Consumer Banking Gets A Facelift

Back to Contents of Issue: August 2001

In Japan's staid world of banking, it is foreign players and new Japanese e-banks that are leading in innovation.

by Augie Tam

DO I GO WITH Snoopy or Miffy? For many consumers in Japan, licensed cartoon characters on cash cards and passbooks amount to the only differentiating factor in choosing a bank. And that's for those who actually choose. Most just bank where their employers deposit their salaries every month. But retail banks are trying to come up with more innovative ways to attract customers.

Japanese households have squirreled away most of their money in postal savings accounts, making Japan's post office the world's largest deposit-taking institution. This may not be so surprising given that the post office defies market principles by offering higher returns at lower risk compared to the banks (which consumers fear may go bankrupt) and boasts the largest ATM network in Japan. The two trillion dollar question is how to lure away some of those deposits.

Until now, banks have been the keystones of Japan's corporate keiretsu networks, with the needs of retail customers a low priority. But the problem of bad (er, non-performing) loans and the unwinding of cross-shareholdings have begun to chip away at the traditional keiretsu system (see "Less Share-Sharing," April 2001). With business in the corporate segment slumping, Japanese banks are beginning to pay more attention to the retail segment.

Furthermore, deregulation since the bursting of the bubble economy (not the Internet one) has permitted financial institutions to cross lines that previously segregated activities such as banking, securities, and insurance. The 1993 Financial System Reform Act (FSRA) permitted banks to own securities companies, insurance companies, and trust banks as subsidiaries. This has paved the way for universal banking and intensified competition in the consumer financial services industry.

Near-zero interest rates have distressed not only retail bank customers, who are often no worse off with their money under the mattress, but also the banks themselves, who are finding it difficult to make profits from lending alone. In order to survive, banks are moving away from interest-based and toward fee-based revenues both in their corporate and retail businesses. This means that retail banks are compelled to offer higher value-added asset management services with higher risk-return characteristics than ordinary deposits.

Japanese banks have recently realigned into four megabank groups -- the Mizuho Financial Group, Sumitomo Mitsui Banking Corporation, the Mitsubishi Tokyo Financial Group, and the United Financial of Japan (UFJ) Group. Ahead of these new giants still lies the complex task of integrating staff, systems, and services. As they lumber forward, smaller and less conservative players such as foreign firms and non-banks may be the ones who set the pace for consumer banking in Japan.

Many foreign residents come to know Citibank as their first bank in Japan, because of the unique capability of withdrawing local currency from Citibank ATMs around the world. But Citibank has also gained strong name recognition with Japanese consumers. Citibank N.A. is the only foreign retail bank that has dared to enter the Japanese market. Citibank began opening retail branches in Japan in 1986 and introduced services that were then unique, such as 24-hour ATM and telephone banking offerings and multi-currency accounts. Multi-currency accounts in particular found a receptive audience in those who wanted to cash in on the high yen during the mid-1990s.

Citibank trades on name recognition

Citibank's strategy in Japan has been to target high-income households. It charges a penalty fee for accounts falling below a monthly minimum balance of ¥300,000, although Japanese banks may soon be following suit in order to alleviate the costs of maintaining inactive accounts. On the other hand, Citibank offers for free services that often incur charges at Japanese banks, such as ATM withdrawals, online and telephone banking, and foreign remittances.

Citibank has avoided the costs associated with having a huge network of retail branches and ATMs but compensates by plugging into the ATM networks of the Post Office and designated city and regional banks. In its efforts to continue to innovate, Citibank is leveraging its experience in foreign currency to offer an array of foreign currency products. Interest rates on time deposits denominated in US dollars or euros command much higher interest rates than those denominated in yen (2 or 3 percent versus 0.01 percent), so foreign currency deposits are one way to beat the zero-interest-rate blues. But foreign currency deposits also carry exchange risk, foreign exchange commissions, and limitations on early withdrawal, so caveat emptor.

Citibank's foreign currency products now include 24-hour forex trading at spot rates or limit order rates in 13 currencies, US dollar and euro time deposits that guarantee rates for up to two years and pay interest monthly, and foreign currency time deposits that convert yen at an average rate over six months in order to mitigate the effect of exchange rate fluctuations.

