eBanking: an experience enriched in Japan
Tuesday, 12 April 2011
Tapan Kanti Sarkar
Two industries going through major changes worldwide are financial services and information technology (IT). Internet-based financial institutions are trying to grab clients away from traditional banks. The Internet, along with deregulation and globalisation of financial systems, is creating new opportunities for financial institutions and also new innovations in banking products and services, all over the world and specially in Asia Pacific. Electronic Banking or eBanking is making a rapid pace due to these waves of global surfacing Information & Communication Technology. Consequently in most countries Internet banking is mounting. Throughout the globe, now banks are offering services through WAP (Wireless Application Protocol). However, stiff competition in these areas exposes banks to substantial risks. So, the need is being felt overseas that transparency and disclosure requirements should be met by the e-Banking community. According to ITU (Information and Communication Technologies), as of June 2010, 78.2 per cent of Japanese population are using Internet; so banks in Japan are increasingly focusing on e-Banking transactions with customers and Internet Banking is an important part of their strategy. In fact, the first cyberbank of Japan, the Japan Net Bank (JNB), was stated in October 2000 by the Consortium of Sakura Bank Fujitsu Limited, Nippon Life Insurance Company, and Sumitomo Bank. Later on, in June 2001, considering various security and privacy issues, Sony Bank alone emerged as the second online bank in the country. The bank provides comprehensive personal banking services via the Internet, including foreign currency deposit accounts, credit cards and mortgages. Bank customers have access to 7600 ATMs owned by Sumitomo Mitsui Banking. Sony Bank offers Internet based software, called MoneyKit, which provides twenty-two financial tools to the customers (Kerr 2001). Account holders can check their account balances, verify checks paid, and obtain loan and investment advice. At present, JNB and Sony Bank are the two major stand-alone Internet Banks in Japan, but they have two minor competitors: eBank and IY Bank After the above, the full-blown Internet age arrived in Japan, prompting even conventional banks to replenish their Net business strategy. With the Internet evolving and spreading at a much faster pace than was envisaged when the big bang was set in motion, perhaps Net banks are still in the early stages -- and have their best days ahead of them. In the past 10 years, since Net banks first appeared in Japan, not one has reached its expected size or even established a solid profit base. Sure, the combined balance of deposits at online-only banks has been steadily increasing, yet it still makes up less than 1.0 per cent of that of all banks. Net banks are the product of financial deregulation, called "the financial big bang," which the Japanese government has been pushing ahead since the second half of the 1990s. Since then, experts argued that new entrants to the banking sector would replace existing banks saddled with bad debt and perk up the industry. Hopes were especially high that entrants from other industries would bring new ideas and business models. In reality, Net banks have done a little to broaden market scope. In the beginning, consumers were concerned about the safety of transferring money via personal computers or mobile phones. So, it took the bank five years to turn into profit. The latest data underline how much smaller the operational sizes of virtual banks are compared to those of traditional banks. The combined balances of deposits of five only Net banks were slightly above 4.0 trillion yen at the end of June, a miserable 0.7 per cent or so of the aggregate deposit balance of all of Japan's banks. Putting too much effort in a service that requires a certain amount of manpower could undermine Net banks' low-cost edge. Still, Sony Bank has established an in-the-flesh service to go head-to-head with conventional banks, which themselves have been injecting massive amounts of management resources into their housing loan businesses. In the housing loan market, however, the bank is exposed to increasingly harsh competition from traditional banks, including its parent, Sumitomo Trust & Banking Co. Conventional banks struggle to draw and retain wealthy customers by offering preferential interest rates. A remark of a Japanese regional bank executive is that "the current unimpressive interest rate differential does not encourage many depositors to shift their money to Net banks." So while virtual banks struggle with their unstable profit bases, they are also having difficulty setting substantially higher interest rates than traditional banks. In this environment, Sony Bank and SBI Sumishin Net Bank appear to become comprehensive banks that provide a wide range of financial products and services. However, if they indeed go down this road, their battle with conventional banks will grow even stiffer. Now all industry eyes are on smart phones, with many online banks planning to launch services for smart phone users in the beginning of the next year. If they can successfully provide services and convenience that cannot be offered through ordinary mobile phones, the Net banks just might be able to adjust these coming services into larger customer bases. The current regulations of the Bank of Japan on physical presence of bank branches are undergoing modifications to take care of licensing of banks and their branches with no physical presence. The Report of the Electronic Financial Services Study Group (EFSSG) has made recommendations regarding the supervision and regulation of electronic financial services. Financial institutions are required to take sufficient measures for risk management of service providers and the