Japan Puts Data Analytics at Core of Modernization Drive

A series of botched IT projects following mergers between Japan’s banks in the 1990s set Tokyo back decades in terms of fintech innovation. Radar looks at how a new drive from the Japanese government may finally rid the industry of its fear of Big Data.

Japan will push its banks to adopt more advanced data analytics across business lines, including compliance, as part of efforts by the country’s financial regulator to make the sector more competitive. 

Speaking to the Asia Financial Forum in January, Himino Ryozo, commissioner of Japan’s Financial Services Agency (FSA) urged all banks to invest in technologies that make their operations stronger.

“I think the best potential of financial technologies lie not in replacing face-to-face and paper with digital and online, but in the accumulation, sharing, analysis, and utilization of data,” he said. “We may want to accelerate our effort to make our regulatory framework more consistent with digital technologies,” he said, adding that it would be a “main engine” of Japan’s post-COVID-19 growth.

Ryozo said raising standards across the financial market was a priority for his team, and they would focus on leveraging data analytics to spur more competition.

Structural Issues

The regulator has cause to step in given the general immaturity of the Japanese financial technology market. There are concerns within the industry that Tokyo is slipping further behind domestic Asian territories, such as Beijing and Hong Kong, and is also offering little to rival mid-tier western hubs, such as Montreal, Amsterdam, and Berlin. 

The country is light-years behind London and Wall Street, said Yasuyuki Ogyu, of EY’s Japan Advisory Strategic Impact Unit.

Much of the issues stem from long-standing issues regarding IT, he said. In the U.S., banks are keen to develop technology internally or are more open to Software-as-a-Service, whereas in Japan there are two structural issues that hinder change, he said. 

“First, they are built on a core-banking model that centralizes authority, which is a high barrier to making progress on new initiatives,” said Yasuyuki. “Second, the Japanese market demands IT systems that constantly maintain a high level of quality, such that the duration of any system crash is severely limited. As a result, only a small portion of IT expenses is allocated to new development.”

According to Yasuyuki, from a global perspective, although Tokyo has some lure as a fintech hub, it occupies a relatively low place among the world’s financial centers. “Two reasons for this are the difficulty in obtaining regulatory licenses, lack of transparency, and obstacles in producing innovation, compared to other financial centers,” he said. 

Support is there from the government, and Himino’s remarks can only help, but in regard to innovation culture, Japan has a long way to go,” Yasuyuki said. “‘Enlightenment on the part of society and consumers is vital: society needs to be more accepting of fintech, and consumer awareness needs to change,” he said. 

The Value of Intelligent Compliance

Banks themselves have been slow to recognize the value of machine learning and artificial intelligence as applied to compliance, believing it to be a balance sheet drain. There are signs this attitude is gradually shifting, but experts believe there is much to do to educate the Japanese market.

“Most large Japanese banks are currently building data management platforms – constructing large-scale data infrastructures that address every potential business and regulatory need,” said Yuji Mizuno of Moody’s Analytics. “While a multi-purpose data platform is a step in the right direction, these ambitious projects sometimes fail at that very task due to their sheer scope and ‘do everything’ strategy.”

This complex problem has caused the industry to experience a paradigm shift from a “bigger is always better” mindset to a more functional and flexible data infrastructure design, he said. “It’s an especially attractive approach for Japanese banks as they aim to both quickly respond to regulations and position regulatory compliance as a profit-making strategy.”

Improving low profitability has long been the main challenge to Japan’s slow-growth economic environment. But finally, after years of rebuilding following the global financial crisis, Japanese banks are finally redirecting their strategies, Yuji said. 

“Large banks are pursuing new means of gaining revenue: expanding outside of Japan, such as making acquisitions in foreign countries, or merging with other banks in Japan,” he said. To increase their revenue, they are also taking more risks under a reasonable risk control regime, rather than simply containing the risks under a conservative limit framework.

“Banks tend to regard regulatory compliance as an annoyance, as they believe it does not generate revenue in and of itself,” said Yuji. Many ask, “Why do we have to use so many resources to analyze when and how we will die?” 

“Beyond simply maintaining a banking license, though, regulatory compliance can help increase a bank’s profitability – if the data is effectively managed,” Yuji said. 

Over the last two years, Japan’s largest banks have unwound what they felt made them successful in the past: effective organizations that group various arms into separate necessary functions and departments. Having determined it almost impossible to attain an optimal solution by continuing with departmental silos, however, they are experimenting with data lakes and pooling organizational data. 

Banks have found that risk appetite frameworks could, in fact, be a solution.

“Japanese banks have begun to view regulatory compliance and data management as an opportunity to enhance their business and increase revenue, rather than as a mere cost of maintaining their licenses,” said Yuji. “Along with regulatory challenges, data management has emerged as a critical issue for Japanese banks.”

The Centralized IT Issue

Japan’s banks typically handle data management through a management information system (MIS). This is a series of IT platforms used in every stage of the process, from aggregating data to reporting to senior management. All banks must build this as a foundation for a risk appetite framework.

As Yasuyuki observed, many Japanese banks now understand that a strong data platform is the foundation for achieving risk management objectives and so tend to deal with all the data issues at once by planning a single, giant IT project. This often makes the task that much harder and increases the likelihood of delays or failure. 

“Moreover, by the time such an ambitious project is completed, there may well be new banking regulations with different data requirements to contend with,” said Yuji.

Numerous banks struggled to integrate IT systems in the 1990s, resulting in a “spaghetti junction” of overlapping data warehousing systems that has bred caution throughout the Japanese banking sector.

“Therefore, data integration projects in Japan are commonly comprehensive in scope and enormous in scale, usually requiring many years to complete,” said Yuji. “But with the extensive, complicated and ever-changing requirements of the current regulatory regime, this centralized IT model falls short.”

There are two specific data challenges that Japanese banks are trying to overcome, said Yuji. “First, the data warehouse system has to be flexible, as the requirements for data management often change. Second, a data management platform needs to be implemented quickly.”

Historically, Japan’s banks have been weak at both, and experts believe they should begin to focus on lighter IT systems and implementing Software-as-a-Service solutions.

“Focusing on ‘data flow’ rather than ‘data storage’ is one way to implement an effective, efficient data platform,” Yuji said. “Banks can maintain existing data sources and create a data flow, which gathers the necessary data from those sources and sends them to a new ‘data relay station.’ Banks do not need to expand the project’s scope to encompass a rebuild of the entire database – a potentially endless project – but can instead simply channel the existing data into a relay station.”

Ultimately, a more sophisticated approach to data management is the foundation for both improving the management of a bank, and increasing revenue in global markets, as has been proved across Wall Street, London, and Hong Kong. 

“For many Japanese banks, imitating the best practices of foreign banks is not necessarily the best solution,” said Yuji. “While they struggle to find the appropriate direction, they have gradually succeeded in ‘Japanizing’ some regulatory concepts while expanding their own concept of effective IT infrastructure beyond the cumbersome ‘centralized’ approach.”

Japan’s banks are currently being challenged to significantly improve their data management systems, he said, specifically for achieving flexibility and speed to continue growing revenues while meeting regulatory requirements. “Accomplishing this will allow a bank to become a stronger, more competitive player on the global stage,” he said.