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We’re excited to share a special episode in partnership with our colleagues in the San Francisco Fed’s Community Development group. Our teams recently collaborated on a special issue of the Community Development Innovation Review in partnership with the Aspen Institute’s Financial Security program, which examined the potential ways financial technology can promote racial equity in the financial system. Today’s episode is a corollary to our recently concluded Financial Inclusion & Beyond series where we explored what we can learn from efforts around the world to improve financial inclusion and wellbeing.
The event included a fireside chat with San Francisco Fed President Mary Daly and Ida Rademacher, Executive Director of the Aspen Institute’s Financial Security Program, and a panel discussion with several journal contributors moderated by Rocio Sanchez-Moyano, a senior researcher in the Community Development group.
Some take-aways from the live event include:
The current financial system does not serve everyone equally. The inability to access and use financial services impedes people’s full participation in the economy. Communities of color and low-income communities are disproportionately left out of the financial system. Fintech provides an opportunity to reach those excluded by the financial system. Fintech shows promise in furthering financial inclusion. Improvements in transaction processing, digital identity, and use of real-time and alternative data for risk assessment could offer significant improvements to individuals currently left out of the financial system. Fintech solutions designed based on a nuanced understanding of lived experiences of those they serve have greater impact. Many consumers come up with work-arounds or adaptations to work with existing services that do not meet their needs. Efforts to increase diversity in the fintech ecosystem (from founders to staff, venture capital, and regulators) and greater prioritization of learning from the experiences and challenges that users from low-income communities and communities of color face can enable the creation of higher impact fintech solutions.Related Content
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The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In the final episode of Financial Inclusion & Beyond, your series hosts take a look back at key themes and takeaways from our conversations.
Some of the key takeaways we review include:
The events of the pandemic left us all humbler at the scope of the challenge we face here in the United States to deliver full financial access to all citizens and promote their financial health. Financial inclusion often conveys the notion of basic access, but true inclusion is about enabling individuals lives and letting them pursue their dreams. Experts from a diverse range of disciplines like impact investing, behavioral economics, and community development are focused on designing new financial products and services to meet the needs of low income populations historically treated as second class citizens in the financial system. Regulators need to grapple with how to promote positive change through their engagement with innovative firms. A narrow focus on simply negating bad outcomes has not been sufficient to create real financial inclusion and racial equity, and a shift in mindset is necessary. The San Francisco Fed’s Framework for Change makes a persuasive case for the economic benefits of a more inclusive financial system. We are at a critical moment to reflect and take action, and both public and private stakeholders have a lot of work ahead of them to promote meaningful change.The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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Our Pacific Exchanges team recently hosted a special Financial Inclusion and Beyond live virtual event that explored lessons from around the world in the use of technology and public policy to build more inclusive financial systems and drive financial health.
The event was moderated by Sean Creehan, the team's lead for financial health and inclusion, and brought together professionals from different corners of the financial inclusion and health spaces, including Greta Bull, the president and chief executive officer of the Consultative Group to Assist the Poor (CGAP); José Quiñonez, the founding chief executive officer of Mission Asset Fund (MAF); Arjuna Costa, a managing partner at Flourish Ventures; and Ting Jiang, a behavioral economist.
We’re excited to share the live event in full as a special episode of Financial Inclusion and Beyond. Regular listeners of the podcast will recognize these voices from their episodes throughout the season; the live event allowed them to discuss how they were managing the challenges to inclusion posed by the COVID-19 pandemic.
Some take-aways from the live event include:
The COVID-19 pandemic has dramatically affected efforts to improve financial inclusion and health. Organizations like CGAP, a World Bank Group affiliate, and MAF, which traditionally focus on the longer-term issues of inclusion, had to re-focus efforts almost overnight to deal with issues related to public health. Those countries which had invested in digital financial system infrastructure could respond with stimulus relief quicker than those which relied on traditional models. Ting Jiang zeroed in the pandemic's effects at the individual level.
