Innovation and Legacy Modernization in Japan

Neil Katkov

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Jun 10th, 2015

As a regional unit, Celent Asia covers all of the industries under Celent’s purview: Banking, Insurance, and Securities & Investments. So it can be a bit of a challenge when we put on a Celent conference in Asia to find topics that resonate across all these verticals.

Our recent (and sold out) Insight and Innovation Day in Tokyo hit the target by examining two interrelated themes of vital import to many financial firms today: strategies for innovation, and legacy renewal to support these strategies.

The event was anchored by not one but two surveys Celent carried out this spring in Japan.

A survey of 1,000+ Japanese consumers initiated by Celent’s CEO Craig Weber suggested that highly digital consumers are the best targets for innovative financial services. The challenge, as this survey revealed (and contrary to popular belief outside Japan), is that digitally savvy consumers are still just a tiny minority in Japan. This implies that financial institutions in Japan must not only innovate, but also educate and lead their customers into the digital financial future.

The second survey, organized by Celent Senior Analyst Eiichiro Yanagawa, looked at legacy modernization trends at more than 60 banks, insurers and investment firms in Japan. Core system replacement is in full swing, with a majority of firms either planning or in the midst of their legacy transformation initiatives. Significantly, survey respondents indicated that the primary driver for replacing the core is to improve customer service and satisfaction. Which increasingly will require digital support for the customer experience. In a word, innovation.

These surveys were modeled on the Celent reports Targeting Innovation: How Your Customers Might Respond and Tracking the Progress in Core Systems Replacement (Global Life and Global P&C editions). We’ll be publishing our analyses of the Japan surveys shortly.

This is what our team does best and, I believe, uniquely: apply our global experience to the markets here in Asia to help firms deliver value.

Pushing beyond apps

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Apr 30th, 2015

It struck me while I was driving this morning: First-gen mobile apps are fine, but virtually everyone is missing high-volume opportunities to engage with their customers.

Allow me to back up a step. I was stuck in traffic. Not surprisingly, that gave me some time to ponder my driving experience. I found myself thinking: Why can’t I give my car’s navigation system deep personalizations to help it think the way I do? And how do I get around its singular focus on getting from Point A to Point B?

I explored the system while at a red light. It had jammed me onto yet another “Fastest Route,” disguised as a parking lot. My tweaks to the system didn’t seem to help.

I decided what I’d really like is a Creativity slider so I could tell my nav how far out there to be in determining my route. Suburban side streets, public transportation, going north to eventually head south, and even well-connected parking lots are all nominally on the table when I’m at the helm. So why can’t I tell my nav to think like me?

I’d also like a more personal, periodic verbal update on my likely arrival time, which over the course of my trip this morning went from 38 minutes to almost twice that due to traffic.

The time element is important, of course. But maybe my nav system should sense when I’m agitated (a combination of wearables and telematics would be a strong indicator) and do something to keep me from going off the deep end. Jokes? Soothing music? Directions to highly-rated nearby bakeries? Words of serenity? More configurability is required, obviously, or some really clever automated customization.

Then an even more radical thought struck. Why couldn’t my nav help me navigate not only my trip but my morning as well? “Mr. Weber, you will be in heavy traffic for the next 20 minutes. Shall I read through your unopened emails for you while you wait?” Or, “Your calendar indicates that you have an appointment before your anticipated arrival time. Shall I email the participants to let them know you’re running late?” Or (perhaps if I’m not that agitated), “While you have a few minutes would you like to check your bank balances, or talk to someone about your auto insurance renewal which is due in 10 days?”

What I’m describing here is a level of engagement between me and my mobile devices which is difficult to foster, for both technical and psychological reasons. And it doesn’t work if a nav system is simply a nav system that doesn’t have contextual information about the user. But imagine the benefits if the navigation company, a financial institution, and other consumer-focused firms thought through the consumer experience more holistically. By sensibly injecting themselves into consumers’ daily routines—even when those routines are stressful—companies will have a powerful connection to their customers that will be almost impossible to dislodge. Firms like Google have started down this path, but financial institutions need to push their way into the conversation as well.

