Softbank Empire-Building in Bid for Bank

Back to Contents of Issue: February 2000

by Aaron Cohen

Softbank moved to further expand its financial activities by bidding -- in conjunction with a group of partners -- for the temporarily nationalized Nippon Credit Bank on November 12. One group member, Ito-Yokado, which owns the 7-Eleven chain of convenience stores, pulled out of the deal and decided to instead apply for its own banking license and install ATMs in its outlets (see "7-Eleven Takes on Japan's Banks," . These announcements point out the radical and ongoing change that will speed up the transformation of banking into e-banking.

The last of the Greco-Roman revival columns is about to fall. The traditional "bank" is dead. Demotion is the work of the Web, and traditional bankers, if they even comprehend that their structures are falling on their heads, are restrained by the lingering effects of regulations, inherited arch-conservatism in management, and a huge overhead of largely redundant personnel, branches, and blotting paper.

Softbank's self-driven change into an Internet company accelerated considerably in November. The month saw, in addition to establishment of an online automotive goods store, the announcement of a Net distributor of music, Nasdaq Europe, a joint venture with the Getty Images picture archive, and the Softbank Finance Corporation's Net-related leasing firm. The latter company, a joint venture with Orix, Fuji Bank, and Fuyo Lease, will specialize in leasing equipment to individuals and small- and medium-scale businesses starting online shops.

That Ito-Yokado apparently changed plans so quickly is odd; the company must have been developing its plan to enter banking for some time prior to Softbank's announcement. Of course, Ito-Yokado could still cooperate in Softbank's group without being an owner (assuming the Softbank proposal is accepted and approved).

Once convenience stores began accepting payment for utility bills and the like, well ahead of the current deregulatory changes, they were on their way to becoming financial service companies. Their need to grow by increasing sales of services (easily computerized, no inventory, little space) over that of goods is a "push" factor here. But the retailer will not provide full financial services; instead, it will specialize in payment-settlement functions (as at present) and earn profits on the transfers. The 7-Eleven bank will reportedly not engage in lending, but may at a future date offer insurance and mutual funds.

Thus Ito-Yokado offers much to the Softbank group without equity participation in the bank buy-out. Ito-Yokado says its bank will be profitable in two years and will list on the TSE in two to three years. Whether Ito-Yokado leaves or stays in the group is for Softbank a moot point, though the consortium would be considerably weakened if it leaves.

Thus, it is still the Softbank move that is most intriguing. Softbank has grown into a group of financial- and Net-specialized companies at unusual speed by anyone's standards, especially Japanese standards. Besides the leasing and graphic-image sales mentioned above, the group offers asset-management advice, loans, insurance information, forex conversion, securities trading, mutual fund ratings, and e-cash services.

The strategy has been joint ventures and takeovers (a joint venture with E*Trade, for example, and the takeover of a small securities firm). Typically, the Softbank partner has had a good market position (Morning-star provides a fund rating service and Getty has a huge archive of still and moving pictures) or specialized technology, as with the automated-currency-dealing software from Irish firm Cognotec, which was rewarded with 42 percent of the equity in Softbank Group's Forexbank.

Reports of the November 12 press conference suggest that the Softbank group was not confident the offer would take. Whatever Ito-Yokado does, acquiring a clean-up bank would be a coup for Softbank. Assuming management styles are compatible and Softbank leadership is accepted, the deal would allow for integration and extension of all services provided by Softbank companies.

In most books this is called (another e-word here) "empire building."

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