Home Finance The Future of Financial Services Lies in the East—but Not Where (And Not Why) You Might Think

The Future of Financial Services Lies in the East—but Not Where (And Not Why) You Might Think

by internationalbanker

By Bradley Leimer, Co-Founder, Unconventional Venture




Akasaka district, Tokyo, Japan, November 2018

Wandering through the Akasaka district on my last night in Tokyo, I was on as much of a quest for gastronomic authenticity as I was for insights from the lessons of modern-day Japan. Would it be udon, ramen or soba noodles that would satiate the needs of my inner Anthony Bourdain? As I walked through streets filled with a mixture of post-war architecture juxtaposed with contemporary glass-and-steel-fused highrises, the occasional flicker of neon highlighted the activities of thousands of workers still very much on the time clock. In many of the wards that make up the Tokyo Metropolis, it is commonplace to see bars and restaurants bustling late into the evening, and tonight demonstrated no deviation from that norm. Packs of people—predominantly salarymen in dark suits—clustered around their superiors with the expectation of staying until the last trains left the station, paradigmatic of the view of Japan as having one of the most demanding work cultures. My own visit was an experience of long days meeting startups, corporates, government entities and academics—yet it felt as if my Japanese hosts would be working longer still. As my phone’s faint glow mirrored the ambiance as I made my way toward my culinary destination, I reflected upon the genetic makeup and history of the world’s third largest economy and what it meant for the global banking business model.

The more I engaged with various elements of Tokyo’s community, the more it seemed that things in the Land of the Rising Sun were rapidly changing, and it would soon become apparent why. My trip to Japan had been eye-opening, with divergent lessons compared to my recent visits to Asia, including time spent in Hong Kong, Beijing, Shanghai, Hangzhou, Singapore and spaces in between. I had toured parts of Japan with my family as a youngster, and—compared to similar trips decades apart to other cities in Asia—Tokyo, and Japan in general, felt less dramatically different, at least what one experiences on the surface. When you arrive in a city such as Shanghai or Beijing, you become aware of the physical transformation that has changed these cities in material form in less than a generation. It starts from your arrival at the modern airport to the efficient transportation systems to the towering glass buildings reaching into the clouds and rewriting the laws of physics. When visiting Japan, you have the underlying sense that while there is a similar technological transformation underway, it is not as evident as a marker as is the physical transformation of its people.      

Unprecedented shift: the ramifications of an aging society

Japan is aging—rapidly—and this has implications for every culture and every industry, especially the banking sector, as financial needs are transformed over longer, often more complex lives. In less than a decade, Japan will become the world’s first ultra-aged nation with more than 28 percent of its population 65 and older. Japan’s life expectancy is now around 85 years old—81.1 for men and 87.3 for women. This is a reflection of many admirable factors: the cultivation of active, healthy lifestyles and diets; an exceptionally clean and modern food system; extensive government-sponsored health insurance; and a significant focus on the care of its older population, including an increased adoption of multi-generational households, often due to economic necessity. Initiated in 1966, Japan even has a national public holiday—Respect for the Aged Day, or Keiro no Hi—to honor the country’s elderly citizens.

While the fact of citizens living longer has positive overall impacts for society, Japan is facing a critical time in its history when its population is actually shrinking. This stems from a demanding work culture, high cost of living, significant costs of raising children and (positively) more choices for women to focus on work and their careers—all of which is leading to a steadily declining fertility rate. Prime Minister Shinzō Abe has characterized Japan’s demographics as a “national crisis”—as the birthrate stands at 1.43, well below the 2.07 required to keep the population stable. In 2018, Japan’s birthrate fell to the lowest level in history—there were 921,000 births compared to 1.37 million deaths. The total population of Japan is now expected to drop from 126 million in 2019 to 107 million in 2050, with some estimates projecting that number going as low as 87 million by 2060. This decline is also influenced by Japan’s long reluctance to accept immigrants, despite immigration’s associated positive correlation with population growth. Japan has a largely homogeneous population—98.5 percent of the people residing in Japan are ethnically Japanese—that is not replacing itself fast enough. Japan’s 1.5-percent immigrant share of their total population compares to 5 percent in the United Kingdom and 17 percent in the United States.

