Japanese banking behemoth Mitsubishi UFJ Financial Group, Inc. MTU seems to have taken yet another step to shield itself from the potential threat of competition from the growing number of financial-technology companies (Fintech) that are challenging traditional lending, wealth management and investing activities. According to a Bloomberg report, marking the first of its kind for a big bank in Japan, Mitsubishi UFJ has established a unit for research and development of new financial technologies.
Citing people familiar with the matter, the report stated that the Innovation Lab division, which is scheduled to be unveiled on Jan 8, will commence operating with 15 employees in Tokyo and Silicon Valley. The division will work with universities, research institutions and Fintech firms and utilize resources within Mitsubishi UFJ including its securities and trust-banking wings in order to develop financial products and services.
Mitsubishi UFJ will establish offices physically separated from its main operations in order to enable independent functioning of the division. The company is also contemplating the set up of a third location in a major city in Asia.
The latest development comes barely a few weeks after the news of a strategic deal between Mitsubishi UFJ and a Tokyo-based Fintech venture – Finatext Ltd, hit the market in December 2015. Through this collaboration, Mitsubishi UFJ looks forward to augment investment trust sales providing information with the help of a smartphone application – The Fundect app.
Notably in a report on Information and Communication Technology (ICT) strategy, Mitsubishi UFJ mentioned, “in this environment, we recognize that to maintain our competitive advantage we must make full use of emerging technologies and our long-accumulated information assets to improve existing business and create new business segments. To this end, MUFG is working to strengthen its ICT initiatives and promote digital innovation.”
As the nation’s regulatory watchdog, Financial Services Agency, is expected to lift out certain investment restrictions, particularly in the FinTech space, Japanese banks are likely to expand Fintech investments. Notably, under the current rules, banks are prohibited to hold more than 5% in companies whose functions are not core banking operations. Bank holding companies are allowed to make a maximum investment of 15%.
Reportedly, Japanese banking giant Sumitomo Mitsui Financial Group is seeking to invest in the FinTech sector.
As banks are embracing technology, they are continuously looking out for ways and working with FinTech to restructure many daily operations, update back-office functions and making huge investments for auto execution of transactions. Further, in this competitive environment, the financial institutions are striving hard to attract and retain clients by offering better digital experience as traditional methods are gradually taking a backseat.
Nevertheless, potential increased competition from FinTech companies remains a concern for banks. In its 2015 annual review of global banking report, McKinsey & Co. stated that over the next decade, digital revolution will likely wipe out approximately 60% of earnings from certain financial products, as FinTech drive prices down and eat away lenders’ profit margins.
Globally, banks record profits of roughly $1 trillion, thereby providing incentives to FinTech companies for seizing a thin slice of market share with cheaper and convenient services. Currently with around 12,000 FinTech startups in the field, this could mean a big threat for banks (both big and small) in terms of revenue and profit.
Mitsubishi UFJ carries a Zacks Rank #4 (Sell). Some better ranked stocks in the foreign banks space include Grupo Financiero Galicia S.A. GGAL, Erste Group Bank AG EBKDY and Barclays PLC BCS. Both Grupo Financiero and Erste Group sport a Zacks Rank #1(Strong Buy) while Barclays carries a Zacks Rank #2 (Buy).
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