Nominations for the 2015 Asia Insurance Technology Awards (AITAs) are now open

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Apr 30th, 2015

The Asia Insurance Technology Awards (AITAs) recognize excellence and innovation in the use of technology within the insurance industry in the Asia Pacific Region.
Nominations for the 2015 AITA Awards are now open. Please find more information on Celent website http://www.celent.com/aita, and you can download the nomination form from there. The deadline for submitting the nomination form is 26 June 2015.

The importance of the quality of the nomination itself, and of the supporting information, cannot be overemphasized. The nomination should be as specific, accurate, and complete as possible. Keep in mind that in most cases those involved in the selection process will have no personal knowledge of the nominated initiative and will lean heavily on the information provided in the nomination form to make reasonable judgements.

AITA AWARDS CATEGORIES

IT Leadership

This award honours an individual who has displayed clear vision and leadership in the delivery of technology to the business. The recipient will have been responsible for deriving genuine value from technology and has demonstrated this trait with a specific project or through ongoing leadership.

Nominations accepted from insurers. Vendors are welcome to assist their client insurers with their nominations, however vendors/suppliers are not qualified to receive this award. All nominations MUST include insurer contact information, and all follow-up will be done with the insurer, not the vendor.

Best Insurer: Technology

This award honours the insurer who has made the most progress in embracing technology across the organization.

Nominations accepted from insurers. Vendors are welcome to assist their client insurers with their nominations. However, vendors/suppliers are not qualified to receive this award. All nominations MUST include insurer contact information, and all follow-up will be done with the insurer, not the vendor.

Digital Transformation

This award honours an insurer or broker who has made the most progress in implementing digitization initiatives, such as sale and service of products online, eco-system integration (such as with business partners, repair shops, medical providers, distribution, etc.), leveraging social networks, work-place enablement (such as BYOD, collaboration tools, etc.), business process automation (STP), engaging user interface design, or analytics (analyse customer behavior, propensity, risks, etc.).

Nominations accepted from insurers. Vendors are welcome to assist their client insurers with their nominations, however vendors/suppliers are not qualified to receive this award. All nominations MUST include insurer contact information, and all follow-up will be done with the insurer, not the vendor.

New Business Model Leveraging Mobile Applications

This award recognises the insurer who has developed a new, perhaps disruptive business model involving the innovative use of mobile technology.

Nominations accepted from insurers. Vendors are welcome to assist their client insurers with their nominations, however vendors/suppliers are not qualified to receive this award. All nominations MUST include insurer contact information, and all follow-up will be done with the insurer, not the vendor.

Best Newcomer

This award recognizes the best new player in the insurance technology field. The recipient will have introduced a game-changing solution to the industry.

Nominations accepted from insurers or vendors.

Innovation

This award recognizes the innovation business model or in the usage of technology.

Nominations accepted from insurers or vendors.

証券市場の進展とTLOのコンセプト

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Apr 30th, 2015

日本の証券市場は、その隆盛を極めている。
今こそ、TLO(トレーディングライフサイクルの最適化)のコンセプトを実現するタイミングと考える。

1. 現下の株式市場、債券市場の動向:
2015年4月、日経平均株価は大幅に上昇し、終値で2万円を回復した。ITバブル期の2000年4月以来となる。
主要国の金融緩和で生まれた潤沢な投資マネーは、この15年で新陳代謝が進んだ日本の株式市場に流入した。
株価2万円は、日本経済がデフレで長期停滞した「失われた15年」を脱し、再成長のスタート地点に立ったことを意味する。
一方、債券市場は乱調であった。国債市場で、長期金利の利回りは乱高下した。
長期金利の指標となる新発10年債(337回債、表面利率0.3%)の利回りは、1月に0.195%となり、初めて0.2%台を割り込んだ。
しかし、2月には一時、0.400%まで回復、これを受けて、長期プライムレート(優遇貸出金利)は、0.10%引き上げ年1.15%に改定された。
欧州市場では、マイナス金利の普及から、「ボンド・プロキシー(債券代替)相場」との表現もされるが、日本市場においても、株式市場と債券市場の動向は対照的である。