At the individual level, it is important to adapt behaviors and develop products and technologies that withstand moments of stress. The poor shouldn't be forced to be secondary or third-order users of financial products but should have access to products designed for their lifestyles at an affordable cost. Fintech should be celebrated when it is also in service of the poor, not simply because it is a shiny new toy.The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In episode nine of Financial Inclusion & Beyond, we spoke with Grovetta Gardineer, the Senior Deputy Comptroller for Bank Supervision Policy at the Office of the Comptroller of the Currency. As a veteran bank regulator with more than three decades of experience in banking supervision, policy and regulation, Grovetta is a well-known leader and expert in the space of compliance and community programs.
We sat down to discuss lessons learned from the COVID crisis, financial inclusion challenges here in the United States, as well as the role public policy and regulation should play. Key takeaways from the discussion include:
The US financial system has failed to provide equitable access for people of color. The barriers to financial access have prevented excluded populations, African Americans in particular, to achieve a healthy financial life and to build generational wealth. To tackle inclusion challenges, the OCC and other regulatory agencies have taken concrete steps to engage in a collaborative effort, Project REACh. The project focuses on three broad areas: bringing so-called “credit invisible” populations back into an inclusive financial system, increasing affordable housing, and recognizing the crucial role that minority depository institutions play in the United States. This effort must leverage the strength of various stakeholders, including all types of financial institutions, businesses, and community groups. For example, fintech firms’ approach to alternative credit scoring can provide opportunities as they partner with innovative banks. While there are benefits offered from collecting financial data, strict privacy guidelines and expectations need to be established to ensure consumer confidence and trust of the financial system.Join Our Live Event May 18!
We will be hosting a live virtual event to mark the release of Financial inclusion & Beyond, the fourth season of our Pacific Exchanges podcast with a panel of four experts who appear in the series. We’ll discuss their lessons learned from the COVID-19 crisis and how the pandemic has underscored the importance of building inclusive financial systems that enable everyone’s financial health and promote equal opportunities. Details and registration link here.
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The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In episode eight of Financial Inclusion & Beyond, we spoke with Tracy Basinger, the recently retired head of supervision here at the San Francisco Fed. Tracy has spent her career focused on the impact of financial services on everyday citizens. From leading consumer protection here at the San Francisco Fed to overseeing a nationwide team considering policy solutions for small businesses suffering during the COVID-19 crisis, Tracy has thought long and hard about the role of public policy, regulation, and technology in promoting a more inclusive financial system.
We get into examples of financial innovations that are promoting inclusion and the challenges for regulators and policymakers who want to minimize risks to consumers and the broader financial system while not getting in the way of positive change. And we talk about how to shift from a historical mindset that focused on preventing exclusion to one that thinks about ways to promote inclusion and broader notions of financial health and wellbeing.
Key takeaways from the discussion include:
The challenges of 2020 made it abundantly clear that our financial system is not fair and forced financial regulators to re-consider rules and policies to ask how they promote or detract from efforts to build a more inclusive financial system. Historically regulators have been considered successful if they prevent bad things from happening. Shifting to an approach to not only protect consumers, but help them meaningfully participate in the financial system, requires a different mindset. Regulating modern financial technology is not simple. The rapid adoption and scaling of new innovations increase their potential both to create benefit and cause harm. To the extent technology is clearly providing a benefit, even an only incremental one, without causing obvious harm, regulators should be enabling it. Providing clarity around rules and regulations to firms is crucial to enable innovation that drives inclusion and financial health. Regulators and supervisors should be engaged from the very beginning to understand the role of new technology, provide guidance when necessary, and avoid reacting after the fact once a problem has surfaced.Related Content
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The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In episode seven of Financial Inclusion & Beyond, we spoke with Matt Homer, Deputy Commissioner of the Research and Innovation division of the New York State Department of Financial Services. Matt is an expert on the use of data and technology for social good. He has previously held positions in the U.S. government and financial technology sectors where he has focused on issues like the role of digital identity in promoting financial inclusion and wellbeing.
We get into the benefits of inclusive technology, but also the potential for digitization to exclude some vulnerable populations, and the unexpected challenges policymakers and firms face in delivering new financial services to people that previously lacked access We also discuss the broader trade-offs between inclusion, privacy, and other emerging data rights.