authorities are required to verify that such measures have been taken. Providing information about non-financial businesses on a bank web site is not a violation as long as it does not constitute a business itself. With respect to consumer protection, it is felt that guidance and not regulations should encourage voluntary efforts of individual institutions in this area. Protection of private information, however, is becoming a burning issue in Japan both within and outside the field of e-banking. Japanese banks are currently requested to place disclosure publications in their offices (branches) by the law. However, 'Internet only banks' are finding it difficult to satisfy this requirement. The report of the EFSSG recommends that financial service providers that operate transactional website should practise online disclosure through electronic means at the same time and should make equivalent paper based disclosure. They should also explain the risks and give customers a fair chance to ask queries. The government of Japan intends to introduce comprehensive Data Protection Legislation in the near future. There are no restrictions or requirements on the use of cryptography. The Ministry of International Trade and Industry (MITI)'s approval is required to report encryption technology. The strong growth of Internet in Japan is driven by the Japanese desire to access information. Long before the spread of Internet, Japanese banks were trying PC banking. Unlike U.S. banks, which targeted PC banking to general consumers, Japanese banks' aim were to go at Small OfficeHome Office or SOHO clients. Though around 200 banks were providing the service, a very few subscribers were attracted due to software problems and telephone charges, along with that the Japanese consumer behavior were responsible partly. In a country in which 24-hour ATMs are just becoming widespread, there was no strong demand for 24-hour dialup PC banking. So, unlike the U.S., the software and technology companies had no strong desire to get into the act though Nippon Telephone and Telegraph Corp. (NTT) and Intuit Japan tried without much success. The success for Internet banking in Japan must start with banks taking strong initiative. So far there are only six banks offering banking on the Internet, contrary to that about 200 banks in the U.S. are doing it. As security for Web-based Internet transactions improve, Internet banking can be the de facto distribution channel for financial products and services. Through Internet, a bank can literally reach each Internet user on the planet and the transactions cost is considerably low. Now, we can practically operate a worldwide bank without a single branch office. This translates to huge reduction of cost per transaction. Moreover, business through Internet is 24 hours, seven days a week, from anywhere in the world and it is getting cheaper and cheaper day by day. (The writer is Head of IT, NCC Bank Ltd. He can be reached at e-mail: tks446@hotmail.com)
Two industries going through major changes worldwide are financial services and information technology (IT). Internet-based financial institutions are trying to grab clients away from traditional banks. The Internet, along with deregulation and globalisation of financial systems, is creating new opportunities for financial institutions and also new innovations in banking products and services, all over the world and specially in Asia Pacific. Electronic Banking or eBanking is making a rapid pace due to these waves of global surfacing Information & Communication Technology. Consequently in most countries Internet banking is mounting. Throughout the globe, now banks are offering services through WAP (Wireless Application Protocol). However, stiff competition in these areas exposes banks to substantial risks. So, the need is being felt overseas that transparency and disclosure requirements should be met by the e-Banking community. According to ITU (Information and Communication Technologies), as of June 2010, 78.2 per cent of Japanese population are using Internet; so banks in Japan are increasingly focusing on e-Banking transactions with customers and Internet Banking is an important part of their strategy. In fact, the first cyberbank of Japan, the Japan Net Bank (JNB), was stated in October 2000 by the Consortium of Sakura Bank Fujitsu Limited, Nippon Life Insurance Company, and Sumitomo Bank. Later on, in June 2001, considering various security and privacy issues, Sony Bank alone emerged as the second online bank in the country. The bank provides comprehensive personal banking services via the Internet, including foreign currency deposit accounts, credit cards and mortgages. Bank customers have access to 7600 ATMs owned by Sumitomo Mitsui Banking. Sony Bank offers Internet based software, called MoneyKit, which provides twenty-two financial tools to the customers (Kerr 2001). Account holders can check their account balances, verify checks paid, and obtain loan and investment advice. At present, JNB and Sony Bank are the two major stand-alone Internet Banks in Japan, but they have two minor competitors: eBank and IY Bank After the above, the full-blown Internet age arrived in Japan, prompting even conventional banks to replenish their Net business strategy. With the Internet evolving and spreading at a much faster pace than was envisaged when the big bang was set in motion, perhaps Net banks are still in the early stages -- and have their best days ahead of them. In the past 10 years, since Net banks first appeared in Japan, not one has reached its expected size or even established a solid profit base. Sure, the combined balance of deposits at online-only banks has been steadily increasing, yet it still makes up less than 1.0 per cent of that of all banks. Net banks are the product of financial deregulation, called "the financial big bang," which the Japanese government