2. 保険会社、ゆうちょ銀行、かんぽ生命の動向:
長期金利の乱高下する要因として、保険会社の国債離れが指摘される。
生命保険協会によると、2014年11月末時点の生保の保有する国債残高は148兆9千億円。前年同月比で6千億円減っており、この結果、買い手を失った国債利回りの乱高下を招いたと言われる。
更に、日本郵政(ゆうちょ銀行、かんぽ生命)の国債離れも鮮明である。
独立行政法人郵便貯金、簡易生命保険管理機構に提出された投資計画によると、
残高ベースで、ゆうちょ銀行が2014年度末(計画ベース)の144兆8千億円から2015年度末は111兆5千億円に、かんぽ生命も同様に、69兆3千億円から68兆7千億円に減る。
残高ベースから逆算すると、30兆円余りが国債市場から流出する計算となる。年金積立金管理運用独立行政法人(GPIF)に次ぐ買い手として、株式市場の関心を呼ぶ。

3. 潜在的なリスクとその対策:
「超低金利で稼げない分をどこまでリスク資産に振り向けるか」、保険会社も今秋の上場を展望する日本郵政も、目線は同じであろう。
こうした「グレート・ローテーション」(大転換期)とも呼ばれるアセットクラスのシフトは、2つの意味で大きな潜在的リスクを含む。

  • パフォーマンス上のリスク:
    – 現在の株価水準が適正であるか、更なる高騰のための経済ファンデメンタルズの本質的な構造改善がなされるか?
    – GDP、長期金利、債券利回り、企業業績、企業の生産性の相関関係とサイクルの変化は、これまで同様か?
    – 企業業績と設備投資の相関性の変化は?(現下の売上増加の伴わない収益改善は、企業の設備投資増加の誘因とならない)
    いずれも、株価水準の継続的な上昇(ポートフォリオのパフォーマンス)に関するリスクとして想定される。
  • オペレーション上のリスク:
    一方で、株式、債券共に、その資産管理に要する技術は高度化し、以下のリスクを抱える。
    – 市場の成長性と技術革新の速度(電子取引の広範な普及に伴う、安全性とスピードのトレードオフの顕在化)
    – 分断化した市場情報(市場のグローバルな広がりと、情報のフラグメンテーション)
    – トップティア(最大手)プレーヤーに、情報利用テクノロジーが偏って存在すること
    中でも、グローバルな最大手のバイサイド(資産運用会社)におけるトレーディングライフサイクルの改善に向けた取り組みは注目される。
    その動向は、装置産業からトレーディングのプロセス産業へのシフトと呼べるほど、そこでの技術革新は急であり、質的な向上は著しい。

リスク資産を管理する能力は、こうしたトレーディングのオペレーション(トレーディングサイクル)に依存する。
日本の保険会社や日本郵政においても、その最適化は急務である。

 

図1. TLOのコンセプト図:

FIG1)TLO

(出典:セレント)

 

関連するセレントレポートの推奨:

アジアと日本の資本市場におけるマーケットデータ パート2:成長市場を獲得するためのシナリオとイノベーション機会
http://www.celent.com/ja/reports/33566

証券取引における取引ライフサイクル最適化:注目のイノベーションシリーズ
http://www.celent.com/ja/node/31509

Cyber Risk Insurance

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Apr 14th, 2015

For the insurance industry, new risks and devising solutions to hedge those risks are fundamental business opportunities. At the same time, new products and new services can require that insurers acquire new capabilities. One such example of this is the “cyber risk insurance” that has been released by one major nonlife insurer in Japan. (1)

This new product is a comprehensive product that covers cyber risks related to business activities all in one policy. In the event that a company was accessed illegally or suffered a cyber attack, this insurance compensates policyholders by covering expenses including forensic investigations (crisis management response expenses) and covers claims for damages and litigation related to incidents such as leaked information.

The company that developed this product launched sales of corporate cyber risk insurance for customers in North America and Europe through an overseas subsidiary. The firm is looking to leverage its sales success overseas by developing this cyber risk product tailored to the Japanese market.