Key takeaways from the discussion include:
People that aren’t a part of the formal financial system don’t dream of things like getting access to a bank account—a traditional indicator of financial inclusion in the past. They want tools to access the digital economy, whether to operate a business or save for the future. Universal digital identities that enable people to verify themselves with financial service providers are critical infrastructure for any efforts to include more people in the financial system and broaden their ability to transact in the digital economy. Policymakers and private companies designing digital identity and other enabling infrastructure must be careful to provide multiple pathways for people to gain access. Matt provides the cautionary example of a brick maker in India whose fingerprints were so worn down that he needed his son to help him provide biometric verification for financial transactions. Protections for customer data rights, from privacy to ownership, are also crucial in promoting inclusive digital financial systems. Matt argues that in countries like the United States, we need a new trust framework to govern data use in the emerging digital economy, helping people better understand and control the use of their data.Please note that the initial interview was recorded prior to the onset of the COVID-19 crisis.
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The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In episode six of Financial Inclusion & Beyond, we spoke with Chris Calabia, the Senior Advisor for Supervisory and Regulatory Policy, Financial Services for the Poor at the Bill & Melinda Gates Foundation. Chris leads the Foundation’s global efforts to promote a regulatory framework that enables digital financial innovation. Previously he was a Senior Vice President and Banking Supervisor at the Federal Reserve Bank of New York.
We sat down to discuss how to drive financial health for the world's poor by improving access to essential financial services through better public policy and regulation. Chris also shared his insights from the Gates Foundation’s efforts to help promote access to financial services among the unbanked, poor and women, especially in lower and middle income countries around the world. Key takeaways from the discussion include:
There has been focus among policymakers, regulators, central banks, and others, to try to improve access to a financial services account in the past 10-15 years. Despite visible progress, there are still 1.7 billion people globally left without access. Evidence suggests that access to financial services can improve economic opportunity for the poor and help them build resiliency against unexpected shocks. Regulation should ensure that providers are able to serve the poor, and welcome new providers such as mobile network operators, fintech companies, and social media platforms into financial services. Gates Foundation research found that countries with functioning digital financial services were far better able to deliver pandemic-related relief to their citizens. One example of digital solutions helping improve efficiency and access is India, where the government has started to digitalize social welfare benefits. Elsewhere, the Gates Foundation has sponsored experiments to encourage digitalizing payroll in Bangladesh and other developing economies. Digital infrastructure, such as digital identification systems, can facilitate various banking functions such as e-KYC and remote onboarding of customers by financial institutions. Other segments of the economy including healthcare providers or the education industry could also benefit from digital identification which will make a huge difference in the lives of the poor.Please note that the initial interview was recorded prior to the onset of the COVID-19 crisis.
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Gates Foundation Leads With Digital Payments In Financial Inclusion InitiativeThe views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In episode five of Financial Inclusion & Beyond, we spoke with Ting Jiang, a behavioral economist who researches and designs products for behavioral change. At the time of this recording, which took place prior to the pandemic, Ting was associated with Duke University's Center for Advanced Hindsight.
We sat down to discuss the way behavioral scientists and product designers can work together to build better financial products that help people take action to improve their financial health. Key takeaways from the discussion include:
Identifying the source of unhealthy financial behavior is a critical step for product designers or policy makers that wish to promote health. While financial literacy is often emphasized as a tool to help low-income populations improve their wellbeing, most poor people understand very well how to manage their money, but there may be other barriers that get in the way. Behavioral science-informed products can help people remember and act upon their good intentions (e.g. to save money or buy insurance) when the complexities and stresses of daily life might otherwise interfere. Technological and human interventions can help bridge the intention-behavior gap. These designs can appear simple but are effective in behavioral change. New technology can also help people better imagine their future selves and the potential unexpected shocks of life, suggesting actions to take right now to build resilience for tough times. The more concrete and tangible the future opportunities or stress scenarios feel to an individual, the more likely they are to take action. Improving the financial wellbeing of a subset of a population can lead to a win-win situation for the individual, their communities, and the financial system. For example, a financial firm helping urban migrant workers in China helps their communities and networks in rural areas, and in turn grows their potential client base.Please note that the initial interview was recorded prior to the onset of the COVID-19 crisis.
