1. An Overview of Fintech

Of course, Wall Street, which is the financial nerve center of the U.S., is on the East Coast, and this initially created a geographical divide between those who supported the rising trend of fintech and those who supported conventional finance. Eventually, the financial institutions on the East Coast would also proactively adopt fintech, through acquisitions and other means. However, at least in the beginning, the rising trend of fintech was in conflict with traditional financial institutions. This promoted competition and spurred on innovation to a degree not seen in Japan and Europe, with no clear divide as the one between the East Coast financial institutions and West Cost technology firms in the U.S. Apart from the U.S., it was easier for a new business area like fintech to grow in countries where communication infrastructure and financial systems were not well developed. Iwasaki (2018) and Fujita (2018) discuss the state of fintech in Southeast Asia and China in detail. Takasaki (2017) provides a concise summary of the state of fintech in Africa, and is useful as a reference.

On November 27, 2018, the Japanese government released a list of seven legal guidelines based on which companies entrusting their decision-making to artificial intelligence (AI) software would be required to explain those decisions. It should be emphasized here that the mechanisms of AI are intuitively comprehensible to anyone who has studied economics. “Optimization” is something a student of economics understands as a matter of course, and the least squares method is taught even to first- and second-year students. Students of economics should, therefore, be confident about understanding the idea of AI. As a concept, there is nothing difficult about it whatsoever; rather, it gives the impression of a concept patented in economics but utilized in a different field. Even if one cannot write the program itself, this knowledge of the thought process behind AI, which is increasingly catching up with human intelligence, will prove very useful in navigating the global economic systems of the 21st century.

This is an “increasing returns industry,” to use economic jargon, and it is very easy for such industries to descend to a state of monopoly or oligopoly. Some startups are leaving Silicon Valley because the big technology companies manage to lure away all the talented people with high salaries.

It is becoming clear, however, that simply possessing big data is not sufficient. For instance, Alibaba used the data it had accumulated to introduce Sesame, a consumer credit rating application, but as of 2018, the application had not been put to use in making loan-related decisions. In Japan, again, companies like LINE and NTT have introduced screening services for loan applicants, but to little avail. Thornhill (2018) has explained quite usefully that there is a difference between “big data” and “strong data.”

The authors’ affiliations and titles are as of the time of the publication of this book in Japanese, August 2019. By its nature, the pace of change of all matters related to fintech is very rapid. We ask readers to keep in mind that the lectures behind these chapters were given in 2018.

As of 2018. Also, though not SNSs, Apple was established in 1976 and Amazon was established in 1994, while their payment services Apple Pay and Amazon Pay were introduced in 2014 and 2007, respectively.

This will be discussed in more detail in Chapter 10, but Okina et al. (2017) goes into greater detail.

Meyer et al. (2018).

Basak and Palmeri (2018).

Catlin et al. (2017).

Higashiyama (2018).

https://​www.​statista.​com/​outlook/​337/​102/​robo-advisors/​europe (viewed on January 2, 2019). For a detailed analysis of asset management in the European Union including through robo-advisors, see European Union (2018).

According to the March 24, 2018, The Nikkei Online Edition, https://​www.​nikkei.​com/​article/​DGXMZO28548230U8​A320C1EA1000/​ (viewed on December 31, 2018).

The Prime Minister’s Office (2018). “Platform businesses” include the aforementioned GAFA and other technology companies that provide platforms.

For those who read Japanese, the website of the Japanese Bankers Association (link to the article in question provided in the bibliography) provides an easy-to-understand explanation of open APIs in banking. For more information on “open banking” to which open APIs pave the way, see Okina (2018).

METI (2018). METI had also released “Japan’s FinTech Vision” in May 2017, the details of which are available in METI (2017). In 2016, the Strategic Council for AI Technology was established, the details of which can be found on the Cabinet Office website (link provided in the bibliography).

https://​sharing-economy.​jp/​ja/​ (viewed on December 31, 2018).

Bank of Japan (2017). Mr. Kuroda stated that “In Japan's case, financial institutions have a solid capital base and credit costs have fallen sharply, so that at present their financial intermediation function is not impaired. However, because the impact of the low interest rate environment on financial institutions' soundness is cumulative, the Bank will continue to pay attention to this risk as well.”

According to Tomura (2017), “Ordinarily, the central bank’s operating expenses come from the profit margins on short-term government bonds and cash. If there is no cash, the central bank would become dependent on the government to provide its budget, which could hurt its independence in implementing monetary policy.” Costa and De Grauwe (2001) also makes the same point.

As discussed again below in connection with security, in order to analyze scenarios where payment methods issued by private entities are used internationally, it is important to consider payment “interfaces” and “settlement mediums” separately. It must be noted here that the first financial supervisory body in the world to point out the need for function-based regulation rather than entity-based regulation was Japan’s FSA. For details regarding these points, see Kaji (2018) and Kaji (2019). Carstens (2018) explains these concepts using a “money flower,” which highlights four key properties on the supply side of money, namely issuers, forms, accessibility, and transfer mechanisms.

According to Dabrowski and Janikowski (2018), looking back at the history of privately issued currencies, such currencies have never supplanted the state-issued currency except in times of hyperinflation, financial crises, political turmoil, wars, and other emergencies. However, according to Prof. Naoyuki Iwashita, the author of Chapter 3 of this book, cryptocurrencies are not currencies but IOUs.

As Kaji (2019) explains, there are two aspects to financial intermediation, one being to provide an “interface” for transactions and the other being to provide the “medium of settlement.” Cash (currency notes and coins) has both of these aspects. In the case of electronic settlements, the app is the interface, while the cryptocurrency used for the transaction is the medium of settlement. The greater the number of alternatives available in terms of both the interface and the medium, the smaller the impact when the provision of one or other is stopped. For instance, people would have a way out if they could pay by credit card in the event of their smartphone app not working. The threats to security are the greatest when a large part of a country’s financial settlements is administered through a single interface, using a single medium of settlement, especially if both these services are provided by a single foreign company.

This section is a reproduction, with the kind permission of the TM Forum, of an opinion piece titled “AI-IoT Society 2030 as I See It” in the TM Forum bulletin. Takechiyo is the childhood name of Shogun Ieyasu Tokugawa.