Have you ever heard of “FinTech”?
It is a coined word combining “finance” and “technology.” It refers to startup companies in the financial and IT industries.
There are many FinTech startups in Japan, including freee, which provides cloud-based accounting software; Money Forward, which offers asset-management tools; and maneo, a peer-to-peer lending firm. As a result, the FinTech industry has suddenly been getting a lot of attention over the past few years.
Metaps has recently announced that its online settlement service called SPIKE, which doesn’t charge fees, acquired more than 40,000 individual and corporate clients in a little over half a year.
This is astonishing, considering that Rakuten and GMO Payment Gateway, both established companies, each have 40,000 to 50,000 members.
(For more, see THE BRIDGE.)
What is this FinTech, which has been attracting so much attention recently? In a series of three articles, we will try to expose its true nature.
This article, the first in the series, will use actual data and case studies to present an overview of the FinTech industry in Japan and overseas.
■ FinTech, a sizzling industry
According to an industry report by Accenture, investments in the FinTech industry have been growing rapidly over the past five years.
The amount of investments more than tripled from $930 million in 2009 to $29.7 billion in 2013, on a global scale.
(Investments in the FinTech industry on a global scale *1)
The largest venture capital firms in the U.S. quadrupled their investments in FinTech startups over the past five years. FinTech is attracting a lot of attention from everyone.
(Investments in the FinTech industry by the biggest 12 U.S. venture capital firms*2)
There are venture capital funds and investment firms focusing on the FinTech industry across the globe. The following is a partial list of such companies:
・FinTech Innovation Lab: an incubation program operated by Accenture in London, New York, and Hong Kong
・Green Visor Capital: a venture capital firm focusing on FinTech companies that are in the early stages of growth
・Arbor Venture: a venture capital firm focusing on FinTech companies in Asia
Even in Japan, Monex Group is seeking to strengthen its corporate venture capital operations and accelerate its investment in FinTech startups.
Surprisingly, even established players are starting to get involved.
Barclays Capital has established Barclays Accelerator, an incubation program focusing on FinTech operations, in cooperation with Techstars, a well-known venture capital firm in the U.S. JPMorgan Chase has formed a partnership with FinTech Innovation Lab.
Elsewhere, institutions such as BBVA, HSBC, Santander, and Sberbank have established independent investment funds, while Goldman Sachs, Citibank, VISA, and Amex are actively investing in FinTech-related startups.
(For more, see Banks Playing Larger Role in 2014 FinTech Funding and Banks Lure Fintech Startups With Venture Funds.)
So, what is this sizzling FinTech that has drawn in even established players?
■ FinTech “disrupts” established companies
Recall Disruptor 50, which was introduced in the previous Next Generation article. CNBC projects and releases Disruptor 50, a list of 50 promising startup companies that may be instrumental in creating the future. The list has been released annually since 2013.
(For more, see this article.)
Actually, CNBC Disruptor 50 can provide a glimpse of FinTech’s true colors.
Let’s look at the FinTech startups listed on the 2014 Disruptor 50 list:
・No. 4：Motif Investing (an online investment broker)
・No. 11：Zuora (a provider of payment software for subscription services)
・No. 15：Stripe (an online settlement system)
・No. 16：TransferWise (an international money transfer service for individuals)
・No. 17：Personal Capital (an investment management and advisory service for wealthy clients)
・No. 20：Wealthfront (an investment advisory service)
・No. 26：AngelList (a platform for startups, investors, and job seekers)
・No. 33：Lending Club (a P2P lending platform)
・No. 35：Coinbase (a settlement service for Bitcoin)
・No. 43：Oscar (an online platform for health insurance)
・No. 45：Betterment (an investment advisory service)
・No. 49：Kickstarter (a crowdfunding platform)
These 12 FinTech startups were recognized as “disruptors.”
Some of you may have noticed something here.
A quarter of the 50 selected companies are FinTech startups.
Considering that in 2013 only six FinTech companies made it to the list, FinTech startups’ rise was a sudden development.
・ FinTech startups that made it to the 2013 list include Boku and Square, which suddenly became popular for mobile settlement services.
Let us look at how these startups are seeking to “disrupt” existing businesses and give rise to a new future.
1. Startups that disrupt investment trust businesses
Motif Investing (which ranked 4th) is perhaps the most prominent example of a startup disrupting invest trust businesses. The company allows individual customers to customize their investments based on portfolios with different themes. The company charges only $9.95 regardless of the transaction amount.
This allows individual customers to easily and inexpensively create their own investment portfolios.
(Motif Investing’s interface*3)
Personal Capital (17th), Wealthfront (20th), Betterment (45th) are up-and-coming investment advisory firms.
These companies also provide asset management and advisory services at fees significantly lower than those of established players.
For example, Personal Capital has acquired more than 500,000 customers since it was established five years ago. Wealthfront, founded three years ago, now has assets of more than 150 billion yen.
These new services became popular because many customers had lost trust in or had become disappointed with established institutions after the issues with the neutrality of major brokerages in 2000, and the global financial crisis in 2008.
2. Startups that disrupt settlement services
PayPal is the leading provider of online settlement services. However, Stripe (15th) has even more potential.
Stripe allows online merchants to use a payment settlement system by adding a source code to the application or program, instead of directing clients to a separate settlement page.
Stripe also charges lower fees (2.9% of the settlement amount + 30 yen, based on the exchange rate of 100 yen per dollar) than PayPal (3.6% of the settlement amount + 40 yen + initial costs).
