SBI Holdings: Japan’s fintech frontrunner

September 2021

Key points

How an entrepreneurial holding company is disrupting the conservative world of Japanese financial services, from banking to broking to Bitcoin.

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The value of an investment, and any income from it, can fall as well as rise and investors may not get back the amount invested.

Satoshi Nakamoto and Yoshitaka Kitao have a lot in common: both audacious figures, they wielded the disruptive force of the internet against sleepy incumbents, upending the status quo. Nakamoto is the alias of Bitcoin’s mysterious inventor, Kitao the formidable founder of SBI Holdings – financier of Bitcoin and other new technologies.   

Japan’s links to this controversial cryptocurrency extend well beyond the (possible) home of its illustrious inventor. Indeed the very idea may have evolved out gaming, of an area the country continues to excel in. Some years ago, companies such as Gree and DeNA both tried to develop cross-game virtual currencies to standardise the monetary system across browsers (in the days when you needed a browser to play mobile games). SBI and GMO Internet were some of the first to process these payments. MTGOX – the Japanese bitcoin exchange that once accounted for 70 per cent of global bitcoin trading – also had its origins in gaming, initially enabling players of a fantasy-based card game to swap their cards like stocks.  

Although MTGOX ended in infamy, that hasn’t prevented the emergence of an effervescent, global crypto craze. There are now thousands of copycat tokens (such as Ethereum, Cardano and XRP), several exchanges to trade them and a few emerging exchange-traded funds (ETFs) that track them. Although several obvious obstacles to cryptocurrency’s wider viability remain – inefficiencies, volatility and even sovereignty – advocates argue that it could eventually offer more benefits than bullion, as a convenient and safe store of value.

Cryptocurrencies also complement consumer preferences and wider technological innovations, accelerating the shift from physical cash. Central banks are beginning to take note: In April 2021 the Bank of Japan started piloting its own ‘central bank digital currency’ (CBDC) for the yen. The low-cost, fast and secure nature of this digital tender could help Japan tackle the burgeoning cost of handling its cash, estimated to be ¥1.6tn (significant given total operating expenses of ¥6.6tn for the industry).  

Companies such as SBI Holdings are at the heart of this technological revolution. A pure play on financial disruption, this unconventional company is riding a wave of new technologies, particularly blockchain, but also big data, artificial intelligence and cloud accounting to pioneer a fintech ecosystem and modernise Japan’s financial system. Through its venture capital fund, it finds and backs new fintech – such as Freee, a cloud accounting and payroll software business for SMEs – and it spreads their applications through the wider SBI group and their partnered regional banks.

Japan’s sprawling, 100-plus tech-shy regional lenders (who have more combined assets than the entire Italian banking system), have long presented a problem for the country after decades of relentless margin compression. SBI offers salvation by plugging its regional partners into its group tech platform. Providing them with smarter loan examination tools or blockchain-backed settlement systems will allow them to jettison outdated and expensive systems. In return, SBI will leverage its technology off a wider client base.   

New, alternative, capital-light technologies have allowed SBI to achieve price leadership and scalability in several other areas. The path to zero commission rates has seen the company surpass Nomura as the country’s largest broker. SBI Sumishin Net Bank, an equity affiliate, has become the largest online bank, after deposits rose tenfold to ¥6.3tn over the last ten years. Having backed leading platform WealthNavi from an early stage, it is at the forefront of robo-advisory asset management.  

Regardless of whether Bitcoin becomes a credible currency or investment asset, its ascent (having reached a market cap of over $1 trillion earlier this year) offers an astounding example of how quickly innovation can challenge established industries. It also offers optimism for those, such as SBI, that wholeheartedly embrace it.

Risk Factors

The views expressed in this article are those of Thomas Patchett and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in September 2021 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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