Inside Eye

Japan's Future Net-Billionaires Have Little Need for the Nation's Tradition-Bound Bank

The emergence of Net firms into the financial sector comes as little surprise -- it's merely a case of taking over antiquated industries and moving them directly from the 19th to the 21st century.

As a colleague remarks whenever he has to exchange currencies in Tokyo, eyeing his bundles of yen and the mandatory form, complete with name and telephone number, slowly passing between the teller and the guy behind her, "It's banking in the Ottoman Empire."

Until recently, Japanese bank employees, shuffling about in their uniforms and slippers, kept longer hours than the automatic teller machines, although they seemed to do little work for all those hours behind the counter. It took a foreign invader, Citibank, to show that it was possible to -- gasp! -- get an ATM to operate 24-7.

Online banking has just appeared here in the last year. But the innovation is unlikely to lure new clients as long as Japanese can get better savings rates at the post office. Banks, offering less interest on savings, are beholden to the clueless and scandal-tainted Ministry of Finance, where bureaucrats have a nostalgic fondness for the ways things were done in the Meiji era, when a few samurai-turned-economic mandarins determined what was best for the lowly merchant class. The digital era puts the merchants at the top of the pecking order and threatens to make government bureaucrats and the political system as a whole an irrelevant sideshow.

The Internet will soon make the whole traditional banking system anachronistic. Japanese can already deposit savings, buy mutual funds, and trade stocks by short-circuiting anything Japan-based. As long as they remember to pay their taxes on earnings, it's legal.

The debt capital market, a vital source of income for banks, is already syndicating via the Net, with such spectacular placements as the World Bank's $3 billion bond issue, cutting out the bank middlemen. Japanese banks and other securities firms that quickly figure out the new paradigm will survive. Nomura Credit, after shaking off decades of incompetent leadership and cronyism, seems to be getting it right.

Lending is also going online. Americans, as long as they have a good credit history and a decent income, can qualify for a mortgage online in minutes and obtain credit cards almost instantly. The next step is not only Net banking -- perhaps without the traditional banks -- but borderless banking.

Foreign investors in Japan have been frustrated by the blatant discriminatory practices of Japanese financial institutions, which don't vet prospective clients on merits, such as income, liquid assets, and ties to the community, but rather consider race and national origin. What the digital economy allows both borrowers and lenders to do is make national borders irrelevant. Credit records will be international, not incumbent on whether one has held a Mastercard in a certain country or possesses citizenship. Consumers and businesses will be able to choose among financial institutions anywhere in the world, selecting those that offer the best rates.

Japanese banks, even if they wanted to participate in financing Japan's Net revolution, are being left out. Startups, especially those linked to foreigners, frighten the average Japanese loan officer. Fortunately, digital startups can take their pick of financing from numerous international venture capital firms, many Japan-based, all too eager to do what the local banks will not. Japan's future billionaires are not likely to have much use for the traditional zaibatsu-based banks. It's a pretty good bet that their firms will bank with digital financial institutions, such as Softbank, whose branches will be vibrant, virtual, and fair -- not old and rotting.