-24
If you have any feedback or questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Keep well, Brendan
The full written transcript, with timestamps, is below:
Morris Iwai 0:01
In Japan, there's been a lot of emphasis and support from the government to push Fintechs and attract foreign investments, with Tokyo being the next Fintech hub, hopefully in Asia.
Brendan Le Grange 0:11
I was going to get engaged in Tokyo, I had the ring in my pocket, it was springtime, the cherry blossoms were out, we were in a rowing boat on the moat around the Imperial Palace. I think I might have even had a little drink of Japanese whiskey to calm my nerves.
But we were also shattered, so I held that for another day. Welcome to How to Lend Money to Strangers with Brendan le Grange.
Morris Iwai, all the way from Tokyo today, welcome to the show.
Morris Iwai 1:02
Thanks Brendan.
Brendan Le Grange 1:03
Now, Morris, Japan is not a market I know well, myself, but it's also not a market that I know many people working in. So talk to me about that path that brought you to where you are today in Tokyo.
Morris Iwai 1:14
Sure, just to give some background: I'm originally from Los Angeles, but I had the opportunity to work both in the US and Japan throughout my career, 20 plus years, primarily with Citigroup in their credit card business, both here in Tokyo as well as New York.
But what really brought me to Japan is my roots here in Japan. So I've been travelling back and forth between the US and Japan since I was little and I've always been fascinated by the market and the country and the people and how it's so different from US and other Western markets. So after college, I decided to move to Japan and start my career here.
Brendan Le Grange 1:48
And Morris, you spoke about being fascinated by the market. I think that is what it is, it's a fascinating market. And I think quite unique because Japan feels at once very familiar but also entirely alien.
I mean, I remember growing up in South Africa, and the daily news reports would include an update on the Nikkei market and the exchange rate to the yen, the Japanese market was a pillar of the global economy. And if I think to all three of my degrees at some stage or another, there's been a case study on the Japanese housing and mortgage situation and deflation and inflation.
But actually, if I think about on the ground, Japanese people going about their day to day lives, I actually have no idea what the consumer finance or consumer credit landscape looks like. So if you don't mind giving us the very basic 101 introductory course, what does that Japanese credit market look like? And how does it differ in your sort of dual experience from what we know, maybe more broadly of the US market?
Overview on the Credit Card market and Payments in Japan
Morris Iwai 2:49
Sure. So Japan is a very mature market, but it loves cash.
The population is about 125 million people. It's very highly banked, ecommerce penetration is very high, there's a very advanced payment infrastructure. Credit card penetration is also very high - I want to say about 65 to 70%, which is probably the most popular form of digital payments. Having said that, it's a very cash-based society, people still like to use cash. And there's a deep cultural aspect to it, where people give cash during holidays and special occasions.
But that love for cash has been changing over the past 5 to 10 years with new digital payments, especially with COVID and the pandemic where there's more and more people accepting and more people willing to pay with their mobile phone through digital payments. They understand the convenience and the value of not having to withdraw money from the ATM machine every time, even though it's super safe here in Japan.
Brendan Le Grange 3:52
Yeah, I remember my time in Hong Kong, the banks were bringing out the digital Lai-See packets for the New Year celebrations, because also that was such a fundamental part of the culture, the handing over of new banknotes.
Tokyo, the new Fintech Hub
But, yes, Morris one thing I'd like to get a sense for as well is the Fintech space, because for me, Japan, it's the source of some incredible innovations in consumer electronics, in automobiles, and even just in things like popular culture, but when it comes to Fintech, I can't think of any Japanese brands or Japanese Fintech products that jump to mind. And this is despite the fact that some of the really big players in terms of the VC market are Japanese, these Japanese mega banks.
So is that a fair assessment, is the Fintech that you see primarily localised?
Morris Iwai 4:40
Yeah, I think it's fair to say, there's not too many Fintechs that are venturing abroad. The one that I do know of is called HYPERLINK "https://www.omise.co/southeast-asia-fintech-company-omise-acquires-payment-gateway-and-ewallet-business-from-dtac-subsidiary-paysbuy"Omise, who acquired a company recently in the US in the payments space.
But to talk about the Fintechs locally here in Japan more broadly, they cover a number of different categories that are very similar to the Western markets. They're primarily in payments, cryptocurrency, blockchain, data aggregation, PFM, and other financial services.
