Japan's Financial Institutions Don't Want to Bank on EDI

Japanese banks, once pioneers in efficient OLT processing, have grown complacent, content now to rely on proven technology. But the banks seem to have forgotten a vital fact: Once a new technology has been developed, it will be adopted and deployed by someone. And if the newer technology proves more efficient than the old, the modern pioneers may eventually use it in ways that will take business away from the banks.

by John Boyd

If you've ever endured the lengthy wait involved in having a check cashed in a Japanese bank, or paid the high fees for remitting money to another account, it may come as a surprise to learn that Japanese banks have been industry leaders in pioneering efficient on-line transaction (OLT) systems. Individual banks began real-time processing of ordinary deposits as early as the mid-1960s, enabling customers to make deposits and withdrawals at any branch of a given bank.

By the early 1970s, the eleven "city banks" (Dai-Ichi Kangyo, Mitsubishi, Sumitomo, etc.), together with several regional banks, settled on an industry standard for cash cards, and agreed to link their ATM (automatic teller machine) network systems for the convenience of bank customers. In 1973, the banking industry created its exquisite electronic jewel: the Zengin System, a nationwide electronic interbanking system providing various services such as electronic fund transfers and the processing of bills and checks. Today, after upgrading to a third-generation Zengin system in 1987, data from the Federation of Bankers Associations of Japan shows that nearly 4,000 large and small financial institutions ó covering 45,000 offices throughout Japan ó conduct much of their general domestic business through the Zengin System. (Zengin is a contraction of two Japanese words: zenbu, meaning "all," and ginko, meaning "banks.")

From leader to (reluctant) follower

Until the end of the 1980s, the Zengin System was unarguably an efficient industry network, one that any business sector could be proud of. But, midway into the "nimble nineties," other industries have been far from idle with their own online efforts ó they are now forging ahead, spurred hard by global competition, the phenomenon of downsizing, and the spread of computers and telecommunications capabilities into every area of business. Forward-looking industries (like those in the electronics sector) and major conglomerates (such as the Hitachi and Toyota groups of companies) have begun to aggressively use new technologies to change the way they do business internally. Spearheading this change is EDI (electronic data interchange), an emerging telecommunications technology that can automate most kinds of transactions and speed up interbusiness communications.

Japanese banks, by contrast, have eased back on their pioneering efforts. They now appear content to rely merely on upgrading the existing Zengin System, even though it is constrained to dealing only with financial data. While this can certainly boost system performance, such upgrading merely increases the capacity and speed for doing more of the same. It does nothing to change the way banks work, as EDI is doing for other sectors.

The sad result is that the Japanese banking industry is no longer a leader. Rather, it has fallen behind other industries in its working methods ó and just at a time when a growing number of corporate customers are requesting additional services.

Divergent opinions of EDI

"There are two major reasons why companies are now asking banks to expand their networking services," says Yasunori Yoshimoto, a partner with business consultant and systems integrator Andersen Consulting in Tokyo. "First, companies have already had many good experiences using EDI. Second, companies ó especially in the consumer electronics, wholesale, and manufacturing industries ó want to have closer dealings with each other, and so want the banks to expand their firm (corporate) banking systems."

Leaders in the banking industry disagree, claiming that such views are exaggerated. "We can't really see the need for FEDI (financial EDI) right now," argues Tsunehisa Shimada, a director at the Center for Financial Industry Information Systems (FISC) which promotes information technology in the financial industry under the Ministry of Finance. "Other industries' requests (for FEDI) are only about small matters, and few industries are inconvenienced."

Neither is Shimada concerned about banks falling behind other industries in implementing EDI. "Yes, we are a little bit behind. But we have an excellent network system for today's business," he counters, referring to the Zengin System.

Not surprisingly, there are some who disagree with that assessment. "The Zengin System is not customer oriented; it's a bank-oriented system," stresses Kenji Itoh, the Asian rapporteur (representative reporter) in Japan for UN/EDIFACT, the United Nations committee that is promoting a worldwide standard for EDI. "If there was a more efficient and high-quality system available, customers would use it at once."

But there isn't, and there seems little chance that one will emerge any time soon. Industry insiders give several reasons for this apparent complacency. "The banks don't see any monetary return from investing in EDI," says Hideyuki Takei, a manger in the international banking department of Olivetti Corporation Japan. "And there's no pressure from the government to motivate them to take it up," he laments, adding that his company, strong in the banking field, is keen to implement EDI systems in Japanese financial institutions.

Why EDI?

Just what makes EDI so important? Well, its goal is to turn that illusive dream of the paperless office into a reality ó or at least to significantly reduce the amount of paper now passing between companies ó and to greatly improve the level of communications. Even in the straightforward activity of one company buying something from another company, the volume of paper can be sizable. There are documents like purchase slips, invoices, and receipts, many of which may have to be duplicated when payment is made and received via the parties' banks.

There is other common commercial data that might be associated with a purchase: catalogues, order forms, and shipping and remittance information. All these need to be checked, filed, stored, and managed ó taking up valuable office space throughout the process, if not done electronically. Furthermore, each paper-based transaction takes time to process, often requires the involvement of a number of employees, and adds to the destruction of countless trees. While electronic methods like the Zengin System, firm banking, and VANs (value added networks) are helping to reduce the paper flow, these systems are proprietary. What's more, they are usually incompatible, are not comprehensive in what they can deal with, and can produce a new series of problems for customers.