Citibank also offers mutual funds (stock and bond, domestic and international) as another vehicle for those seeking higher returns and willing to bear the risk. Citigroup owns a 25 percent stake in Nikko Securities, which is also Citigroup's 51-percent partner in the Nikko Salomon Smith Barney brokerage house.

Rising out of the ashes of the failed Long-Term Credit Bank (LTCB) is a new retail bank that blurs the distinction between foreign and Japanese banks. Shinsei Bank Ltd. (shinsei means "new birth"), which launched its retail operations on June 1, 2001, is the first Japanese bank operating under foreign management.

shinsei bankShinsei Bank gained its new name in June 2000 after the nationalized former LTCB was acquired by a private investment group led by US-based Ripplewood Holdings. Within a year, Shinsei Bank created a retail bank from scratch as one half of its strategy, along with M&A advisory services on the investment banking half, to evolve away from the unprofitable business of long-term debentures.

Shinsei Bank's CEO and president, Masamoto Yashiro, was responsible for building Citibank's retail business in Japan before taking the helm at Shinsei, several of whose executives hail from Citibank. When the Japanese government was considering a bailout plan last year for the now-defunct department store chain operator Sogo, Yashiro refused to participate in the debt forgiveness scheme. Yashiro's stubborn focus on his company's shareholders (currently, the private investment group and the Japanese government) irked politicians and Sogo's other creditors, as they watched Sogo collapse. While it was probably not meant as a compliment, Yashiro was accused of playing like a "foreign banker."

Shinsei Bank intends to change the face of consumer banking in Japan. It is doing so literally by giving its 24 branches a colorful facelift based on retail store concepts. Even the humble ATM has been given a new designer look. At the pre-opening ceremony, Yashiro joked, "The ATM used to look like a washing machine, but now it is much more fashionable." Shinsei Bank's ATMs are 24-hour and bilingual, and although the bank does not have overseas operations, it plans to link eventually with overseas networks to allow for global ATM access.

While snazzy interiors are nice, what are customers really looking for? According to Shinsei Bank's K. Sajeeve Thomas, corporate executive chief of staff, they want "information" (extending to advice in some cases) and "ease of transactions." After having completely revamped the former LTCB's decades-old IT system, the bank aims to provide both information and ease of transaction through four major channels: the branch, the ATM, the Internet, and the telephone. All of these channels except for the branch will be available 24 hours per day, 7 days per week (see Shinsei CTO Dhananjaya Dvivedi interview, March 2001).

Thomas says, "The Internet is not intended to get cash out; therefore if you keep the cashing service out of the scope of discussion, the customer should be able to do everything else on the Internet."

After cash, the most oft-used ATM transaction is bank transfers (furikomi). But making bank transfers online requires pre-registering recipients the old-fashioned way -- by paper. However, in its efforts to reduce the paperwork so beloved in Japan, Shinsei Bank is working toward eliminating pre-registration. Now if only the high commissions on bank transfers could be eliminated, too.

GE Capital surfs for online credit applicants

Then, of course, there's the issue of money. For starters, Shinsei Bank will not charge fees for basic services such as ATM withdrawals nor its Internet and telephone banking services. Thomas says, "One thing that bothers me, and bothered many of the customers we talked to, is that we pay to take our own money out of the bank." And transacting with banks on a different ATM network can mean double the charges. Shinsei Bank belongs to the long-term credit banks' ATM network and has also connected to the postal ATM network. For transactions with the city and regional bank networks, Shinsei Bank will even cover any ATM withdrawal fees charged by the other banks for customers with a monthly balance of one million yen or who hold a Shinsei Bank Gold Card.

For those looking for returns higher than near-zero percent on ordinary deposits and willing to take on the higher risk, Shinsei Bank emphasizes foreign currency deposits and mutual funds. It offers deposits in six major currencies and mutual funds from a variety of providers. According to Thomas, the time is ripe for these products. "Originally most banking customers [in Japan] were very risk-averse and accepted whatever terms that they got, but today, when the returns are so miniscule, many people are prepared to take a little more risk because there's no point in just sitting there with zero percent interest earning."