I would say some of the bigger headlines over the last few years have been Fintechs, like Money Forward, Freee, and Zaim. And these Fintechs that offer cloud based software, which help really automate back office tasks for certain companies with expense management, invoicing, and so forth.
And then followed by, I would say, new payment providers like BASE or Pay.JP. They are an E-commerce platform that helps merchants process credit card payments, and so forth. They've also launched a form of Buy Now Pay Later or Deferred Payment option as well.
And then crypto, as well as some of the Personal Financial Management, PFM providers like Money Forward, Moneytree, which are slowly kind of evolving more into that data aggregation space where they're providing insight to different clients, and really help them kind of grow their business through API based solutions.
And while these Fintechs are small, they're still growing.
There's been a lot of emphasis and support from the government to kind of push Fintechs and attract foreign investment into Japan. And there's a number of conferences that they're hosting here in Japan, most recently with Growth Industry, then there's a few coming up next year with City-Tech.Tokyo in February and SusHi Tech Tokyo, with Tokyo being the next Fintech hub, hopefully, in Asia.
Digital payment trends and the push towards cashless
Brendan Le Grange 6:29
Yeah, well, let's place that in the bigger context as well, you've spent a lot of time working both on payments and on credit and that includes the Fintechs, but also the very traditional products we all know so well. And so, when we think about how Japanese consumers are buying goods and paying for goods, what products are people gravitating towards, and what sort of providers are behind those products?
Morris Iwai 6:55
So, as I mentioned, digital payments is growing in popularity, the government is aiming for 40% cashless by 2025, which aligns with this Osaka Expo that they're going to be hosting.
So 40% is the target.
Right now, it's about 36% in terms of digital payments, and that includes credit cards, debit cards, QR payments, and other forms of non-cash payments. I would say, you know, back 10, 20 years ago, you couldn't go around with just your mobile phone, you always had to have cash on you. But now, more merchants accept credit cards and other digital payments.
Just recently, there was a report by Asahi News where Japan reached about USD $830 billion in terms of cashless payments. And the market is growing about, I want to say, 5 to 6% every year. And what that means is there's a big opportunity for Fintechs and other up and coming new payment providers here in the Japan market.
Insights on Japanese consumer mindset
Brendan Le Grange 7:56
Yeah, and I think that's really interesting because, as you said, it's a mature market, but there's aspects of it that are of days gone past. Now, my uneducated view of the Japanese market is a market that is relatively well off and relatively conservative in terms of financial decision making. And so it doesn't strike me as a hotbed of consumer borrowing and things like personal loans, cash loans, but what is the reality of that?
Morris Iwai 8:22
Generally speaking, the Japanese are very debt adverse, they don't want to over spend, over borrow. And that has been really the trend that we have been seeing for the past few decades.
But what I will say is that with wages very stagnant, the economy not growing, core inflation rising, more and more customers are looking to be able to manage their finances, whether that's through PFM or through BNPL - but certainly not to the extent like in the US and other markets, where probably 50% is revolving.
Here in Japan, only about 7% of outstanding balances actually get revolved or paid in instalments. And so that's a reflection of how the Japanese consumers really want to use their credit card and pay it off as soon as possible and not have to pay any interest. But that certainly brings opportunities for Buy Now Pay Later companies where they are interest-free for consumers.
Rise of BNPL and leading players in Japan
Brendan Le Grange 9:27
Yeah, well, let's talk about BNPL in Japan and what you have seen over the last few years as that industry has grown.
Morris Iwai 9:33
BNPL as we know it, in terms of Interest-free instalments is still relatively new. It was introduced by Paidy in October 2020 - so it's only been around for three years - and the reason why there's such a big opportunity here in Japan is although there is your traditional Point-of-Sales credit card instalments, similar to Mexico and Brazil, credit card issuers charge an APR anywhere from 12 to 15%. And because of their legacy system, they are not able to offer interest-free instalments at the point of sales, like Buy Now Pay Later companies.
So there are companies like Paidy, which was acquired by PayPal, and they have about 24% market share, and they have been growing over 200% over the past couple of years. They partnered with Apple, Amazon and some of the biggest retailers here in Japan. So certainly there's a demand both on the merchant side who are willing to pay that fee, and consumers that are looking to split their payments and manage their cash flow.
In the Buy Now Pay Later space, it's predominantly the local players here in Japan with Net Protections as the biggest provider of Buy Now Pay Later. But really in the form of Deferred Payment, the ability to pay in full at a later point in time, and not really your typical Interest-free instalments.
