Fintech firms make inroads into the banking biz

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With startups offering financial technology services raking in billions of dollars around the world, fintech, coined from “finance” and “technology,” has become a buzzword that old guards at big name financial institutions can no longer ignore.

Originally a term to describe computer technology applied to the back end of banks and trading firms, fintech now refers to services using software to provide a wide range of financial services — from making online payments, such as PayPal, to promoting financial planning.

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As fintech firms offer more consumer-oriented products, the service makes the world of finance more accessible and user friendly for consumers, experts say.

“The reason fintech has recently become such a trend is because some fintech firms have grown to be major players in the industry,” said Toshio Taki, who heads fintech research laboratory at Tokyo-based Money Forward Inc.

Founded in 2012, Money Forward provides an app that enables users to keep track of financial accounts, including banks, credit cards, e-wallets and point services, such as Amazon point, in a type of digital version of Japanese traditional kakeibo (household bookkeeping).

Taki, who is one of the founding members, said he was using this kind of application when he was in the U.S. He thought it was useful and wanted to create a similar one in Japan.

“Nobody was seriously making this kind of service in Japan. We thought it would be worthwhile if we do it,” said Taki.

The Money Forward service has drawn interest from investors, including existing banks.

In October, the company raised about ¥600 million from firms including Toho Bank and Mitsubishi UFJ Trust and Banking Corp.

Globally, many startups under 10 years old are becoming key players, especially in the U.S., with open-source software and rental server systems allowing them to create applications and run businesses more easily, Taki said. The spread of smartphones and tablet computers are benefiting their businesses as well, he said.

“Consumers will become more demanding with financial products and services (as well). Fintech could bring solutions to them,” Taki said.

In one example, Lending Club, a San Francisco-based fintech firm that enables people to borrow money from investors online, has grown to be a powerful online financial player.

As it has no branches, the firm has lower operating costs, and this means lower interest rates for borrowers. Founded in 2006, Lending Club went public last year.

Another U.S. based startup, Acorns, created an app in 2014 that automatically rounds up users’ shopping transactions to the nearest dollar and invests the change, which Taki said is a smart idea to let people more casually save and invest money.

Cryptocurrencies, such as bitcoins, are also considered fintech.

As fintech businesses gain momentum, established financial institutions are starting to offer funds — seemingly aware their own business could be threatened in the same way Apple changed the landscape of the music industry with iPods and iTunes.

Another Tokyo-based fintech startup, Moneytree, which also provides an app that lets users track their financial account balances, received funds from Mizuho Capital Co., Mitsubishi UFJ Capital Co. and SMBC Venture Capital in October although the amount was not disclosed.

“The big challenge for established players is their organizational culture’s ability to adopt a collaborative approach with new innovators and startups,” says U.S.-based consulting firm Accenture in its report “The Future of Fintech and Banking: Digitally Disrupted or Reimagined?”

Media organizations tend to label fintech as a disrupter of the existing financial industry, but fintech operators are trying to play this down, saying the two sides should collaborate.

“In other markets, sometimes people say or use the word ‘disrupt.’ That’s not going to happen in Japan. We are going to collaborate with the banks and help them provide better services with our technology,” said Mark Makdad, one of the Moneytree founders.

Moneytree users can use basic functions for free, with paid versions then available for extra features. The firm also earns revenue through businesses with corporate customers by providing a technology that can link Moneytree users’ accounts to their services.

For instance, Moneytree, selected by Apple as one of the best apps on iPhone and iPad in 2013 and 2014, is partnering with Yayoi Co., which provides financial management software. People using Yayoi’s software can link Moneytree’s accounts, so they can easily fill out expense records.

Makdad said it would also be possible for people who seek a bank loan to show their credit and bank account records to ease the application and screening process, which is beneficial both for consumers and banks.

While fintech services are expected to grow, some people still have concern for security and privacy problems following last year’s Mt. Gox fiasco, in which customers’ bitcoins were misused.

Makdad said Moneytree had a strong security team and was constantly asking third parties to try to break in to its system to check the security level.

He added that when it came to security and privacy, “both of these things are really about trust, which is: Do you trust Moneytree to be secure and keep your data private?”

This is where collaboration with existing banks comes in, since many consumers trust them with their money.

“We think working with the banks, we can get the consumers’ trust by appealing in the same place,” he said.

This section, appearing on the second Monday of each month, or on the second Tuesday when Monday is a press holiday, features new technologies that are still under research and development but expected to hit the market in the coming years.

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