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The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In episode four of our series Financial Inclusion & Beyond, we spoke with José Quiñonez, the founding chief executive officer of Mission Asset Fund (MAF) and a visiting professor at UC Berkeley, Department of City and Regional Planning. MAF uses innovative national models for integrating financially excluded, low-income communities into the mainstream.
We sat down to discuss how the formal financial system leaves credit invisible (individuals without a credit background) behind. José discussed how MAF is helping those that have typically been left out get integrated into the formal financial system. MAF is drawing on the rich tradition of lending circles to help the low-income and immigrant communities develop a credit history and join the financial system. Key takeaways from the discussion include:
José draws on his experience and insights from working with the local San Francisco immigrant community and shares his view on how to improve financial inclusion and financial health. Low-income individuals traditionally are secondary users of financial products. Banks and fintechs can ‘meet people where they are,’ by building products to address the primary concerns of the low-income community. The growing awareness of financial inclusion and financial health reflects a broader understanding that there are more systemic issues at play that keep many low-income individuals credit invisible. Having a bank account is only the first step towards financial actualization. For poor people to manage complex financial lives, financial services providers, regulators and non-governmental organizations all need to come up with innovative solutions tailored to specific needs of underserved users.Please note that the initial interview was recorded prior to the onset of the COVID-19 crisis.
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In episode three of Financial Inclusion & Beyond, we spoke with Arjuna Costa, managing partner of Flourish Ventures, a leading social impact fund focused on financial health. Arjuna invests in entrepreneurs around the world to catalyze innovations that help people achieve financial health.
We sat down to discuss the way entrepreneurs are harnessing the power of behavioral economics and customer-centric design to meet the everyday financial challenges of low income populations. Key takeaways from the discussion include:
For too long, financial systems have thought in terms of standardized products that do not always meet the needs of customers or enable their life goals. Challenges common in emerging economies often force individuals to become micro-entrepreneurs out of necessity, spurring demand for new financial solutions. This has led to many innovations that are now coming back to developed countries like the United States. Partnerships between incumbent banks and fintech start-ups can help spread inclusive innovations throughout the financial system, emphasizing the need for banks and regulators to consider how to enable more collaboration. While financial product innovation can do a lot of good, inclusive economic growth and robust social safety nets are essential to provide the steady income streams that support financial health and resilience in good times and bad.Please note that the initial interview was recorded prior to the onset of the COVID-19 crisis.
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In episode two of our series Financial Inclusion & Beyond, we spoke with Greta Bull, the chief executive officer of CGAP (the Consultative Group to Assist the Poor) and a director at the World Bank. Greta is an expert in development finance, primarily focused on small and medium enterprise finance, microfinance, and digital financial services.
We sat down to discuss the history of financial inclusion efforts and the evolution of the financial inclusion movement, the micro and macro effects of inclusion, and lessons learned from various efforts around the globe. Key takeaways from the discussion include:
While global inclusion efforts have taken different paths, they all seem to be converging at the ‘platformization’ of financials services. The modern financial inclusion movement evolved from microfinance in the 1970s and 80s in countries like Bangladesh and reached scale with the creation of digital credit by the mobile network operator (MNO) M-Pesa in Kenya in 2008. Today, fintechs and banks have been competing across a disaggregated landscape of financial services and are moving to new platforms that offer a range of competing services to the public. Financial inclusion has traditionally meant the inclusion in formal financial systems of poor people in emerging markets. Effectively done, it provides access to financial services to people who previously didn't have them; establishes a viable and reliable alternative to working entirely with cash; and adds value to people's lives. Financial inclusion can significantly improve individuals lives. Efforts over the past decade have been effective in bringing 1.2 billion individuals into the formal financial system, but 1.7 billion remain excluded. There is still work to do, both in expanding and deepening inclusion and harnessing these efforts to expand global growth.Please note that the initial interview was recorded prior to the onset of the COVID-19 crisis.