has been pushing ahead since the second half of the 1990s. Since then, experts argued that new entrants to the banking sector would replace existing banks saddled with bad debt and perk up the industry. Hopes were especially high that entrants from other industries would bring new ideas and business models. In reality, Net banks have done a little to broaden market scope. In the beginning, consumers were concerned about the safety of transferring money via personal computers or mobile phones. So, it took the bank five years to turn into profit. The latest data underline how much smaller the operational sizes of virtual banks are compared to those of traditional banks. The combined balances of deposits of five only Net banks were slightly above 4.0 trillion yen at the end of June, a miserable 0.7 per cent or so of the aggregate deposit balance of all of Japan's banks. Putting too much effort in a service that requires a certain amount of manpower could undermine Net banks' low-cost edge. Still, Sony Bank has established an in-the-flesh service to go head-to-head with conventional banks, which themselves have been injecting massive amounts of management resources into their housing loan businesses. In the housing loan market, however, the bank is exposed to increasingly harsh competition from traditional banks, including its parent, Sumitomo Trust & Banking Co. Conventional banks struggle to draw and retain wealthy customers by offering preferential interest rates. A remark of a Japanese regional bank executive is that "the current unimpressive interest rate differential does not encourage many depositors to shift their money to Net banks." So while virtual banks struggle with their unstable profit bases, they are also having difficulty setting substantially higher interest rates than traditional banks. In this environment, Sony Bank and SBI Sumishin Net Bank appear to become comprehensive banks that provide a wide range of financial products and services. However, if they indeed go down this road, their battle with conventional banks will grow even stiffer. Now all industry eyes are on smart phones, with many online banks planning to launch services for smart phone users in the beginning of the next year. If they can successfully provide services and convenience that cannot be offered through ordinary mobile phones, the Net banks just might be able to adjust these coming services into larger customer bases. The current regulations of the Bank of Japan on physical presence of bank branches are undergoing modifications to take care of licensing of banks and their branches with no physical presence. The Report of the Electronic Financial Services Study Group (EFSSG) has made recommendations regarding the supervision and regulation of electronic financial services. Financial institutions are required to take sufficient measures for risk management of service providers and the authorities are required to verify that such measures have been taken. Providing information about non-financial businesses on a bank web site is not a violation as long as it does not constitute a business itself. With respect to consumer protection, it is felt that guidance and not regulations should encourage voluntary efforts of individual institutions in this area. Protection of private information, however, is becoming a burning issue in Japan both within and outside the field of e-banking. Japanese banks are currently requested to place disclosure publications in their offices (branches) by the law. However, 'Internet only banks' are finding it difficult to satisfy this requirement. The report of the EFSSG recommends that financial service providers that operate transactional website should practise online disclosure through electronic means at the same time and should make equivalent paper based disclosure. They should also explain the risks and give customers a fair chance to ask queries. The government of Japan intends to introduce comprehensive Data Protection Legislation in the near future. There are no restrictions or requirements on the use of cryptography. The Ministry of International Trade and Industry (MITI)'s approval is required to report encryption technology. The strong growth of Internet in Japan is driven by the Japanese desire to access information. Long before the spread of Internet, Japanese banks were trying PC banking. Unlike U.S. banks, which targeted PC banking to general consumers, Japanese banks' aim were to go at Small OfficeHome Office or SOHO clients. Though around 200 banks were providing the service, a very few subscribers were attracted due to software problems and telephone charges, along with that the Japanese consumer behavior were responsible partly. In a country in which 24-hour ATMs are just becoming widespread, there was no strong demand for 24-hour dialup PC banking. So, unlike the U.S., the software and technology companies had no strong desire to get into the act though Nippon Telephone and Telegraph Corp. (NTT) and Intuit Japan tried without much success. The success for Internet banking in Japan must start with banks taking strong initiative. So far there are only six banks offering banking on the Internet, contrary to that about 200 banks in the U.S. are doing it. As security for Web-based Internet transactions improve, Internet banking can be the de facto distribution channel for financial products and services. Through Internet, a bank can literally reach each Internet user on the planet and the transactions cost is considerably low. Now, we can practically operate a worldwide bank without a single branch office. This translates to huge reduction of cost per transaction. Moreover, business through Internet is 24 hours, seven days a week, from anywhere in the world and it is getting cheaper and cheaper day by day. (The writer is Head of IT, NCC Bank Ltd. He can be reached at e-mail: tks446@hotmail.com)