How Will Fintech Change the Economy and Finance?
August 17, 2016
Mr. Hiromi Yamaoka
Director-General, Payment and Settlement
Systems Department, Bank of Japan
Fintech is a coined term which combines Finance and Technology. It is a fast growing industry, especially among overseas countries, where several thousands of Fintech start-ups are entering the world of financial services. Fintech provides three services: firstly “payment, settlement and remittance” which developed along with smartphone-based e-commerce, secondly internet-based financial intermediation services, and thirdly financial information provided to investors by utilizing artificial intelligence (AI) and big-data analysis.
Now what makes Fintech so innovative? I think three new elements have propelled its rapid growth worldwide: “blockchain-enabled distributed ledger” which is the technology underlying Bitcoin and other digital currencies; “big-data analysis and AI” utilized by various industries, including the point card business for customer analysis; and explosive growth of smartphones which have become the primary media of financial services today.
History proves that finance enabled us to secure resources and invest them in promising industries with higher productivity and growth, thus playing an instrumental role in constructing our socioeconomic system. Money, which constitutes the basic infrastructure for financial activities, physically symbolizes information pertaining to value in the form of metal or paper by using relevant technologies. “Ledgers” and “double-entry bookkeeping” enable efficient and centralized management of information and contribute to the economic and social development of the modern era. Financial industries have developed parallel to the advances in various techniques and infrastructure related to information processing.
Fintech applies information technology to the basic financial infrastructure, including money and ledgers, which have traditionally been managed by banks and registry offices in a centralized manner. Fintech allows all participants within a network to share an asset database by using his/her PC or smartphone. It is expected to facilitate “financial inclusion” in developing countries where people have limited access to financial institutions and to expand the frontier of economic activities, including on-line shopping and remote education, through on-line payments and settlements.
Fintech has the potential to unbundle and reconstruct traditional financial services. An online transportation network company “Uber” and accommodation matching service “Airbnb” are new forms of economic activities comprising the “sharing economy,” which identifies idle resources dispersed throughout the economy and utilizes them to match people’s supply and demand.
Fintech also has the potential to reshape the traditional financial architecture. Commercial banks have long been the main provider of payment services and financial intermediations. Based on IT networks and big data, an increasing number of non-financial institutions have moved into the financial sector, including Fintech companies, IT and retail giants like Google, Apple and Alibaba. Access points to financial services have expanded through internet and mobile devices, making various entities compete to secure more global platforms rather than having a larger number of fixed assets.
Fintech has various implications for central banking. One issue that gains attention is the possibility of digital currencies to be widely used as a settlement measure without being converted into yen or dollars. This has the potential to undermine the effectiveness of monetary policies. Even though the possibility of digital currencies to substitute the sovereign currencies is low at this moment, digital currencies in future could override other currencies if people lose confidence in central banks. Another issue is the possibility of central banks issuing digital currencies to save costs for printing, storing, transporting and safeguarding physical currency.
Thanks to the innovation in IT technologies, people can search the internet to shop via smartphones or transmit information via SNS. Companies capture and analyze such information on the tastes and preferences of customers to develop profiles on individual customers. Active exchanges among financial institutions, IT companies and retailers can enhance economic development. But we must strive to promote both the utilization of information and protection of privacy. Financial services create added value in the linkages between economic entities such as lenders/borrowers and payers/receivers, based on people’s “trust.” The importance of trust also applies to Fintech. If information security problems repeatedly occur in a part of Fintech services, public trust toward Fintech in general would be eroded and eventually hinder its sound development.
Fintech companies should take proactive measures toward an aging society. Their biometric authentication technology is not only convenient but safe, so if we can convince people on its usefulness, we can facilitate the development of this sector.
Financial institutions in Japan have long been providing basic financial services to wide-ranging customers while maintaining their own extensive physical infrastructure. IT innovation and Fintech can make the existing infrastructure an outdated unnecessary burden. We must be ready to “metabolize the existing infrastructure to enhance new services that utilize information technology.”
We should also construct a business model that can be exported overseas to stimulate growth of the Fintech sector and to profit from the merit of scale. We must seize the mega markets in Asia that have ample room for growth in the financial service sector.
The Bank of Japan established the Fintech Center this April. We will strive to further enhance the convenience of financial services and to revitalize our economic activities through the sound development of Fintech in Japan.