PayPal may soon be eclipsed by this new service.
Some companies are even trying to replace the system of cash and credit cards.
Coinbase (35th) provides settlements in a virtual currency known as Bitcoin.
It will probably take some time before Bitcoin becomes widely circulated. Still, it cannot be denied that there are advantages over traditional banking and credit systems.
3. Startups that disrupt consumer credit companies
Up til now, individuals who wanted to borrow money turned to consumer lenders or banks, or used credit-card cashing services. These services usually charge interest rates of more than 10%.
On the other hand, banks pay interest rates of 1% or less on deposits. As this difference goes to the bank, they make a huge profit.
Lending Club (33nd) wants to change all that by offering lower rates to borrowers and higher rates to lenders.
The company will do so by matching borrowers and lenders online.
There have been reports that Lending Club will soon list its shares on the New York Stock Exchange, making the company the hottest stock in the FinTech industry.
4. Startups that disrupt venture capital firms
Venture capital funds are supposed to support startups. However, in a somewhat ironic twist, some startups are disrupting venture capital firms.
Angel List (26th) is an online platform that connects startups with investors.
The company offers similar services as CrunchBase, which lists information on startups. However, Angel List differs from CrunchBase in that it offers individuals recognized as “accredited” investors the opportunity to invest in startups. The service has won approval of the U.S. Securities and Exchange Commission and Congress. In other words, the executive branch and the legislative branch of the U.S. government are endorsing this “disruption.” There are absolutely no limits on the investment and fundraising amounts for this service, which allows for direct transactions without going through a market.
*Accredited Investors: individuals who earn at least 20 million yen a year, or have an annual household income of at least 30 million yen, or have assets of at least 100 million yen (excluding real estate). For details, see the SEC website.
This service eliminates the need for startups to find investors, which can be an arduous process, and makes it possible for them to raise capital more efficiently. It is not an exaggeration to say that almost all startups register for this service.
Angel List, in addition to helping startups raise funds, also matches companies with personnel. As a startup that provides information on people, things, and money, it deserves close attention.
We hope it has become clear that FinTech is seeking to disrupt the world as we know it and bring about a new future.
In addition to the startups mentioned above, over the past several years new startups in the FinTech industry have been born, threatening established players.
(Reference：FinTech industry map*4)
■ How to create disruptors in the FinTech industry in Japan
Let’s turn to Japan.
The number of FinTech startups in Japan has been increasing over the past several years.
(FinTech industry map for Japan*5)
[Settlement, Asset administration, Asset management
Bitcoin, 19 (domestic) FinTech services, Peer-to-peer lending
Financial information, Accounting]
Some of these companies may already be familiar, like freee, which provides cloud-based accounting services; UZABASE, an operator of industry database DPPEDA; and Money Forward, an asset management service.
What does it take for these Japanese FinTech startups to become disruptors?
Japan is the world’s third-largest economy, with high IT literacy, and advanced financial systems, all creating conditions ripe for FinTech innovations.
In fact, there are many FinTech startups in various areas of the financial service sector, and growing demand for their services.
However, one element is missing in order for Japan to produce FinTech disruptors: an “ecosystem” involving government and major corporations. Such a system is necessary to incorporate innovations made by startups into a financial system that serves as social infrastructure.
To grow the FinTech industry as a financial system that serves as social infrastructure, there are three essential aspects: legal, capital, and customer trust. These are unique to the financial service industry. However, it is extremely difficult for startups to meet the necessary requirements on their own.
In the U.S., the government and major corporations play a crucial role in the development of the FinTech industry. The government pursues financial deregulation, while financial institutions provide capital and human resources.
Take Angel List, for example. This company came into existence because deregulation made it possible for individuals to invest in startups over the Internet (the Jumpstart Our Business Startups Act, or JOBS Act).
In Japan, such a service cannot be established because of regulatory hurdles.
Meanwhile, Motif Investing lists major financial institutions, such as Goldman Sachs and JPMorgan Chase, as investors. Executives of these banks also serve as advisers.
In Japan, major financial institutions may not be as eager to invest in FinTech startups.
Many FinTech startups are local players because regulations differ from country to country.
However, some non-FinTec companies (such as Uber) are already fighting foreign regulations as they expand internationally, and it may be just a matter of time before FinTech startups go global.
Angel List, mentioned above, is entering the U.K. and Canada, and eying further global expansion.
Angel List, backed by the U.S. government and major corporations, will likely have enormous negotiating clout and growth. Are we the only ones concerned about the future of the Japanese FinTech industry, which may have to compete with such companies?
DI has been contributing to the establishment of businesses in various industries, linking the government, major corporations, and venture capital firms. (For more, see the DI business overview page.)
With respect to Japan’s FinTech industry, DI is tackling a number of challenges jointly with the government and big businesses to deal with various issues, such as those mentioned above.
Please keep an eye out for DI’s various activities, as we try to hatch Japanese disruptors.
Shunsuke Hayashi, Business Producer
Joined DI after graduating from Tokyo University, majoring in economics, specializing in finance.
At DI, he is involved in constructing growth strategies and the medium-term management plan, planning overseas strategy development, and developing new businesses in various fields, such as finance, communication, environment and energy, trading, medical, and consumer products. Recently, he has also been focusing on venture capital businesses, and has experience providing investment advice, strategy-making, and execution support in areas such as finance, digital media, environment and energy in Japan and abroad.
From Shanghai, China.