The other... they're not an overseas Fintech, they are a Japanese company but managed by folks with international experience and people from overseas, is Smartpay, which launched, I want to say back in 2021. And they're quickly expanding here in the Japanese market partnering with different retailers, clothing brands, electronics stores, and so forth. And it's very popular with ecommerce where people want to buy clothes or makeup and they want to try it on before they actually make any payments. And it's super easy, super convenient to use, you don't have to enter your any credit card information. It's a very simple credit underwriting process and you don't have to deal with the headache of any chargeback or disputes or anything like that with your credit card issuers.
So that has been very, very popular for a very long time. But now it's kind of migrating into that Interest-free instalments space that I mentioned about earlier.
Brendan Le Grange 11:54
The new BNPL use cases, particularly around access to fashion and easy convenient spending seem quite similar between Japan and, say, the US.
Morris Iwai 12:05
Yeah, that's right. Certainly the BNPL market here in Japan has been growing: it's a $12 billion market in terms of US dollars, and it's expected to grow 15% year over year, according to Yano research.
But I would say that over the last two, three years, it's really been propelled with Paidy’s services, and you know, their partnership with some of these big retailers. And so we're seeing that shift. And I think we're going to continue to see that growth.
Brendan Le Grange 12:31
And is that having any impact on the traditional credit products, things like personal loans, cash loans?
Morris Iwai 12:38
So that's a great question, Brendan. So what I would say is, having looked at some of the market data, when we look at your large credit card issuers or across the board, really, the outstanding balance is about USD $36 billion in terms of unpaid balances or anything longer than two months, where these financial institutions are charging interest. That $36 billion has been pretty much stagnant over the last seven years, it has not been growing, but for many different reasons.
But I would say in terms of instalments, certainly the Buy Now Pay Later companies have been taking up more share. And that's something that, you know, these large issuers cannot really continue to ignore anymore, especially because these Fintechs have kind of demonstrated their place here in the market and the consumer demand is kind of showing that, you know, there is certainly a need to manage finances, split up payments. And so yeah, definitely there has been some impact in terms of the credit market.
But having said that, obviously, Buy Now Pay Later, this still represents a very, very small share, and it will take some time to catch up. But certainly, it presents a lot of opportunities for these Fintech Buy Now Pay Later companies. Especially if I think about Tap to Phone on Apple on Google, certainly I think there's an opportunity there in that physical space where perhaps, you know, more and more customers can use BNPL at physical stores.
Acceleration of E-commerce spend
Brendan Le Grange 14:03
When we think about people living their day to day going about their lives. Is E-commerce a big portion of spend, or is it a culture that's in-store based?
Morris Iwai 14:12
E-commerce has definitely accelerated post COVID. It's going to reach about USD $243 billion if I'm not mistaken, and it's growing 6% year-over-year. Some of the beneficiaries obviously have been Apple Pay, Google Pay, Amazon Pay, Rakuten Pay, PayPay and others but there's a huge demand for E-commerce, especially with cashless and the government promoting digital payments.
Challenges with Credit underwriting process
Brendan Le Grange 14:38
And let's talk about the risk side of things when a lender is looking to make a loan or extend credit to Japanese consumer. What sort of tools do they have at their disposal to measure risk. Are there credit bureaus, credit bureau scores?
Morris Iwai 14:52
It's very similar, I would say to other markets in terms of looking at basic information about the customer in terms of declared income, their age, years of employment and so forth, and also how much debt do they have outstanding.
I think where it's different is, there is no FICO type score here in the Japan market. There is no bureau or agency, which provides a standard scoring for all financial institutions. The local credit bureau here in Japan: although they provide data, it's really on negative payment behaviour. And so I would say it's very limited compared to other Western markets and that is, I think one of the opportunities.
State of Open Banking in Japan
Brendan Le Grange 15:36
Yeah, well, let's sort of move that way. Because one of those opportunities, typically speaking, at least, is Open Banking. And I know that you've been looking at Open Banking as well. So kind of while we're on that topic, what does that look like as a data source in Japan, how far along its journey is Open Banking?
Morris Iwai 15:54
It's still in the very early stages, and there's a few reasons for that.
Number one, it is not a regulatory driven market, like Europe, where you have PSD2 requirements. It's more market driven. And that means you have to have participants that are willing to share their data. And so because the Japan market is dominated by these mega banks who account for 60, 70% of the market, I do believe they have a lot more to lose than to gain when it comes to data sharing. And I believe that one of the other challenges is that over the past few years, there's been a lot of companies where they have abused their privilege and use customer data without their consent.
