New Context

New Context

Context in the Fintech Market, Which is Drawing Lots of Attention from Institutional Investors

The global Fintech market is projected to reach 1.5 trillion dollars by 2030, and many new services of more types are appearing. How are investors watching these startups and the future of the Fintech market? We spoke about the potential of Fintech with DG Daiwa Ventures Principal Ryutaro Nojima, who focuses on Fintech startup investment.


Principal, DG Daiwa Ventures Inc.

Ryutaro Nojima

After graduating from the Boston University Questrom School of Business, Nojima joined SMBC Nikko Securities in 2017 and provided corporate financing services to chemical, healthcare, and infrastructure companies. He later joined SBI Group’s venture capital arm and invested in Fintech and IT startups, mainly across Europe and Southeast Asia. Joined DG Daiwa Ventures in February 2021, where he invests in Japanese and foreign Fintech companies.

Fintech growth backed by smartphones and deregulation

The term “Fintech,” a portmanteau of “finance” and “technology,” came into widespread use around 2015. Services for individual money management began emerging, starting with MoneyForward and other budgeting apps. However, Nojima said the Fintech concept already existed in the year 1999.

“When he was interviewed that year, PayPal founder Peter Thiel predicted there would be one billion internet-enabled mobile phones within the next five years. He said there would be easy-to-use financial services in which all people could access bank accounts and transfer money from their mobile phones. I think that was essentially the start of Fintech.”

“Thiel actually began building the Fintech market with his payment services, but it didn’t immediately catch on, even in the United States. Most mobile phones didn’t have internet access, and there weren’t any convenient services like those of today. Smartphones kicked off the growth of Fintech because they let anyone get online easily.”

Today the U.S. has a more mature Fintech market than Japan, probably due to the earlier prevalence of smartphones that led to the creation of the Fintech market and its remarkable growth. Smartphones have contributed to Fintech expansion in other countries as well.

Regulations also have major effects on Fintech market growth. Because finance is such a regulated industry, market trends are significantly impacted by the stances of regulators like the Japanese Financial Services Agency (FSA). Consumer protection requirements are also particularly strict for financial products. If a country is more cautious about new services and technologies, Fintech growth is weakened. Conversely, deregulation leads to market growth.

More corporate Fintech services are imminent

Next, Nojima explained the different factors affecting Fintech growth in advanced countries and emerging nations.

“Compared to advanced countries, emerging nations have more latent growth potential. Lots of people in emerging nations can’t access services from traditional financial institutions—many don’t even have bank accounts, which are a normal part of life in Japan. There has been rapid growth in consumer financial services and online banks that are easy to use via smartphone, such as neobanks and challenge banks, and these financial services have become widespread at an astounding speed.”

“There are some online banks in Japan, but I don’t think they hold as much appeal because Japanese people already have bank accounts at regular financial institutions. In developing nations, people who can’t access traditional services are able to use more cutting-edge financial services via their smartphones, which is an example of ‘leapfrogging.’”

Let us consider the situation in Japan, where the Fintech market has been drawing attention for roughly eight years. It appears that the Fintech market for individual consumers has reached a certain level of maturity.

Some degree of digitization has taken place in the main categories of Fintech services for individual consumers, namely banks, insurance, and securities. Users can access their bank accounts from smartphones and easily shop online for insurance, stocks, bonds, and other investment products. They can also leave home without a wallet due to the wide range of payment services available.

“I’m sure we will see new Fintech services aimed at individuals, but it looks like the market has matured somewhat. For further growth, the key will be offering optimal financial products to individuals in this era when many people are utilizing digitized financial services.”

“At the same time, major growth is predicted in the market for corporate Fintech services. While many individuals are utilizing electronic payments, numerous companies still use paper and PDF files for business-to-business transactions and payments. Technology could make this much more efficient. I think that accurately visualizing a company’s credit could help them get loans from financial institutions in a more timely and efficient way, such as for working capital, when financing needs arise.”

Fintech appeals to investors, despite difficulties in global expansion

Fintech differs from other industries because of the high barriers in place against global expansion. Because this industry is so regulated, countries have significantly different rules and value systems related to money. Nojima said that Japan and Europe tend to prefer conservative financial services, while the U.S. favors more aggressive financial services and has relatively less resistance to taking on debt.

Global expansion is a major goal for startups. Investors pay particular attention to this, because business growth is limited for a startup that can only offer services in one country. We asked Nojima for his thoughts on this topic.

“It’s true that global expansion is challenging in the Fintech field. It’s not easy to take a successful Japanese service to another country with different regulations and financial product business practices. It takes time to negotiate with new regulators, and it costs money to start up a business mostly from scratch. Still, a service can be appealing even if there are difficulties with expanding overseas. There are also high barriers for foreign companies trying to get into the Japanese market, which has many regulations of its own.”

“Despite these regulations, the finance industry is very attractive because of its marketability and good potential profit, even in the domestic market. In my opinion, the difficulties in taking a Fintech company global are not negative factors.”

Global expansion is easier for some Fintech services in fields with fewer regulations, such as online payments and software as a service (SaaS). At first glance, they may seem to have better future prospects, but the reality is not that simple. These types of services are less profitable than Fintech in more heavily regulated sectors, and there tend to be fewer barriers to market entry as well. This results in fiercer competition, including against foreign companies.