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We’re excited to launch our latest season, Financial Inclusion & Beyond, an exploration of what we can learn from efforts around the world to improve financial inclusion, health, and wellbeing. This is a topic we’ve explored in previous episodes on fintech, and we're eager to ground global insights in the context of our modern challenges amid the COVID 19 crisis and renewed efforts to promote racial equity in the US financial system.
We begin the series with a conversation with our very own San Francisco Fed president Mary Daly. We get into why the Fed cares about financial health and inclusion, how we're engaging and learning from a community of subject matter experts and the general public, and the significant work ahead of us. Key takeaways from the discussion include:
True economic and financial inclusion means everyone has access to the tools that make their lives easier—the ability to meet their daily needs and accumulate wealth for themselves and their families. From the perspective of the broader economy, we all do better when everyone is included and participating. For policy makers, financial exclusion undermines the resiliency of the economy and hinders growth. The COVID-19 crisis has magnified the challenges for those citizens that are not fully included in the financial system. Regulators have historically relied on rules-based approaches to prevent exclusionary behavior, practices like discriminatory “red lining” in mortgage lending that prevented African Americans from buying homes in the 20th. Negating the negative is not enough, however, and regulators need to broaden their mindset to think about how to promote positive change that delivers racial equity in the financial system, drives inclusion, and enables economic life for everyone.Related Content
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We’re excited to share a sneak preview of our upcoming series, Financial Inclusion & Beyond, where we’ll be exploring lessons from around the world on how a combination of public policy and technology can create a more inclusive financial system and promote financial health and wellbeing for everyone. We started recording this before the pandemic, and it’s taken us a little longer to get this to you as we record from home, but the events of the past year have only reinforced to us that this a crucially important topic. Stay tuned for the release of the entire series starting April 15.
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In this episode of our series Rethinking Asia, we spoke with Chad Bown, Reginald Jones Senior Fellow at the Peterson Institute for International Economics. Chad is an expert on trade, having worked on the issue at the World Bank, the White House Council of Economic Advisors, and the World Trade Organization.
We sat down to discuss the recent trade disagreement between South Korea and Japan. While, rooted in the countries’ deep historical, political, and social tensions dating back to the early 20th century, the attitudes and tactics adopted in the dispute reflect broader global sentiments surrounding trade. Key takeaways from the discussion include:
A new front in global trade wars has opened, with South Korea squaring off against Japan. Specifically, the Japanese government put export restrictions on various exports to South Korea and, most recently in early August, removed South Korea from its so called ‘white list’ of countries that enjoy special trade terms with Japan. The move requires Japanese companies to follow a bureaucratic process when exporting to Korea, disrupting supply chains for Korean microchip and display manufacturers that rely heavily on Japanese inputs. Today’s tensions date to the Second World War, when Korea was a Japanese colony and Japanese companies used forced Korean labor. In 1965, the two countries signed a treaty to normalize the relationship under which Japan paid restitution to South Korea. Recently, however the South Korean Supreme Court ruled that the treaty only applied at a country level and that individuals could bring cases against Japanese companies. Japanese export restrictions are seen as retaliation for the decision. The deterioration of the trade relationship between Japan and South Korea reflects current attitudes and trends in trade by which countries are increasingly using trade as a lever to resolve political and social disputes once mediated through diplomatic channels. This dispute reveals that a focus on bilateral disputes may make it harder for countries to form regional or global trade agreements. Prior to the dispute, according to Bown, South Korea was interested in acceding to the Japan-led CP-TPP (Comprehensive and Progressive Agreement on Trans-Pacific Partnership) trade agreement among 11 countries. It is unlikely to follow through in light of current tensions. It is hard to say whether the current attitudes toward trade will upend the trend toward globalization established in the aftermath of the World War II. Recent results are a mixed bag: while high profile cases of anti-trade rhetoric and behavior have garnered the most attention, other countries continue to sign free trade agreements.The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In this episode of our series Rethinking Asia, we sat down with Nick Lardy, senior fellow at the Peterson Institute for International Economics. Nick is one of the world's most prominent analysts of China's economic development and the role of its private sector in generating growth.