And that has put a lot of negativity in terms of the general public. And so there's a number of challenges, I think, in terms of Open Banking. But what I would say is, if I were to look at Open Banking broadly from two different perspectives, one is the AISP, Account Information Sharing, and PISP, which is the payment side of things, account sharing has been getting traction, especially with PFM players, where customers do see the value of giving consent to be able to kind of consolidate all their financial information into one app to be able to see their credit card balances, bank statements, and so forth, but less so on the payment side of things.
You know, outside of your typical or smaller Fintech players, there are challenger banks or digital banks, like SBI Sumishin Neobank, who are partnering with major retailers and offering Banking-As-A-Service. So when you visit these E-commerce sites, you're able to open a bank account and be able to make deposits and pay through that form of digital channel. These digital banks are becoming very, very creative in terms of how they're growing here in Japan.
Impact of Digital Wallets and QR payment providers
And then the other one I want to mention really is over the past three to five years, QR payment has been really accelerating, where you pre-load or pre-pay your account, through your bank, and you're able to use your phone and pay at convenience stores and other merchants. And that has really kind of created a lot of challenges for some of the larger credit card issuers and their successes really tied to, you know how easy it is to download the app and sign up with very little information that you need to share to open up an account, accepted at thousands of stores. And it's very popular with the younger demographics.
And these QR payment providers like PayPay are really forming into what I would say these financial super apps where they're like a digital wallet, you can set up a digital bank account and you can do , you know free P2P money transfers.
Brendan Le Grange 18:48
Yeah. And I think that's really interesting. Because if I simplify the world, we've kind of got the two models where the front end might seem the same, you know, I've got Apple Pay on my phone, but in reality that's still going through the credit card, and that's still going through one of the big banks.
What we saw emerging in China - and it sounds like is the situation more in Japan - is that the people that own that journey, the app itself isn't one of the big banks. Yes, it could be prepaid now, but they see all their transaction data, they see the history with the customer, they see you know, all the data on the phone from the app. If that information goes out into a different system, not the old credit bureau ecosystem were familiar with, suddenly we losing insights on our low risk customers who we may want to provide good offers to.
So if I was to place, Japan then on this model of the US or the UK where a credit card is stored on your phone, to China where it's a financial super app that's doing it and credit cards are struggling to compete.
Morris Iwai 19:48
It's still dominated by your credit card issuers. So most people if they have Apple Pay or Google Pay, they have loaded their credit card and that's probably the most popular form of payment. But these QR payment providers who have their own mobile apps is very, very popular. And it's accepted everywhere. And while they still represent a very small share in terms of total purchase volumes, they are by far, the fastest growing, and that is why issuers are very, very concerned.
And it's a closed loop payment. And so credit card issuers and other bureaus are not able to see that data. So certainly, you know, it's a worrying concern. And these QR payment providers are also going into that credit space, where they're offering a small credit of maybe $500 to $1,000 dollars. But they're using very basic information. So just your name, phone number, email. And so it's much, much faster and easier to apply for that new QR payment credit versus a traditional credit card.
Brendan Le Grange 20:52
And I think it's tempting to think, well, that's just the youngsters. And yeah, the big banks can say, well, we've still got the customers with the main spending power, but what we need to think about is the roots into the traditional credit model as well, where you typically need some credit to get credit.
And the exception was always well, somebody's first job, somebody's just finished university, we all have a product for them to bring them in. And that will solve the problem for most people. But if youngsters are establishing their reputations, establishing their financial history in these apps, when it comes time to buy a house, get a mortgage, or buy a car, make some bigger purchase, where they do want to go to the traditional bank, those banks need to be thinking about how do they review that customer?
When the traditional data isn't there yet, when their reputation is inside this closed loop: How do they onboard them? You can't then when somebody is 30, and has access to all these products, offer them a very low limit and say, well prove yourself. And they'll say 'well, I've already done that', you know, you need to find a way to compete head-to-head in a world of asymmetric access to data.
The banks have always been the ones who had the data, there's going to be significant groups of customers where that's not true. And either you're going to be paying these payment providers fee for finding new customers and pre-qualifying your customers or internally, you're going to have to think maybe it's Open Banking, maybe it's something else.
But how do I review my customers when they haven't had the chance to slowly build up a reputation in my ecosystem. And so lessons in there, I think and reason for people to watch what happens in that space.