The story unfolding in Japan, then, is much more than one of longevity and aging populations; it’s about how its society responds to this unprecedented shift. These demographic pressures have been building for decades. Some of the mitigating factors are being addressed through policy—most notably the government offering incentives for childbirth, assisting with early childcare costs, reducing the number of hours people work and more recently, adding a new five-year working visa to increase immigration. Through this Specified Skills visa, immigrants will be able to enter Japan to work in particular sectors (agriculture, nursing care, construction, manufacturing, and food and hospitality services) for a maximum period of five years. The plan to admit up to 345,000 workers under the new visa will address some of the growing labor shortages in Japan’s rapidly aging society—but these workers will not be allowed to bring their families or settle permanently, at least for now. More steps will be necessary, more policy changes will be required, and every stakeholder must be heavily engaged. This is just the beginning of Japan’s ongoing transformation, and while it will be a journey that the Japanese will take first, they won’t be alone for long.

Other societies will soon face similar challenges due to their own aging citizenry and should take note of the ways that Japan is responding. The population of the United States stood at 321 million in 2018 and will grow to 398 million by 2050, largely due to immigration; but over the same period, people who are 65 or older will grow from 14 percent of the population to 22 percent. While that seems like a large percentage change, the problem is magnified in countries such as the United Kingdom, Germany, France and Italy. Even China will experience an aging populace due to factors such as the one-child policy, as its population will go from 1.36 billion people in 2018 to 1.30 billion in 2050, and the portion of Chinese over 65 will grow from 10 percent to 27 percent. Aging societies and declining populations are slowly becoming a global phenomenon, with some projections showing that the world’s population will soon decline because fertility rates dropped from 3.7 to 2.7 percent from 2003 to 2018. You can see how this will quickly become a problem for overall savings and investment rates, use of credit and the ability to pay back obligations, as well as divestment and decumulation of assets to subsequent generations as more of our global population ages. But how can this be?

According to the new book Empty Planet: The Shock of Global Population Decline by Canadian journalist John Ibbitson and political scientist Darrell Bricker, the United Nations population-forecasting model primarily leverages three pieces of data: fertility rates, migration rates and death rates. It doesn’t take into consideration the expansion of education for women (which provides many more life choices, especially in regard to having children), the speed of urbanization (which increases cost of living and employment rates and places downward pressure on fertility rates), expanded health-care options (allowing for later child-bearing years or more options to postpone having a family) or the adoption of technologies such as smartphones (which provide people with ideas for life options that may not include children). What happens if the world actually runs out of people? Who would banks lend to then? While being a bit flippant, these structural shifts in our population should at least change how corporates look at their long-term strategic planning. Banks need to start paying much more attention to the needs of its fastest growing and most profitable customer segment: those households that are over the age of 50. They ignore this group at their own peril.

The future of Japan’s ecosystem of innovation

Japan is working rapidly to address the needs of its aging population through technology, innovation, policy and structural changes. As a people, they historically have demonstrated the technological and manufacturing prowess of China; the innovation, research and academic focus of the United States; and the deference to its unique culture and history seen throughout Europe. Will this be enough to stave off cultural and economic obsolescence despite its shrinking populace—one that prompted economists at Tohoku University to develop a population doomsday clock, predicting that the native Japanese population will face extinction on August 14, 3766? While the numbers seem dire, my ongoing research suggests that they are working to address these complex challenges head-on.