We sat down to discuss Nick’s new book, The State Strikes Back: The End of Economic Reform in China? Nick walked us through some troubling statistics about the Chinese private sector’s diminishing role as measured from a number of data sources and qualitative indicators of slowing economic reform. Key takeaways from the discussion include:
The role of the private sector has been significantly diminished over the last decade as indicated by a wide range of data related to access to credit and share of investment, and sector-level growth.
China’s state sector has undergone a massive amount of consolidation, with the number of state-owned enterprises (SOEs) declining by roughly 50%, while at the same time state-owned assets grew five-fold. Despite this consolidation—or perhaps because of the implied reduction in competition it brings—the efficiency of SOEs continues to lag that of private companies by a wide margin.
While Chinese President Xi Jinping has recently indicated the banking sector should direct more funds to the private sector, it remains to be seen whether this state-oriented growth pattern will reverse any time soon.
Should China continue down this path of diminishing support for private sector activity, the implications for long-term growth, employment, and innovation could be substantial. On the other hand, a future downturn in the Chinese economy could make Chinese leadership more receptive to reform-minded economists that argue for better policy support for the private sector.The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In this episode of our series Rethinking Asia, we spoke with Brad Setser, a Senior Fellow for International Economics at the Council on Foreign Relations. Brad also served as the deputy assistant secretary for international economic analysis in the U.S. Treasury and was previously the director for international economics, serving jointly on the staff of the National Economic Council and the National Security Council.
Brad walked us through the evolution and recent trends in cross-border capital flows in Asia. In the wake of the Global Financial Crisis, capital flows were primarily driven by current account surplus countries in Asia, whose governments were investing money abroad to offset appreciatory pressures on their exchange rates. In recent years, however, divergent global interest rates, economic developments, and a search for yield have spawned a complex web of flows across the Pacific. Key takeaways from the discussion with Brad include:
Throughout the post-crisis period, Asia has been a net exporter of capital. The bulk of financial outflows arose through a buildup in foreign exchange reserves among Asia’s current account surplus economies, though movement out of Japan was also driven by private investors seeking higher yield in a zero-interest rate environment. Immediately after the crisis, China experienced significant capital inflows. This reflected China’s gradual liberalization of its financial account. Comparably higher interest rates in China led to a growing carry trade, but these inflows reversed sharply in 2015 as the economic outlook deteriorated. In recent years, however, flows have stabilized as China restricted outflows and entered a modest economic recovery. Capital inflows into emerging Asia have generally followed global investors’ interests in emerging market exposure more broadly. While bank flows were a major component of pre-crisis inflows to the region, regulations have changed to limit banks’ short-term and foreign currency exposure compared to the pre-crisis period (though China is a notable exception). Portfolio flows into the region have taken on a greater role post-crisis. Across Asia, financial institutions increased purchases of offshore assets in a search for yield as the Fed began rate normalization. The biggest shift in trend over the past five years has been the rise of private capital flows, assuming the dominant role of official flows immediately post-crisis. The ongoing trade dispute has had a relatively minimal impact on regional capital flows, particularly when compared to the tumultuous effect of China’s exchange rate adjustment in 2015. U.S. tariffs have put downward pressure on the yuan, which in turn put regional currencies under pressure. Rising production costs in China have raised the appeal of neighboring economies, and could lead to rising foreign direct investment in other Southeast Asian nations. Funding mismatches among the Asian financial institutions is a growing vulnerability. In particular, growing dollar balance sheets in Asia have become an important source of funding for the U.S. economy and recall the experience of European banks pre-crisis. This risk is mitigated somewhat by large reserves in surplus countries and international swap lines, but the systemic implications of the global network of funding demand greater attention.The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In this episode, we continued our ongoing series on fintech in Asia with Toshio Taki, the co-founder of Money Forward, a Japanese fintech firm that provides financial management tools for individuals and small businesses. In addition to his role at Money Forward, Toshio also serves as a director of the Japan Association for Financial APIs, promoting the use of open APIs (application programming interface) in Japan.