"In the firm banking area, for example, companies still have to ask the banks to settle each transaction," notes Arthur Andersen's Yoshimoto in reference to the problems of current electronic systems. "And if one company has accounts with different banks, the accounting section must install different terminals for each bank." In this case, duplication of paper gives way to duplication of hardware. If companies were to agree on common electronic forms, protocols, formats, and procedures ó and this is already happening outside of Japan, via UN/EDIFACT óvirtually all transactions could be fully automated using a single system. This could end the paper flow once and for all, as well as remove the need for a multiplicity of computer systems. The outcome would be the almost instantaneous processing of transactions, which would result in great costs benefits and vastly improve communication.

EDI: A solution for the 90s

"EDI is a business solution for the 1990s: the electronic way of doing business," says Yoshihiro Oono, a director of Dallas, Texas-based Stirling Software. Stirling, a leader in EDI packaged software, is trying to break into the Japanese market. "But unless the banks here also adopt EDI, companies cannot complete their business."

The US is acknowledged as the leader in evolving EDI. The process there is being spurred on by major corporations like General Electric and General Motors, which are making it known to suppliers and banks who want to work with them that they must adapt to this more efficient way of doing business. A number of hurdles remain to be overcome before EDI becomes widely used, but already a US industry standard has emerged around the ANSI X.12 communications protocol. Moreover, according to UN/EDIFACT's Itoh, US standard makers are committed to moving to the UN/EDIFACT standard in 1997; the European Community and other regions are already adopting this international standard.

Still in the race

All this is not to say that Japanese companies and industries are lagging so far behind as to be out of sight. On the contrary, there is growing EDI activity. As many as 50,000 companies are participating in some kind of EDI system, estimates Yoshio Kubota, director of the information systems department at the Tokyo Electric Power Company. The problem, he says, is that most of these EDI systems are based on proprietary corporate systems or otherwise closed industry protocols. In the US, on the other hand, Kubota estimates that some 50% of EDI users now follow the ANSI X.12 standard.

Before things get too far out of hand, the Ministry of International Trade and Industry (MITI) has begun urging the various manufacturing industries under its authority to follow the CII (Center for the Informatization of Industry) format as an evolving inter-industry standard. CII is the responsibility of the MITI-sponsored JIPDEC (the Japan Information Processing Development Center), which works to promote industrial information technology. In an attempt to create a national standard, MITI, through JIPDEC, is calling on industries outside its authority ó including the Japanese banks ó to join in a pilot inter-industry project scheduled for sometime in 1995.

While this may seem like a positive development, some view it as just the opposite. "CII is just a standard for the Japanese manufacturing industry," complains UN/EDIFACT's Itoh. "We don't need another peculiar Japanese standard when we are entering a borderless society. We should be aiming to establish an international standard."

A bankless society?

So far, though, the banking industry has not accepted the JIPDEC invitation. "Yes, we have heard about the JIPDEC project; it is still under consideration," responds FISC's Shimada. "We are planning to set up a FEDI system in the future, but we must study the situation first," he adds. Wrangling about standards aside, such coolness on the part of the banks is understandable, given the long and deep rivalry between the two overseeing ministries: the Ministry of Finance and MITI.

There is another factor as well. "The banks have already developed their own separate proprietary networks to deal with commercial data, so they see no merit to invest again in EDI to get the same results," points out Olivetti Japan's Takei.

But Professor Eiichi Ebisawa of the School of International Business and Management, Kanagawa University, believes that there is much more at stake. "This is a major power politics game," he claims. "From a historical standpoint, the big banks [through their dominance of the old zaibatsu and now the keiretsu industry-bank groupings] have held power over the manufacturers, and they don't want to give it up." A real possibility is that if the manufacturing industries with MITI come to gain full control over their communications through new EDI systems, the various industry groupings would no longer have to rely on the VANs created and controlled by the banks. This would diminish the banks' power in these groups, which is not a prospect they relish.

Moreover, notes Ebisawa, who lectures on business organizational theory, as companies tie themselves closer together electronically through EDI, eventually they may move to integrate their internal databases into an extended electronic system that is intermeshed with EDI. Even competitors, believes Ebisawa, will be willing to share information with each other because this will greatly increase the strategic value of the information. "Once you reach this synergistic stage, you move up to a higher level of using information," he says.

On the other hand, he points out that banks only deal with financial information, not product, logistics, and customer information. "So, at this higher shared level, the companies can cut off the banks' involvement. We could see a cashless, and finally a bankless way [of doing business] appear," Ebisawa suggests.

Such a picture must conjure up some scary prospects for the banks, but for their customers who wait forever to have a check cashed and pay through the nose when remitting cash, this might not seem such a bad idea at all.

"The Zengin System is not customer oriented; it's a bank-oriented system."

"EDI is a business solution for the 1990s: the electronic way of doing business."

"We don't need another peculiar Japanese standard.... We should be aiming to establish an international standard."

"We could see a cashless, and finally a bankless way [of doing business] appear,"