As with any massive social undertaking, federal and local governments will be heavily involved. In discussions with the Tokyo Metropolitan Government (TMG), I learned more about its emphasis on building safe, inclusive and increasingly diverse smart cities of the future. As Tokyo approaches its turn to host the Summer Olympics in 2020, expect to see the results of increased focus and investment on robotics, autonomous transit and other social infrastructure to increase access and mobility to benefit every demographic. Along those lines, the Japanese government is approaching public-private partnerships much in the same way as we see in Silicon Valley—through an ecosystem of innovation driven by a collection of established corporates, venture-capital investment and partnership in startups, alongside research from academics such as those at Tokyo University. The municipal government acts to be openly innovative and supportive as it drives efforts focused across IoT (internet of things), AI (artificial intelligence), robotics, fintech (financial technology) and asset management. The TMG—in collaboration with the national government, private sector and others—is advancing initiatives to revitalize the financial sector in order to win back Tokyo’s position as the top global financial city in Asia.

During my time in Tokyo, I took part in the Tokyo Metropolitan Government’s (fintech) Demo Day, which featured the following international companies: Botelz (Singapore) (AI travel bot), GROM (Hong Kong) (health platform for technicians), Hear & Now (France) (AI smart shoes for Alzheimer’s patients), Heartbeat AI (Canada) (AI analysis for customer support), ICM Hub (US) (chatbots for airlines and flight reservations), InteliTaap (India) (sensor-driven retailer data), InForIntelligence (Netherlands) (AI-driven innovation strategies and partnerships), Motionloft (US) (sensor data to analyze behavior), One Smart (US) (analysis of video and images captured by standard surveillance cameras), Situm Indoor Positioning (Spain) (sensor-based indoor navigation service), TACIT (US) (worker productivity by linking industrial wearables with multiple devices), Taiger (Singapore) (AI analysis of financial reports) and Weiwojiangxin (China) (analysis of product engagement in real-time). These programs further their support of external startups and innovation within the Japanese startup ecosystem.

Federal policy will also be critical to the future challenges of Japan, as will the ability of the large corporates and the nascent fintech industry to meet their people’s financial needs. During my visit to Tokyo, I spent time with Takuya Hirai, the Japanese Minister for Information Technology, Science, Technology and Space Policy, who took office in October 2018. An obvious lover of technology, he took time to demo technologies such as Pocket Talk, which translates 75 languages in real-time, as well as the various robots and models of Japanese-designed rockets in his office. His team is working on public-private technology solutions geared toward ensuring the health and wellness of the people of Japan and is providing capital and linkages to globally minded startups that can be part of these solutions. He says his work will be “assessed by the impact on society by technology” and is very focused on the aging society, decreasing labor force and shifting population. He said he worries about his 87-year-old mother but is happy she is always connected via her iPad. It’s also why Minister Hirai thinks AI solutions will be critical to address larger challenges around aging and shifting health-care needs more efficiently. He listens to startup pitches in his office every Wednesday, including those within the growing fintech ecosystem in Japan. Financial innovation must increasingly be considerate of the shifting needs of the society that it serves, and that was made clear during these discussions. Japan is definitely thinking beyond its borders as much as it is trying to bring more companies into its own market.

The challenge for startups is often one of scale. For markets such as Japan, startups focusing on health and wellness, physical activity and health tracking seem a natural fit for the space, as do ones you may not think about, such as those monitoring financial data to detect elder abuse or those that deploy voice technologies to promote connectedness instead of loneliness and isolation (as in the case of Minister Hirai’s mother). In Japan, and other markets, the focus on automation and robotics can ensure that areas such as cleaning one’s house or getting prescriptions or groceries delivered are accomplished more efficiently. We also see mobility through autonomous vehicles and transit systems being a focus, as aging societies are increasingly more active. We must remember that the 80-year-old of today is not the same 80-year-old of 50 years ago nor of 50 years in the future. As societies such as Japan age more quickly, deploying these solutions at scale to improve our societies will be crucial test-beds as more countries experience the adventures of longer lives. Expect more emerging technologies, and therefore research and development, venture capital and the focus of thousands of startups to go into this space in the decades to come.