Toshio talked us through the open banking and API landscape in Japan, highlighting where recent changes in regulation are encouraging further development, and comparing Japan to global peers in this area. Through his work both at Money Forward and with the Association, Toshio is pushing for greater adoption and integration of financial technology services among Japanese clients, and looking in particular to help draw Japan’s economy away from its heavily cash-reliant systems.
Roughly 80 percent of all consumption in Japan is cash-based, placing Japan as a distinct outlier relative to other developed economies. One of the key factors for Japan’s high dependence on cash is the lack of a dominant electronic payment network that is universally accepted in Japan. Compared to China’s Alipay and WeChat Pay, for example, Japanese providers are fragmented and lack merchant integration. Japan’s Banking Act was amended in June 2018 to promote open banking. However, the regulation lacks clarity on data portability, and implementation of open banking components among Japanese companies remains voluntary. Nonetheless, roughly 130 chartered banks in Japan among the largest 140 have plans to open up APIs by mid-2020. In its early stages, there are already around 20 Japanese companies using open APIs to provide account information services. Personal finance and corporate accounting services are expected to be significant beneficiaries of open API. Other opportunity sectors will likely include peer-to-peer payment platforms and the development of personal electronic money accounts. Standardizing bank practices and data formatting across different countries remains a challenge. In part, this reflects the local nature of API development and lack of cross-border services driving international collaboration. This multiplicity is evident even in Japan by itself, where a handful of system vendors have created multiple standards around API infrastructure. Rather than rushing to standardize, however, now may be the optimal time to let early movers experiment and learn what works well and what doesn’t. Fintech development in Japan is happening quite differently from the way it is evolving in the United States. The U.S. model is based on small disruptors creating a very successful user experience and using this base to alter specific banking functions. In Japan, by contrast, fintech development is occurring in partnership with the larger, more traditional providers. In part, this reflects the difference in Japan’s credit landscape, where households are generally happy with current banking services and SMEs have not faced credit constraints the same way U.S. businesses have post-crisis. Looking forward, financial services and the banking sector writ large are expected to face major upheavals. For Japanese banks, the transition away from cash will transform the way they attract customers, shifting the major attraction of local banks from their ATM proximity to how exciting their apps are and their exclusive product offers. In addition, a new credit cycle in Japan could usher in novel credit channels – similar to the way peer-to-peer lending was catapulted forward in the U.S. post-crisis to fill the gap left by traditional credit providers.The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In this episode, we continue our ongoing Rethinking Asia series with Louis Kuijs, the head of Asia Economics at Oxford Economics. His background includes a particular focus on China, reflecting experience in both the public and private sectors covering banking, macroeconomic, and policy issues in the world’s second largest economy.
We spoke with Louis about the ongoing trade tiff between the United States and China. He shared his thoughts on the regional economic and structural effects of evolving international trade patterns, China’s path to further integrating into the global financial system, and consequences for the broader U.S.-China relationship from the trade dispute fallout.
The mood in the U.S.-China trade talks has seen some improvements as progress is being made. More broadly, the ongoing trade dispute reflects the change in American mentality; in the U.S., the narrative on U.S.-China relations has shifted from cooperation to rivalry. When measuring the near-term effects of the U.S.-China trade tiff, the impact on business confidence is often overlooked. Indeed, the effect of uncertainty could be larger than the direct impact of the tariffs via weaker exports and higher prices. Over the medium term, however, the trade dispute may have much larger effects via a global reconfiguration of supply chains and growing underlying tension between the U.S. and China which is centered on technology. While China serves as a well-known hub in the global supply chain, Chinese demand and China’s rapidly growing role as a destination for imports have been major drivers for regional trade. Tariffs will ultimately result in a net loss for regional trade partners by reducing Chinese growth and demand. Gains in trade for partner countries associated with receiving relocated production facilities, for example, will likely be overwhelmed by slower growth. Despite the U.S.-China dispute, appetite for free trade agreements in Asia remains strong. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which came into effect on January 1, includes greater flexibility in several provisions relative to the TPP version. Another regional agreement, RCEP, can potentially add an additional layer or extension of trade liberalization that compliments CPTPP. Over the longer term, China’s stated liberalization objectives have implicit contradictions. On the one hand, policymakers plan to continue taking steps to open up the country, further integrating China into the global economy and financial system. On the other hand, policymakers have underscored their commitment to maintain China’s current model, whereby the Party remains at the heart of economic decisions and state-owned enterprises have a central role.The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In this episode of our series Rethinking Asia, we spoke with Ken Hokugo, head of Corporate Governance and the director of Hedge Fund Investments at Japan’s Pension Fund Association, which manages more than $120 billion in assets. Ken is also a globally recognized expert on and strong advocate for Japanese corporate governance reform. The opinions expressed by Ken in the podcast are solely his and not those of his organization, the Pension Fund Association.