This product is pioneering in a number of ways:

  • The process of being considered for a policy itself entails a security management check of the company. For the insurer this inevitably involves new underwriting.
  • Estimating premiums for cyber risk is both a challenge and also groundbreaking. There is a wealth of statistical data making it is easy to estimate the accident risks and set appropriate insurance premiums for insurance such as auto insurance, but for cyber risk the paucity of statistical data makes doing so a pioneering endeavor.
  • In Japan, there is a precedent for insurance products designed specifically to protect personal information and, as such, there exists some sales performance data. However, such information is extremely limited when it comes to comprehensive cyber risk insurance products in Japan.
  • Increasingly a global approach will be essential. Cyberspace has no borders and there will come the day when the issue arises of compensation for legal damages filed abroad. Unlike conventional insurance such as that for leaks of personal information, this insurance covers claims for damages and litigation expenses filed overseas, meaning that ostensibly a range of support will likely need to be deployed in the future related to implementing these insurance contracts.

 

(1) Cyber Risk Insurance (Tokio Marine & Nichido)

Insurers and the Internet of Things

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Apr 6th, 2015

The Internet of things (IoT) will significantly change the way that insurers do business. Change is a foregone conclusion; rather, the salient questions are how fast and to what extent will this change occur. Key topics that merit attention include the following:

  • Value to policyholders in the form of reduced premiums and costs of risk
  • Value to insurers in the form of reduced loss costs as well as costs of risk
  • Costs associated with creating, maintaining, and using the IoT

The IoT portends change across all areas of the insurance value chain. For example, we need to consider how it will impact the fundamental areas and operational processes of insurance listed below:

  • Product design
  • Insurance premium setting
  • Insurance underwriting
  • Policyholder services
  • Insurance policy claims

Ultimately, because insurance premiums are reduced in proportion to decreases in losses, this raises the question whether the below are foregone conclusions:

  • Could this mean that the insurance industry might possibly adopt a strategy to pare down the scale of its business?
  • If insurance premiums are drastically reduced, will insurers be able to accept a reduced role in the overall economy?
  • As we forge ahead in the time of the IoT can insurers focus on loss reduction and discover alternate sources of income?

To deftly navigate this era of the IoT, Celent advocates that insurers adopt a framework that is driven by harnessing technology.

 

Celent views the IoT as being made up of three fundamental components:

  1. “Things” or devices with networked sensors
  2. Data stores
  3. Analytical engines

In tandem with this, Celent sees the IoT generating value in the three ways below:

  1. Data and information indicating in-company and external states
  2. Conclusions derived through analytics
  3. Feedback and control processes

 

Celent suggests the following reports to learn more about the IoT, the Internet of Everything (IoE), and digital strategy.

Life Insurance Underwriting (R)evolution in the Age of the Internet of Things

Are Insurers Ready for the Internet of Things?

The Internet of Things and Life & Health Insurance

The Internet of Things and Property/Casualty Insurance

Telematics and Japanese Insurer Business Strategies

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Mar 30th, 2015

Japan’s insurance industry is increasingly focusing on telematics-based insurance. One major Japanese nonlife insurer has, following the acquisition of a British insurer, announced that it will be launching mileage-linked insurance. (1) (2)

Celent has analyzed market trends in Europe and put forth the argument that the proliferation of telematics technology and insurance that draws upon this technology results in the following trends in the traditional (read non-telematics-using segment) of the auto insurance industry:

  • Increases in the proportion of “problematic” drivers in the driver pool
  • A rise in the cost base of auto insurance business operations
  • Increases in frequency and amount of auto insurance claims
  • A possible decrease in conventional auto insurance policy values and the number of policyholders

At the same time, the impact of these trends are significantly related to and swayed by the culture and accepted practices of the driving cultures of the countries and regions in question. As a result, companies need to take into account the global impact based on differences in vehicle culture and environment.