While venture-capital investment in Japan is dominated by the US$100 billion SoftBank Vision Fund, its own startup ecosystem is not at the scale that we see in the United States, China or Europe. Yet it is still very significant, and it is critical to pay attention to it. It was great to spend time with the teams from FINOLAB (partnering with more than a dozen corporates as well as 30 banks) and Blue Lab (partnering with several companies, including Mizuho Bank) and learn about the current batch of 42 startups with which they are working, many of them focused on fintech. Japan has fully embraced blockchain, distributed-ledger technology and open APIs (application programming interfaces), and that was very apparent in conversations with WiL (World Innovation Lab), with offices in Tokyo and Palo Alto, California, which has invested more than US$900 million across two funds. They have an impressive portfolio of 17 corporate LPs (limited partnerships), and their investments in areas such as AI, marketplaces, transportation, enterprise SaaS (software as a service) and fintech are focused on building truly global startups.

Trips to other parts of Tokyo’s technology centers helped round out the impression that Japan was becoming a major player—albeit quieter than its neighbors—within the global startup ecosystem. Visiting ZMP Inc. demonstrated the future of mobility, as this company is focused on the goal of being the “robot of everything” driving a more convenient lifestyle for everyone. This means level-four completely autonomous self-driving vehicles (a 2020 goal of Prime Minister Abe and Information Technology Minister Hirai), mass deployment of logistics robots (automated delivery) and focus on the needs of the country’s aging society. Spending time with Shift Technology, I saw the well-demonstrated results of its partnership with the Tokyo Metropolitan Government to innovate within Japan’s second largest insurance market by leveraging technology to make insurance claims more efficient. Peter Haslebacher of Shift said, “If you succeed in Japan, you can make it in any market”, referring to the complexity and homogeneity found within the Japanese ecosystem—a great challenge for any ambitious startup. A trip to ANA’s (All Nippon Airways’) innovation lab felt very familiar in light of the methodology of enterprising corporates as they try to navigate future changes to the airline and transportation industry—perhaps too familiar for any large banks reading this. My final stop was a visit to Link-J (Life Science Innovation Network Japan), Tokyo’s vast life-science innovation network (which reminded me of the medical and biotech cluster in San Francisco’s Mission Bay), which hosts nearly 400 events a year for corporates and startups. Seeing startup pitches one afternoon there further reinforced the message to me of how critical health and wellness is to financial wellness and inclusive financial practices.

It becomes quickly apparent that Japan is not only serious about being more open to external ideas but is also becoming more open to corporates and startups creating innovation geared toward what is becoming a global challenge. Through interest and investment, this market will increasingly become a critical test-bed for new ideas impacting us all. Being open to new ideas is just a start, according to Toshihiro Menju, managing director of the Japan Center for International Exchange, who states the power of external ideas and influence in context: “The history of Japan is marked by repeated waves of foreign influence, each of which stimulated innovation and development and ultimately became an integral part of Japan’s own distinctive culture. In my view, this active acceptance and creative assimilation of foreign influence is at the very heart of what it means to be Japanese.”

Empathy and the global financial-services model

What can financial services learn from what’s happening in Japan compared to the rest of the globe? The banking system in Japan is modern and increasingly consolidated, with three large banking giants—Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group dominating the financial landscape, alongside the massive savings institution Japan Post Bank. With 200 institutions, the Japanese financial system is more akin to that of several European markets than the United States, with its long tail of nearly 11,000 institutions. Japan’s payment infrastructure and use of cash is more similar to rates found in the United States than places such as China, where the glow of the QR code of Alipay or WeChat seem to be ever present. Based on what travelers experience going between these three markets, the future model will likely become increasingly dependent on the growing access to data across financial services, commerce, social media and devices. This shift toward data and digital applications driving financial business models and access to financial services isn’t necessarily age agnostic. We must question whether access to technology and broader financial inclusion will provide opportunities for banks to serve everyone as we age.