Ken discussed some of the challenges that Japan faces implementing corporate governance reform. Notably, the practice of cross-shareholdings and the lack of truly independent directors sacrifice corporate success for management stability and dampen investor confidence in Japanese stocks. Ken discusses how cross-shareholding, among other practices, is entrenched due to a host of historic and structural factors. Some of our main takeaways from our exchange with Ken include:
Poor market performance among Japanese stocks suggests a failure to create value and a lack of management accountability. Combined with a refusal to heed international investor concern, this has led to a lack of enthusiasm for Japanese stocks on the part of foreign investors in the past few decades. The use of cross-shareholding, which is common in Japan, is often cited as the poster-child for Japan’s need for corporate governance reform. Cross-shareholding refers to the practice whereby a web of companies hold significant quantities of each other’s shares, on the promise that each will vote to approve management initiatives. Holding cross-shares has origins among keiretsu, conglomerates that dominated Japan’s modern economic development. In post-World War II Japan, keiretsu used the practice to provide capital to companies involved in Japan’s re-industrialization. While the conglomerates were dissolved under government law, the practice of cross-shareholding remains, in many cases prizing management control over corporate success. The appointment of independent directors to corporate boards is relatively new in Japan. A small group of appointed “independent” directors monopolizes the position for thousands of companies and remains beholden to management in most cases. There are only a handful of reform success stories taking root in Japan. Beyond this, Ken believes collective engagement of domestic and foreign investors can help change corporate behavior.The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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In this next episode of our series Rethinking Asia, we pick up where we left off last episode looking at the role of debt in China’s economy. We spoke with Charlene Chu, a senior partner for China macro-financial research at Autonomous Research, an independent research firm. Well known for her analysis of China’s shadow banking industry, Charlene previously was a senior director covering Chinese financial institutions at Fitch Ratings.
Charlene gave her assessment of the recent rise in Chinese debt and why she thinks a painless deleveraging is unlikely. While China has implemented some reforms in recent years, it has mostly avoided deleveraging. Previously, China relied on a high deposit base to support credit expansion, but new credit consistently outstrips deposit growth making the levels of credit growth unsustainable. Some of Charlene’s main takeaways include:
China’s debt-to-GDP has increased by nearly 150 percentage points since the Global Financial Crisis, accompanied by a $30 trillion increase in the banking sector. While other countries have experienced large increases in debt-to-GDP before, the size and scale of China’s economy makes the growth alarming. The vast majority of China’s debt is in the corporate and property sectors. China has also experienced a run up in consumer debt over the last few years, but, currently there is no concern in households’ ability to service the debt. One of the most troubling aspects of China’s debt problem is the surge in the more opaque and less regulated shadow banking sector. However, the merging of two regulatory bodies should reduce some of the regulatory arbitrage that has allowed off balance sheet lending to grow. While a financial crisis is not preordained, Charlene dismissed the prospects of a “beautiful deleveraging.” Any attempts to deal with China’s debt burden will require hard decisions, including shuttering less productive companies by forcing them to realize losses, reining in shadow banking, capping credit growth, adjusting lending rates to account for risk, and accepting lower levels of GDP growth.The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.
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