Based on this situation, Celent offers these three recommendations for Japan’s insurance industry:

  • Monitoring: How can companies harness the spread of new technology to better monitor and grasp changes in damages encountered by policyholders? Which department or section of a company should be tasked with the monitoring? A company-wide approach that spans and includes multiple departments—such as those in charge of managing risk, insurance accounting, and product development—will be crucial.
  • Analytics: What will next-generation telematics data entail? Will telematics improve the way that people drive? Are there ways to collect, analyze, and use the granular data such as from collision prevention devices and automated traffic violation prevention devices? These new technologies will provide new types of data and analysis methods that portend significant changes including in the setting of insurance premiums rates and underwriting.
  •  Strategy: What issues should each business department have on their respective radars? How will this all affect key Are there potential business partners in other industries (such as automobiles, networks, or telecommunications) with which players should be seeking to collaborate? Being aware of these issues and building them into business plans for this year and next as well as reflecting them in mid- and long-term business strategies will be key.

 

(1) Acquisition of Shares of Box Innovation Group, a Major U.K. Telematics Auto Insurance Firm (Aioi Nissay Dowa Insurance)

(2) Mileage-linked insurance (Aioi Nissay Dowa Insurance)

ON THE DISMANTLING OF ‘BEDROCK’ REGULATIONS, Part 3

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Mar 19th, 2015

Japan’s financial market is also home to outdated bedrock regulations.

Background:
Currently in Japan there are approximately 270 Shinkin banks (Credit Unions). On average, these average a deposit balance of around 500 billion yen and loans of 300 billion yen, with some large Shinkin banks that exceed regional banks in size.

Joining Forces:
The January 2015 announced merger of Ogaki Shinkin Bank and Seino Shinkin Bank was premised on a proactive business strategy looking five to 10 years in the future and taking into account the shrinking population and economy. The new entity will boast a post-merger total of 700 billion yen in deposits, falling in the realm of mid-tier financial institutions and with a notably high capital adequacy ratio. With Ogaki boasting a capital adequacy ratio of 12% and Seino 15%, this union of banks—which could go it alone—speaks to a strategic move to maintain or enhance regional market share and consolidate forces to achieve greater economy of scale. Both institutions are located in central Japan’s Gifu Prefecture, which is home to a number of robust regional institutions including Juroku Bank (assets of 5.0 trillion yen), Ogaki Kyoritsu Bank (assets of 4.2 trillion yen), Gifu Shinkin Bank (assets of 2.1 trillion yen), and also one of the few areas of Japan that is enjoying staunch competition in retail banking. This merger can also be seen as hinting at things to come.

Outlook:
The dominant take is that strategic partnerships and mergers will proceed apace among institutions of suitable scale and sound management until an appropriate number for the market has been reached. A trend similar to that witnessed in the U.S. credit union industry is expected, in which as the hurdle to survival has risen, especially in urban areas, many credit unions boasting assets in excess of 2 trillion yen are created. It would seem moving forward that in addition to scale, financial soundness, and operational efficiency, that having a strategy that focuses on offering niche services that fill local needs will prove essential.
(Lessons that can be learned from developments in the U.S. credit union industry are addressed in detail in the below Celent report.)

Challenges and Strategy:
From the perspective of efficiency, regional financial institutions will for the most part operate in partnership with other institutions using a shared center system rather than operating such systems themselves. This will solve cost and resource challenges, but at the same time could hamper efforts to offer unique products and services when it comes to taking advantage of IT. In addition, until now there have been other system–related obstacles to partnerships and mergers across regions. Outdated “bedrock” regulations remain. You might say this area of the industry has been protected by virtue of the system. However, the largest impediment would seem to be human resources. We hope to see strategic and proactive initiatives taken by networks of financial institutions and overarching bank entities such as the Shinkin Central Bank.

Partnerships and mergers taken with strategic intent are urgently needed. For example, Shinkin banks, which boast freestanding shop networks, manpower to undertake business activities, and with strong local ties, by joining forces with dedicated online players (in banking, insurance, and securities), with their robust online sales and powerful national mass-marketing capabilities, could quite conceivably realize strategic online-to-offline (O2O) channel development and omnichannel marketing. If they can do this, then they can be expected to devise unique services that set them apart from megabanks and mega-insurers and—in this time of shrinking populations and declining local economies—create novel financial service delivery models. In doing so, key success factors can be expected to boil down to the use of technology and human resources.