The financial-services business model, and data, then can be seen as having three general paths: Open and Controlled (Europe/European Union, United Kingdom), Regulatory Environment Being Defined (United States, Japan) and Unbridled but Muzzled (China). While often personally extolling the virtues of the data-privacy standards of the European model and its new focus on securely opening up their payment and financial data through the European Union’s (EU’s) PSD2 (Payment Services Directive 2) and the United Kingdom’s Open Banking initiatives, the past year’s rollout has been rather lackluster in terms of adoption and value creation, so time will tell. On Japan’s flank, China has embraced the idea of leveraging data across its massive social and payment platforms from Alibaba and Tencent to the extent that I’ve often said that the next financial-services business model is already here—it’s in the form of the super apps of the East, where every element of banking falls into the background. In 2018, Tencent and Ant Financial represented US$22 trillion in mobile payments, 98 percent of the Chinese mobile-payments market. That is more than the entire world’s debit-card and credit-card payments volume. The question is whether the Chinese model can be exported to more than emerging markets. Financial systems such as those of the US and Japan are somewhere in between, where massive data repositories are being held close to the vest by both financial and technology firms and policy is still being developed.

Some of the other lessons of Japan for banking are complicated. The needs of people as they age are growing more complex, and this has significant impact on how the banking industry addresses a lifetime of financial needs. What happens when you accumulate enough assets and retire and then run out of funds? What if you are 65 and want to continue to work, as the majority of Japanese workers do? While one’s life was once a beginning and an end, it is now a series of new beginnings throughout one’s life. Financial services, of all industries, must awaken to this new demographic reality and be prepared to support five generations working side by side; longer periods of different stages of work—including unemployment; a different scale of asset gathering, decumulation and distribution.

Shifting global demographics is but one lesson that falls back toward the use of empathy to drive business decisions. We must focus on making positive changes to our business model from within the enterprise—to stand on the side of the consumer and develop a way of doing business that benefits society over any particular bottom line. Too many corporate strategies are for short-term gain and lack empathy for the needs of individuals, and for the society as a whole. This needs to change. This goes really for any industry vertical, but it’s especially true for financial services, and it is especially necessary as more economies face an unprecedented demographic shift. That seems to be what is happening in Japan—out of necessity and out of survival. Much as aging is not homogeneous, so are the ways societies address the questions around longevity. We can only hope to address these future shifts with such dignity and grace as Japan.

Collectively we are living longer lives. We need to focus on making those longer lives increasingly productive and meaningful. Living doesn’t end at retirement. US President John F. Kennedy said in February of 1963 that “it is not enough for a great nation merely to have added new years to life—our objective must also be to add new life to those years”. We need to encourage more public-private efforts to focus on longevity—to help inspire healthier lifestyles and lifelong wellness, both physical and emotional, that is far more independent than that of the past. Let’s focus on broader efforts to make the last 30, 40 or more years the best in everyone’s lives.


Postscript Tokyo

As I quietly settled into a seat at the bar at Ittenbari Ramen & Chahan Restaurant and proceeded to enjoy my ramen—simple, honest comfort food symbolic of a dynamic culture half a world away from my own in San Francisco—I was as infused with ideas gained from new knowledge of a robust technological ecosystem readying itself for a significant demographic shift as I was enamored with the delightful delicacies of a bowl of steaming broth, ramen and pork.

I plan to return to Japan to explore more of both. 



To learn more about Tokyo Metropolitan Government (TMG) policies and support:

– More details can be found on TMG‘s website

– Any inquiries, contact Access to Tokyo

TMG provides various support for foreign startups, such as: free consulting services, and an accelerator program. The next round of support begins in April 2019, program schedule below. Please contact Access to Tokyo!

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The Future of Financial Services Lies in the East—but Not Where (And Not Why) You Might Think – JapanBiZZ April 1, 2019 - 7:00 pm

[…] The TMG—in collaboration with the national government, private sector and others—is advancing initiatives to revitalize the financial sector in order to win back Tokyo’s position as the top global … ( read original story …) […]


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