By Samuel Arnold-Parra
Japan boasts a dynamic and expanding fintech industry. In 2019, Japan’s fintech market size was estimated at $3.2 billion USD and it was forecasted that this could increase to over $10 billion USD by 2022. Regarding fintech sub-segments, Japan’s cryptocurrency, digital payments and crowdfunding segments particularly merit discussion given their growth and activity in recent years. Here, we look at those particular segments within Japan’s fintech sector and highlight obstacles and opportunities for foreign companies looking to collaborate or invest.
Why does fintech matter?
Financial technology, or fintech, is an emerging industry which is developing rapidly in countries around the globe. Often drawing on cutting edge technologies like the blockchain, fintech is increasingly significant both individually and commercially due to its potential to revolutionize how money is invested, transferred and kept secure. The importance of fintech is set to grow in the future as technologies like machine learning and artificial intelligence see increased use in the industry.
Among countries with notable fintech industries, the United Kingdom and United States stand out. The UK alone accounts for around 10% of the global fintech market and is home to prominent fintech businesses including Revolut and SumUp. The US ranked first in Findexable’s 2020 Global Fintech Rankings, which categorizes national fintech industries based on attributes including their size and companies’ impact within the financial services ecosystem. However, fintech is not dominated by Europe and the Americas, as the Asia-Pacific region is among the fastest growing market segments globally.
Crowdfunding in Japan
Japan’s crowdfunding ecosystem has seen notable growth in the past few years; between 2016 and 2020, the market’s size grew by approximately 157% from a starting point of $647 million USD. Statistics from 2017 indicate that the overwhelming majority of crowdfunding in Japan is in the form of peer-to-peer loans, followed by funding for goods or services. Charitable donations make up a smaller share, although it is likely that the onset of the COVID-19 pandemic has led to an increase in charitable donations and peer-to-peer funding for medical institutions and projects related to the pandemic.
Crowdfunding in Japan took off after the 2011 Tōhoku earthquake and tsunami, which inspired the founding of firms like CAMPFIRE, now Japan’s largest crowdfunding site. Nowadays, there exist a range of platforms catering both to individuals or small start-ups as well as more established firms. With an appropriate business plan and the correct marketing approach, it is likely that overseas firms looking to expand into Japan could also make effective use of Japan’s burgeoning crowdfunding sphere.
Digital payments in Japan
Japan’s digital payments market is also evolving, with the government aiming to have 40% of transactions be cashless by 2025. In 2020 the amount of money transacted via cashless systems exceeded $36 billion USD, nearly 4 times the previous year’s figure. The most popular digital payment service in Japan is PayPay, a joint venture between Yahoo Japan and Softbank established in 2018. PayPay accounts for 43.1% of the market while the next closest competitor, NTT Docomo’s d-Harai, takes up 18.2%. PayPay’s strong market share has been attributed partly to cash-back campaigns and providing the service for free to smaller shops in order to attract interest from both vendors and shoppers.
Connected to digital transactions, Japan is also a well-developed cryptocurrency hub. Though Japan’s crypto market has experienced difficulties in the past, such as the hack of the cryptocurrency exchange Coincheck in 2018, government regulation since 2018 has enhanced security and transparency in Japan’s crypto ecosystem. Recently, well-known firms including DMM and Rakuten have introduced cryptocurrency wallets and exchange systems of their own. Notably, Rakuten’s decision this February to allow Bitcoin and Ethereum to be used to charge users’ Rakuten Cash balance has increased the scope for cryptocurrencies to be used in day-to-day transactions. Japan holds a lot of potential for crypto-connected firms wishing to enter its market, not least because of high levels of crypto awareness in Japan.
Obstacles and opportunities in Japan’s fintech sector
Despite the rapid evolution of Japan’s fintech landscape, cashless payments still only account for around 30% of transactions, potentially limiting the room for growth in the digital payments space. On the other hand, the COVID pandemic may have a silver lining in spurring digital payments; statistics show that between January and December 2020, the use of QR code-derived digital payments increased by around 89% from 156,522,000 transactions to 296,681,000.
The persistence of cash payments and the yen’s stability may also hamper the adoption of cryptocurrencies in Japan for day-to-day transactions due to their volatility. Nevertheless, developments such as the release of the JPYCoin stablecoin in January 2021 or the Bank of Japan’s ongoing efforts to develop a digital yen are cause for optimism. Such developments are likely to further popularize digital payments and Japan’s cryptocurrency ecosystem, offering new opportunities for fintech innovation. Japan’s low interest rates may also encourage investment into crypto.
The state of funding for start-up companies in Japan may also pose a challenge to fintech’s growth. The COVID-19 pandemic has stifled start-up investment, causing overall funding to decrease by approximately 12.6% from the 2019 figure of 553.2 billion JPY. Prior to the pandemic, start-up investment consistently trended upwards, making it probable that the situation will improve as COVID subsides. Even so, Japan continues to lag behind other large economies like China or the USA with regards to start-up funding.
Another issue is suggested by the fact that the median funding amount raised by start-ups less than a year old in 2020 was 20 million JPY, equivalent at the time of writing to about $181,000 USD. The statistics indicate that, as a general rule, older start-ups receive significantly more funding than new ones. The difficulty to secure sufficient funding during start-ups’ critical early years may hold back promising firms and innovative entrepreneurs, to the detriment of Japan’s fintech competitiveness.
Japan’s fintech space is developing and holds a lot of potential. With appropriate insight, overseas firms can benefit greatly by engaging with this exciting sector, whether their engagement be direct entry or investment into budding Japanese fintech firms.
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