 

Catch CU: The Ongoing Evolution of the Credit Union Market

Mobile Payments in Southeast Asia

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Mar 17th, 2015

With the rapid growth of smartphone penetration in Southeast Asia, e-commerce and mobile commerce is one of the hottest issues in the region. Not only local players but also global e-commerce players have entered into the region to expand their business. However, a number of Southeast Asian countries still have low banking account penetration rates, hence people may not have access to payment methods for e-commerce and mobile commerce.

Mobile payments may be one of the solutions for e-commerce payment. With the growing popularity of e-commerce and m-commerce, mobile payments is receiving more attention than before. Not only global mobile payments players such as PayPal but also local players like MOL, Fasspay, 2C2P, Smart Money, and GCash operate business in Southeast Asia.

Some Southeast Asian countries still have a relatively high level of unbanked population but mobile payments is rapidly being accepted in the region because smartphone penetration rates are growing much faster than bank account penetration rates.  Also, people can hold a mobile payments account without a banking account at some mobile payments services.

However, there are some obstacles to the future growth of mobile payments in Southeast Asia. A number of people are not well aware of mobile payments services, hence mobile payments players should invest more into marketing activities, although investment in infrastructure and equipment is also important.

A number of payments players are considering entering into the Southeast Asian mobile payments market, but they may face difficulties to set up their business in the region. Each country has different regulations, telecommunications infrastructure, payments infrastructure and financial environment. Players who consider entering into the market should develop strategies to fit each country’s conditions.

Celent believes that mobile payments in Southeast Asia will grow strongly for the next few years because the infrastructure is already in hand and smartphone penetration is still growing swiftly. Celent will keep an eye on this trend and update the trends in upcoming reports and blogs.

ON THE DISMANTLING OF ‘BEDROCK’ REGULATIONS, Part 2

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Mar 12th, 2015

Stubborn “bedrock” regulations remain in Japan’s financial market.

These are embodied by proposals to expand the operation of Tokyo Stock Exchange (TSE), which at five hours daily has shorter trading hours than both London and New York, and to make interbank payment transactions real time 24 hours a day year-round.

Last November, TSE announced that it was going to delay introducing longer trading hours for stocks (1). The bourse said that it had explored expanding trading hours with a focus on night trading, but had been unable to get the majority of brokerage houses to sign on. TSE believes that even expanding trading is not necessarily a recipe that can be expected to attract diverse market participants—all of which points to strong fears that Tokyo’s international competitiveness will falter.

Meanwhile, the Japanese Bankers Association (JBA) last December pledged to offer world-leading payment services. These new services are to be expanded to cover what have been non-business hours, such as nights, weekends, and holidays. Toward this end, the organization committed to establish a new year-round, 24-hour platform that will enable funds to be sent between banks in real time (2). At the same time, when reporting on this story, The Nikkei, Japan’s leading business daily , noted only that the JBA had decided to launch a new interbank system that would be active 24 hours days, omitting the information about real-time interbank payments being made possible around the clock year-round because there are banks that are not keen to extend business hours and it is not clear when in fact this will be up and running (3).

Deregulation and technological progress are the two wheels that propel the vehicle of innovation forward. The proliferation of digital technology heightens the possibility of technological innovation catching on. At the same time, deregulation creates opportunities for the application of innovative technology. The dismantling of “bedrock” regulations of massive scale and, beyond that, establishing a growth strategy will not happen minus collaboration on the part of government—that is to say financial regulatory authorities—and entrepreneurs or corporations —namely financial institutions and financial service vendors. Put another way, if these entities can work well together—with motivated businesses with expertise in digital technology and a government-backed growth strategy initiative functioning as two wheels advancing in tandem—then innovation can be expected to accelerate.

Digital technology that can be used to realize innovation is already here. The challenge is to create opportunities to apply it—opportunities that presuppose the dismantling of these bedrock regulations.

 

(1) Tokyo Stock Exchange (TSE)

(2) Japanese Bankers Association (JBA)

(3) January 9 edition of Nikkei