Non-bank consumer finance companies have served the needs of customers who don't qualify for personal loans or credit from the banks. For investors, the stocks of non-banks, with their double-digit earnings growth in recent years, have been the bright spot in the financial services sector amid Japan's banking crisis.

With the legal limit on consumer lending rates reduced last June from 40.004 percent to 29.200 percent (and due to be reduced again in 2003), consumer finance companies face a tougher environment and are also witnessing consolidation in the industry. Only the bigger lending firms are able to procure funds at attractive rates. As the gap in lending rates between banks and non-banks closes, non-banks will find themselves partnering or competing with the banks.

Citigroup expanded its consumer finance operations in Japan with the acquisition of US-based Associates First Capital Corp., the world's largest consumer credit firm and the fifth largest in Japan after Takefuji, Acom, Promise, and Aiful.

Hot on the heels of Citigroup is GE Capital Japan, which entered Japan's consumer finance market in 1994 with the purchase of the consumer credit business of Minebea. GE Capital Japan's two main retail platforms currently consist of GE Edison Life Insurance (which subsumed Toho Mutual Life Insurance) and GE Consumer Credit (which is still known by the acquired brand name "Lake"). There is also a consumer credit card operation.

money kit
Sony Bank brands its all-in-one e-services as the "Money Kit"

Tadashi Matsumura, managing director of corporate communications and external affairs, points out changes in Japan that offer opportunities for GE Capital. "First of all, deregulation is the biggest change. Without deregulation, we wouldn't have been able to enter this market. Also, restructuring of Japanese corporations in the financial industry gives us more opportunity to acquire some of the companies that are being offered for sale."

Like banks, consumer finance companies are also taking advantage of channels like the Internet and cash machines to provide greater reach and convenience. Matsumura notes that these machines are one area in which Japan differs from the US. "We have many kiosks where you can use your card to borrow money easily," he says.

While some banks and consumer finance companies view the Internet as just another remote channel for their brick-and-mortar operations, new online-only banks are betting that the Internet can be the primary channel.

Japan Net Bank, affiliated with the Sakura and Sumitomo banks, launched in October 2000 to provide settlement services for transactions such as e-commerce and utility bill payments. eBank, affiliated with trading houses Itochu and Sumitomo and scheduled to launch in July 2001, specializes in settlement services. Financial deregulation has allowed non-banking institutions to be granted banking licenses.

Sony Bank, which launched in June 2001, will focus not just on settlement services, but also banking services such as deposit products, mutual funds, and card loans through the Internet. While some may wonder what the consumer electronics giant is doing in the banking business, Sony has actually long been involved in financial services through its life and non-life insurance units.

Without the cost structure of physical branches, Internet banks can presumably offer better interest rate returns and smaller transaction fees. Or so the reasoning goes. Online-only banks in the US have met little success, and some find themselves building physical branches in order to grow.

Although online-only brokerages have succeeded in staking out a share of the market for discount stock trading, the level of interaction associated with banking will make it difficult for online-only banks to compete against brick-and-mortar banks with online operations. One of the dilemmas (particularly in Japan) is that the computer-savvy who would take to online banking tend to be the younger generation, with few assets, while the elder generation (with all the assets) tends to prefer face-to-face meetings when it comes to money management.

What Japan lacks in PC penetration, it makes up for in Web-enabled mobile phone penetration. Most banks have extended their online banking services to the wireless Internet, so that users can check balances and transfer money through their wireless phones or PDAs. Banks as well as brokerages are also gearing up to offer their services on new platforms such as NTT's L-mode (a sort of i-mode for fixed-line phones -- see "J@pan Inc Newsletter," No. 130, and digital TV.

Consumers in Japan can expect to see an increasing number of ways to bank and an increasing number of sophisticated financial products from their banks. But so far the Japanese have not flocked to these new instruments as quickly as had been hoped. In the meantime, the post office has only to fear super-popular prime minister Koizumi, who has pledged to privatize the postal system.


Augie Tam is the founder of He can be reached at

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