Digital banking makes inroads in Japan

Written by Kapronasia || February 20 2023

As the most cash-loving advanced economy in Asia, Japan has not historically been eager to digitize its financial services sector – with a few exceptions. One of those is Rakuten Bank, which launched in the twilight of Web 1.0 back in the year 2000. At 23 years of age, Rakuten Bank must be one of the oldest digital lenders in Asia, if not the oldest. Gradually, other online banks are entering the Japanese market to compete with Rakuten.

Rakuten Bank reached 8 trillion yen (US$5.96 billion) in deposits as of mid-2022, an impressive deposit base for a digital bank. What is even more impressive is how fast it grew: In June 2019, Rakuten only had 3 trillion yen in deposits. Clearly, the digital lender benefited from the changing habits of Japanese people during the pandemic, alluded to in a press release from the bank that mentions how the scourge “necessitated new lifestyle choices.”

It was only in the past few years that Rakuten enhanced the mobile banking options for its digital bank. Because Rakuten Bank is so old, it was originally designed for use on computers, not handsets. However, now users can check their Rakuten Bank account balance using the Rakuten Pay smartphone app.

A newer digital bank in the Land of the Rising Sun, though it calls itself “Japan’s first digital bank,” is Minna Bank, which is unique for its focus on the cloud. An offshoot of Fukuoka Financial Group (FFG), Minna says it is the first bank in the world to build a full cloud banking system, which it did in the middle of the pandemic with the help of Accenture, Google, Microsoft, AWS, Salesforce and Oracle. In its first year of operations (May 2021-May 2022), Minna Bank, recorded over 1 million downloads of its mobile banking app and opened more than 400,000 accounts.

Looking ahead, competition in digital banking is set to increase in Japan – and there is plenty of of low-hanging fruit. In a November 2022 report, Nikkei Asia noted that digital banks in Japan hold less than 3% of the overall deposits in the country, but that is up from 1.6% in 2017.

SBI Sumishin Net Bank, a joint venture between Japan's largest online broker, SBI, and its largest asset manager Sumitomo Mitsui Trust Bank (SMTB), has the biggest loan volume among Japanese challenger banks. Both it and Rakuten Bank are preparing for IPOs as early as this year that will help fund their next stage of expansion. SBI Sumishin's IPO involves a share release as well as a capital raising to fund its computer system development. Analysts estimate Rakuten Bank's IPO is worth 300 billion yen and SBI Sumishin's 400 billion yen, which would make them among the largest IPOs in Japan this year if they do decide to list. 

Notably, both SBI Sumishin and Rakuten Bank are more profitable than traditional Japanese lenders, according to Nikkei’s calculations, with a return on equity of 12%. Other digital banks have strong ROE, among them Orix Bank (8.6%), a virtual lender affiliated with leasing company Orix, and 7-Eleven’s Seven Bank (8.7%).