When evaluating Fintech startups, Nojima said he focuses on teams more than marketability. Talented human resources are not the only important thing; the team must have members who can speak on equal footing with the FSA and other regulators, as well as with traditional financial institutions that can serve as partners for offering new financial services.

“Startups need so-called ‘gray hairs,’ staff members with ample industry experience who can communicate as equals with regulators like the FSA. Credibility, sincerity, transparency, and safety are important requirements for financial businesses, based on the standpoint of consumer protection. Regulators might look suspiciously at the best business model if they don’t trust the team, which has to include members with profound industry knowledge. Users will hesitate to try untrustworthy services, and investors like myself won’t feel secure giving funds to those types of financial businesses. An important question for startups is whether they can bring in human resources with lots of industry knowledge and strong networks, including ‘gray hairs.’”

The latest Fintech technologies and business sectors drawing investor attention

Cutting-edge technology is essential for Fintech market growth. Does this mean that investors are focusing on blockchain technology, which has close connections to Fintech? Nojima said, “No, I’m looking at Fintech and blockchain separately.”

This is because crypto assets—which brought blockchain into prominence—are not yet very popular, and are still owned by a small number of people. Things might change if crypto assets became a regular part of our daily life, but they are still developing and are not in popular use like traditional financial services.

QR Codes and near-field communication (NFC) tags, which are currently drawing attention, are technologies that already are or could become game changers in the payment field. It is possible that a shift to electronic payments would eliminate the need for stores to install large point-of-sales terminals, making it extremely easy to utilize data and transforming the very concept of payment.

But even more than these technologies, Nojima said he is paying attention to artificial intelligence (AI). “The finance industry is already starting to use AI, including AI chatbots. Previously, chatbots could only give answers to pre-set questions. With generative AI technology, chatbots can provide customized responses. For instance, a chatbot could suggest optimal loans, insurance, or investment products according to an individual’s assets and salary. We expect that financial institutions and other companies could develop original AI technologies to reduce human error and apply AI in more fields, which will help prevent people from becoming victims of investment fraud.”

When asked about business sectors drawing his interest, Nojima replied, “BaaS.” BaaS stands for “banking as a service” and refers to banks offering cloud-based functions and services via application programming interfaces (APIs). BaaS provides behind-the-scenes systems that non-financial companies use when they launch financial services, and is attracting attention as a method for embedded finance, the integration of financial functions into existing services.

“Apple and Amazon are issuing credit cards, and Uber offers a debit card. There is a certain degree of familiarity regarding financial services, such as payments and loans, in all industries. Companies can create more points of contact by offering financial services. I think even more businesses will aim to launch financial services, which can help improve customer satisfaction and prevent attrition. BaaS is drawing so much attention because it isn’t easy for companies with no industry experience to suddenly start financial businesses. Angela Strange is a partner at Andreessen Horowitz, a prominent American venture capital firm. She says, “Every company will be a Fintech company.’ This means we will see many different companies entering the finance industry and building their own ecosystems, and BaaS companies will certainly be the main support behind this significant movement.”

Things to keep in mind when entering the finance industry

Many people may feel confused about the idea that all companies will be involved in Fintech. We asked Nojima to provide some examples of what might be possible. 

He said that Fintech is a particularly good match for industries handling products with high unit prices, such as vehicles and home appliances. Fintech could come into play when offering loans for high-priced goods based on the customer’s credit. Some appliance companies are working with banks to launch services that make it easier for customers to buy expensive products.

The same applies to industries with high-priced services. For example, travel companies could offer insurance to customers purchasing their services, or provide loans for expensive travel products.

“The largest threat to financial players is the Big Tech companies that already have lots of customers, namely Google, Apple, Facebook, and Amazon. For instance, Rakuten’s ecosystem includes bank and insurance services. I think that banks and securities corporations would suffer serious damage if more of these companies got involved in finance. I also see major business potential in software as a service (SaaS) offerings used by corporations to handle internal data other than financial information. Fantastic Fintech offerings could be created by adding financial information management to existing sales management tools, such as Salesforce.”

Finally, we asked Nojima to share some advice for companies in other sectors that are thinking of offering financial services. First, he said, “Don’t be in a big hurry to launch.”

“There are advantages to offering financial services, but there are also serious risks. This can harm a company’s image. Many Japanese people have a negative impression of the finance industry, and a company could lose fans if it seems like they are focusing solely on profiting through financial services.”

Nojima’s second piece of advice was, “Use BaaS services.” Starting a financial service is not that difficult; anyone can do so with an FSA license. However, this is a challenging industry for beginners, who can see their profit from core businesses evaporate if their lack of expertise results in incorrect risk analyses.

Financial services can provide good returns, but companies must fully understand the risks involved. BaaS is founded on finance industry expertise, and is a good option for companies to maintain their profitable services while minimizing risks as much as possible.

“Lately, I’m seeing startups that are trying to profit from financial services before their main products are profitable. I believe that financial services can be an important strategy for building profit streams, but this comes second to their main products. Before launching products, I think a company should go back to its starting point and consider its missions, values, and who benefits from its offerings. This can bring about long-term business growth.”

DG Daiwa Ventures Inc.

DG Daiwa Ventures is a global venture capital firm founded in Japan, with assets under management totaling roughly 25 billion yen, that continually invests in cutting-edge technologies, both in Japan and abroad. It collaborates with prominent venture capital firms around the world to win the best investment opportunities and support startups that can become top global players. Provide active support for business growth by utilizing the knowledge accumulated while consistently delving into each area on a worldwide basis.