Japan, being the third-largest economy in the world, is still not a highly attractive hub as far as fintech is concerned. The two major reasons for that are the difficulties financial centers face in being able to produce innovation and the challenges they face in obtaining regulatory licenses due to a lack of transparency in the region. However, the government of Japan provides massive support to the growth and expansion of fintech in Japan, but the consumer demand and innovation culture are still keeping it from enhancing at a pace that it potentially could.

With higher consumer awareness and society becoming more accepting of it, fintech in Japan can grow at a rapid pace. Another reason why the fintech industry is experiencing a slow expansion is that the IT systems in the country are sturdy and robust from the inside as well as the outside due to the high level of quality demanded of them. This impedes their abilities pertaining to cost and speed to adapt and embrace new initiatives, such as fintech.

Crowdfunding in Japan

The time frame between the years 2016 and 2020 has seen considerable growth in the ecosystem of crowdfunding in Japan, 157% to be exact. This has come to effect with major support from funding for goods and services and peer-to-peer loans. The Covid-19 also enabled a notable increase in P2P funding and charitable donations for pandemic-related projects and medical institutions.

Campfire is the largest crowdfunding site in Japan that initiated its operations after the 2011 Tohoku earthquake. There are several other firms and platforms that help small start-ups, individuals, and established firms pertaining to their financial requirements. With an appropriate base already set, all that the international firms need is an effective marketing approach and an efficient business plan to leverage the swelling crowdfunding sphere of Japan.

Digital Payments in Japan

By 2025, the current Japanese government plans to achieve a 40% rate of cashless transactions in the country. Currently, no other industrialized country except for Germany has a higher rate of cash utilization for payments. The rate with which the digital payments market is evolving can be ascertained by the rate of growth in the number of cashless transactions from 2019 to 2020. In a span of just one year, the figure of $9 billion reached $36 billion, and the digital payment service that hosted most of the amount is PayPay.

The success of PayPay has come due to its free provision of service to small shops and cash-back offerings through frequent campaigns. Vendors, as well as shoppers, use the service that accounts for 43% of the total cashless transactions in the country. The company that follows is NTT Docomo’s d-Harai, far behind at 18%. PayPay was established in 2018 with the undertaking of a joint venture of Softbank and Yahoo Japan.

The cryptocurrency hub in the country is not lagging behind by much either. The start did not go too well for the country with Coincheck’s, a major cryptocurrency exchange, hack in 2018. However, the incident prompted the government to impose regulations in the crypto infrastructure and processes that increased transparency as well as security. Rakuten and DMM are two big cryptocurrency firms operating in Japan that have recently introduced exchange systems and crypto wallets to the public. This ensures that foreign firms that are connected to cryptocurrencies and seek to enter a new market are greeted with a landscape that has potential as well as an abundance of opportunities.

Blockchain Initiatives in Japan

If we compare the volume of blockchain usage in the non-financial and public sectors of Latin America and Europe with Japan, there is a huge gap in the pace at which the ecosystems are developing. However, the financial centers in Japan are taking on blockchain initiatives in a vigorous manner.

Open Banking and API Laws in Japan

The Banking Act in Japan has met with modifications, making it easier for financial services to utilize APIs. The amendments introduced a solid framework that lays out policies that cater to AISPs (Account Information Service Providers), as well as PISPs (Payment Initiation Service Providers). A registry was also established for electronic payment service providers to assist them with their operations. Furthermore, all the co-operations and affiliations between AISPs and PISPs and banks were to be published. A deadline, 31^st May 2020, was set for Open Banking services implementation, as well as the conclusion of commercial contracts.

Like in most of the countries globally, Japan also now maintains that the right to consent to the use of personal information needs to be in the control of the individuals. However, though, there is still room for improvement in terms of public awareness about the importance of moving to services that use personal data.

The lack of education in this regard is mainly due to the fact that data-based services in Japan have not yet been able to penetrate the market as effectively as similar services in European and North-American countries. In order to provide seamless and efficient services to the customers, it is vital for different and several companies to be able to use the same data. The cause will get fueled by the development of ecosystems through APIs that will help the Industry side.

Japan’s Payment Service Act (PSA) to Regulate Cryptocurrencies

The potential of Fintech in Japan can be determined by the fact that the success of digital currencies in the country has reached farther heights than most of the other countries in the world. This suggests that the region is not only efficient in its endeavors to popularize e-money but has a strong command over maintaining the cryptocurrency system. Japan was the first country on the global scale to ascertain its legal position on e-money by introducing revisions to its regulations and laws pertaining to the settlement of funds. The country introduced a licensing regime for crypto exchanges and made Bitcoin legal tender in the April of 2017. On 1^st May 2020, amendments to solidify the crypto assets investors’ protections were also incorporated into the PSA, as well as the FIEA (Financial Instruments and Exchange Act).

These modifications helped in drawing a clear line between security tokens and crypto-asset derivatives, and crypto-assets. However, the larger picture proposes that the components, such as exchange assets to be equal to hot wallet holdings, cold wallet requirement of 100%, customer assets segregation, and custody rules, would restrict the business. These stricter regulations for cryptocurrency exchanges also include a limit of 2x on margin transaction leverage. The established brokers are in firm control as security tokens transferred via blockchain are ‘Type I Securities.’ This means that they are equivalent to investment unit trusts, bonds, stocks, and other liquid securities, and their transactions would require a FIBO (Financial Instruments Business Operator) license.

The government of Japan has made huge strides in building mechanisms that seek to protect customers. The act of regulating how cryptocurrency exchange service providers are supposed to be treated, the cryptocurrency transactions are not only facilitated in an efficient manner but are embellished with appeal as well. Initial coin offerings can further promote financing by offering it an even healthier growth if further development is achieved.

Conclusion

There is no doubt that fintech in Japan has been experiencing a rapid evolution. However, the potential for growth is much higher. Only 30% of transactions are cashless, hindering the development in the digital payments sector. Fortunately, the QR payments in the region spurred to 296,681,000 from 156,522,000 in just two months due to the pandemic. Another reason for the slow growth is the constant stability of the yen and the volatile nature of cryptocurrencies. There is clearly a reluctance in the adoption of e-money for daily transactions.

Despite these obstacles, though, there are some motivating factors in the industry of fintech in Japan as well, like the ongoing efforts of the Bank of Japan to create a digital yen and the release of the JPYCoin stablecoin. Such endeavors hold promise to encourage investments into crypto and popularize its ecosystem. The low-interest rates in the country are another factor that furthers the cause.