Future of payments in Japan and new growth opportunities
Morris, when this episode goes out, it's going to be the first episode of 2024 for the show. So a great time to sort of sit down and think about what the future may hold. Japan is a market that's clearly changing quite a lot. It's got some trends that are somewhat unique to it, but also some trends that are maybe leading in what we will see in other markets. So as you look ahead, and you look at the different things going on in the market, what trends are you following? And what developments do you think will be most important?
Morris Iwai 23:01
In the consumer finance, consumer payments space, certainly, as I mentioned, the biggest opportunity is cash displacement. And that's going to continue for the next, you know, I want to say 5 to 10 years. And that presents a big opportunity for Fintechs where if they can become the next PayPay, Rakuten Pay and provide a digital form of payment that's popular, it's going to take off and it's going to become you know, mainstream.
Because more and more people are realising that there's no need to carry around cash. And it's much more convenient, easier to pay with their mobile phone.
And in terms of what's been really popular in the recent 6 to 12 months is AI, Generative AI. And that's going to be a huge game changer.
Because there's so much opportunity here in Japan to optimise and to improve productivity, just across the board. And that's just not in credit cards, consumer finance and payments, but really across all verticals on all categories here in the Japan market where people do complain about how things are very manual process oriented and things just take a lot of time.
And then the other thing I'd point out just real quickly is, in terms of, you know, the B2B side of things. Right now, here in Japan, it's mainly bank transfers, I think only 2% of B2B payments are actually on commercial cards.
So that represents a huge opportunity where if you can get these companies to you know, make payments to their suppliers, vendor using commercial cards, it's faster, safer, easier to manage your expenses and so forth. That's a big opportunity. Here in Japan, you know, small medium business owners when they apply for a business card. Typically the average credit line is about 1.5 million Yen or $15,000 US dollars, and that's just not enough to cover their operating expenses and pay to their suppliers and vendors.
And that's primarily because these banks have been using their credit decision models that were designed from a consumer lending standpoint, and not really from a B2B perspective. So that's where I think there's going to be some opportunities in that underwriting and credit space in terms of B2B.
Brendan Le Grange 25:23
Yeah, that's interesting, because if you think about a consumer level, it's more equivalent to profit rate is how much money coming in at the end of the month. Whereas a business you need to be buying stock in turnover, and thinking of much higher multiples of that so, a lot sounds like that can happen there in a space like globally is just changing quickly as well, so super exciting.
And then a little bit more bias for me, is the cash replacement one, which I think is interesting, because where we see a lot of the innovation now, and cash replacement, may be shaped slightly by my background, but we've seen emerging markets, we're replacing it because cash is risky for theft, and inflation just destroys its value. And logistically, if we're looking at markets where there's small value or transactions being done at great distance over bad roads.
And so, when we think about who could benefit about cash replacement, or could provide services with cash replacement, in a very different world, a world where values are high and risk is low, maybe there's some opportunity for a Fintech, or some Fintech thinkers born in Africa, born in Latin America to come in see a place like Japan as a place to operate.
Morris Iwai 26:33
Yeah, that's right. I am really excited about the future here in Japan, especially with the government supporting Fintechs, as I mentioned before, and just generally speaking, you know, the market and more consumers willing to use digital payments, whether that's through E-commerce or mobile payments, like Apple Pay, Google Pay, and others. Yeah, it's really exciting and I think there's a big opportunity ahead.
Brendan Le Grange 26:57
And Morris, if people are excited as well, they want to maybe see more of your insights, learn more about what you're doing, or maybe get involved in some of these projects: where can they find you online?
Morris Iwai 27:07
You can find me on LinkedIn, that's probably the easiest way to reach out to me and happy to share my point of view, thoughts, and you know, my perspective here in the Japan market.
Brendan Le Grange 27:19
Well, Morris Iwai, thanks again for making the time to speak to me today. It's a fascinating market, and one I think that has the potential to shape the future maybe more than we think, so thank you again.
Brendan Le Grange 27:42
And thank you all for listening.
Please do look for and follow the show on your favourite podcast platform and share the updates widely on LinkedIn where lending nerds are found in our largest concentration. Plus, send me a connection request while you're there.
This show is written and recorded by myself Brendan le Grange in Brighton, England and edited by Fina Charleson of FC Productions.
Show music is by Iam_wake, and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show and I'll see you again next Thursday.