The Taiwan Banker

With the announcement of an interest rate hike from -0.1% to around 0-0.1% at the Financial Policy Decision Meeting in March 2024, plus another planned hike to 0.25% in July 2024, The Bank of Japan (BOJ)’s17-year period of ultra-relaxed monetary policy officially came to an end. The end of the negative interest era will have a significant impact on the economy as a whole, the livelihood of Japanese consumers, and the revenue structure of financial institutions. Initial projections suggest that when the BOJ raises interest on reserves to 0.25%, the annual interest income of private financial institutions will increase by approximately US$8.3 billion. Critics of this decision argue that higher rates will function as a subsidy for financial institutions. The majority of experts however believe that the adjustment aims to restore the earnings of financial institutions and depositors to more normal levels. In its annual financial report released in March 2024, the combined net profit of the three largest financial conglomerates – Mitsubishi UFJ (MUFG), Sumitomo Mitsui Banking Corporation (SMBC), and Mizuho – reached approximately US$20 billion, a record high. Specifically, MUFG’s net profit was US$9.5 billion, SMBC’s about US$6.15 billion, and Mizuho's roughly US$4.35 billion. Additionally, 70% of publicly listed local banks exhibited profit growth, indicating a continued recovery for the industry. With the end of the negative interest rate policy, banks can further enhance their profitability by widening the spreads between deposit and lending rates. Major banks are also offering more attractive and innovative financial products to attract depositors, specifically targeting young people. For example, PayPay Bank launched a new type of checking account called 'Savings Revolution,' offering annual rates of up to 2% on JPY and USD hybrid deposits. SBI New Life Bank's 'U28 Zero Generation' program, which targets individuals under 28 years of age, offers a rate of 0.3% on current deposits – approximately three times the previous rate. Additionally, most banks have raised checking deposit rates to at least 0.1%, a 100-fold increase, as competition in the deposit market continues to heat up. This change in the interest rate environment has brought the operating model of banks to the forefront. Historically considered conservative, banks can now value and increase revenue by offering customers a wide range of products and services. Moreover, they are also adjusting their brick-and-mortar strategies to enhance the customer experience and attract new depositors. For example, in May 2024, SMBC converted some of its branches into 'Olive Lounges' featuring Starbucks coffee and free-access space, in contrast to the overly serious stereotype attributed to the bank, using wooden furniture and the bank’s signature green color to create a relaxing atmosphere that feels like a forest. Tokyo and Osaka have many Olive Lounges. By presenting an 'Olive Card' (which includes SMBC debit cards, credit cards, and insurance cards, etc.), you can access these shared spaces, enjoy discounts on purchases, handle various financial affairs, and receive advisory services. The lounges are open from 7:00 a.m. to 10:00 p.m., catering to the busy lives of users. In addition, Resona Bank has opened a new branch, Resona !n, in the Aeon Nara shopping mall, offering flexible and convenient services to attract potential customers, such as account opening, loans, insurance, and asset management. However, experts predict that an era of rising interest rates could lead to a concentration of deposits in large, metropolitan banks, to the detriment of small and local banks. Challenges of digitalization and outside competition In addition to the changing interest-rate environment, digitalization also poses challenges. In the past, new technologies underwent extremely thorough internal reviews and assessments before Japanese banks felt comfortable fully adopting them. While this approach minimized risk, it also slowed down the decision-making process, preventing banks from keeping pace with the rapidly evolving technological landscape. Nowadays, as the trend of digitalization sweeps through the conservative Japanese banking industry, sectors such as technology and telecommunications are making significant inroads into the financial services market. Companies in these industries offer loans, asset management services, and cashless payments through mobile apps, thereby threatening the competitive advantages of traditional banks, and exerting considerable pressure on them. At the same time, the Japanese government’s vision of an ‘asset utilization nation’ has compelled the banking industry to accelerate its transformation by integrating digital technology with its strengths in face-to-face services. First, to increase efficiency and enhance customer experience, traditional banks have cut back on their physical branches and have shifted their focus to online services, as well as AI, blockchain, digital identification, and other advanced technologies. For example, MUFG recently introduced the 'AGENT' system to attract a younger demographic, enabling customers to use tablets at MUFG branches to independently complete procedures and transactions, thereby improving efficiency and reducing labor costs. In late 2024, MUFG also acquired WealthNavi, a publicly listed start-up company, through a takeover bid. WealthNavi utilizes AI to provide asset utilization advice via its app. This acquisition complements MUFG’s existing automated asset allocation service, serving as a successful example of transforming the threat posed by external entrants into a valuable opportunity. Given the significant 'digital generation gap' in Japan, banks face the challenge of promoting digitization and introducing new technologies to attract younger customers, while also catering to older customers who are less familiar with digital tools. Additionally, the must attract IT professionals to join their ranks, helping promote digital transformation and integrate new technologies internally.