In Japan, the adoption of fintech has been slow compared to regional peers, despite recent advancements in digital payments and digital assets. In 2023, the usage rate of online financial services in Japan stood at about 17%, behind the global average of 27% and a far cry from 30% in South Korea, a new technical note by the International Monetary Fund (IMF) says.

Cash still dominates transactions, making up for about 65% of all transactions. This is despite an increase in cashless payments, which rose from 21.3% in 2017 to 36% by the end of 2022, and an increase in QR code payments, which grew from nearly zero in 2018 to JPY 7.9 trillion (US$50 billion) in 2022, according to Deutsche Bank.

Businesses in Japan largely prefer cash transactions due to the inconvenience and fees associated with digital payments and credit cards, according to a report by Al Jazeera. This enduring preference is part of a broader pattern of resistance to digital transformation partly due to the the efficiency achieved with analog systems and a general cultural conservatism towards changing established practices, Martin Schulz, chief policy economist at IT services firm Fujitsu, told the media outlet.

Despite its high-tech industries like robotics, Japan lags in many aspects of the digital economy. The 2023 World Digital Competitiveness Ranking published by the Institute for Management Development ranks Japan 34 out of 64 economies in regards to digital competitiveness, trailing behind China (#19), Hong Kong (#10), Taipei (#9), South Korea (#6) and Singapore (#3).

Crypto activity remains low

The slow uptake of fintech in Japan is also evident in its small digital asset market, where only 5% of people owned digital assets in 2022. This is low compared to about 12% in South Korea, 16% in India, and 20% in Indonesia, according to the IMF note.

Despite being an early leader in the crypto world, Japan’s market slowed significantly after major hacking incidents in 2014 and 2018. Mt. Gox, a Tokyo-based crypto asset exchange, operated between 2010 and 2014 and was responsible for a large share of bitcoin transactions globally.

In 2014, the company collapsed after being the target of a cyber-attack that resulted in the loss of significant crypto assets.

Another major security breach occurred at Coincheck, a leading exchange supervised by the Financial Services Agency (FSA), in 2018. This hack resulted in the loss of over US$500 million worth of cryptocurrencies, making it one of the largest cryptocurrency heists in history.

These incidents prompted the introduction of a gradually stricter regulatory framework, which likely partly accounts for the decline in trading activity in the following years, the IMF says.

Though the crypto-asset market in Japan remains limited, the number of users of crypto is on the rise. Since 2018, the number of accounts at exchange service providers has doubled. By the end of November 2023, there were about 8.6 million domestic accounts across Japan’s 29 crypto exchanges, with three providers accounting for about 60% of these accounts.

Japan’s fintech scene sees more adoption from banks

Despite slow adoption of digital financial services, the IMF notes says that the banking sector is gradually moving towards digital services. Although there is no official regulatory definition of a digital bank, guidelines from the FSA outline a category of banks providing services entirely online without physical branches. These digital banks now total 11 players and are growing rapidly.

The first digital bank to operate exclusively via a smartphone app in Japan, Minna Bank, launched in 2021, and reached nearly 600,000 accounts in its first two years in operation. By March 2024, the bank boasted 960,000 customers, according to Statista.

Another positive trend highlighted by the IMF is the increase in traditional banks offering services through partnerships with non-financial institutions, known as banking-as-a-service (BaaS). The industry is also embracing digital trends and technologies, including open banking, with most banks in Japan having developed systems for open application programming interfaces (APIs). Additionally, many financial institutions are adopting cloud services for their internal systems and web servers, with 67% using cloud services by the end of March 2022, up from 46.7% in March 2018.

The financial sector is also beginning to experiment with tokenization, though this market is still very small. According to the IMF, asset tokenization has mostly concentrated in tokenized real estate trust fund units, with an approximate issuance size of JPY 23 billion (US$142 million) and tokenized corporate bonds, with an approximate issuance size of JPY 1.8 billion (US$11 million).

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