The term fintech is an abbreviation of Finance + Technology. Therefore, theoretically, two contexts can be considered in interpretation. One is the context of "finance changing technology," and the other is the context of "technology changing finance." However, since the former concept of "finance changing technology" is considered to have no meaning beyond the notion that money flows to excellent technology, we will consider fintech here in the context of "finance being changed by technology." The general public interpretation is likely similar.
 

Therefore, the first point that needs to be confirmed is what finance is. In other business domains, it is often difficult to define one's own business domain in the first place, but regarding finance, as it has been a subject of economic research since ancient times, relatively clear definitions exist academically. In this column, we would like to analyze fintech by taking an approach of reconfirming the functions of finance according to such general definitions of finance, and then examining what impact technology can (or cannot) have on each function.
 

■What is finance in the first place?
 

Finance is economic activity that facilitates funds from economic sectors (economic entities) with surplus funds to economic sectors (economic entities) with funding shortages. Among economic entities, there are always funding shortage sectors and surplus fund sectors, with the overall relationship being balanced between shortage and surplus. Therefore, the role of finance is to facilitate funds from surplus fund sectors to funding shortage sectors, maximizing the fund efficiency of the entire economy.

■Types of finance by function

Next, let us classify finance by function. In this case, finance is classified into just two types. This is what is called MECE in consulting terminology, and there are no others. Specifically, there are two types: whether fund providers indirectly assume the economic fluctuation risks of fund recipients (indirect finance), or directly assume them (direct finance).

■Classification organization of indirect finance and direct finance.

Now, let us organize indirect finance. In indirect finance, since fund providers only bear risks indirectly, institutions are needed to assume the risks of fund recipients on behalf of the providers. These are financial institutions, with commercial banks being representative financial institutions. The intermediation function refers to commercial banks standing between fund providers and recipients, bearing risks while mediating these relationships, and is the most important function of commercial banks.
 

This intermediation function of commercial banks consists of the most important function mentioned first, the "risk-bearing function," and the "information production function" and "asset transformation function" that support it. (For details of each function, see the figure below) Also, banks have the "settlement function" that provides various payment methods to society based on sufficient funding volume and credit. Furthermore, the credit creation function, which expands deposit currency through the credit creation process, is also one of the very important functions of banks. (Credit creation is somewhat complex and not very relevant to the purpose of this article, so detailed explanation is omitted)

In contrast, in direct finance, since fund providers directly bear risks, institutions that carry direct finance do not exist in an essential sense. (If we must say, individuals and companies themselves as fund providers become the institutions that carry direct finance) When these are organized and summarized, they appear as shown in the figure below.

■Functions of securities companies

As such, "institutions" that carry direct finance do not exist. However, it goes without saying that securities companies play an important role in making direct finance functions (market functions) work. Therefore, in this column's examination of fintech, "functions of securities companies" are treated as equivalent to "functions of finance." Accordingly, when we organize the major businesses (functions) of securities companies, they are as follows. (For details, see the figure below)



 

■Transformation of financial business brought by technology

With this, the organization of "functions of finance" is complete. Now we enter the main topic. So, how can indirect finance businesses mainly carried out by commercial banks, or direct finance businesses mainly carried out by securities companies, be replaced (or not) by emerging companies utilizing technology (fintech ventures)? To consider this, first, let us organize and link the major business domains of fintech ventures that are currently attracting attention in Japan or worldwide with each function of finance.


 

When organized in this way, it becomes clear that fintech ventures are already developing businesses in both indirect finance functions and direct finance functions. However, on the other hand, it was found that regarding the "risk-bearing function," which is the most important function of indirect finance, fintech ventures that have this as their main business do not yet appear to exist. Since the credit creation function of banks is premised on having a risk-bearing function, fintech ventures with credit creation functions also do not exist.

Setting aside the examination and interpretation of this for a moment, next we analyzed to what extent fintech ventures are replacing the functions of securities companies. (Here, businesses of companies recognized as fintech ventures that are not classified as indirect finance, direct finance, or direct finance-related businesses are organized as "fintech venture business domains of other finance-related functions.")

Looking at this, among the functions of securities companies, the areas where fintech ventures are particularly attracting attention seem to be quite concentrated in areas such as investment advisory, portfolio advice, and investment management services utilizing artificial intelligence. Also, venture companies that conduct businesses such as proprietary trading and brokerage trading in the primary market using AI appear to be increasing. (However, this is an area that securities companies have been working on for many years) On the other hand, fintech ventures that are encroaching on traditional securities company businesses such as underwriting and distribution barely seem to exist.

■Is fintech a buzzword?

The risk-bearing function, which is the core function of indirect finance, requires the scale and strength to collect funds from a larger number of depositors and lend them out as larger-scale loans. And what supports this is, needless to say, credit based on long-term transactions, which is the most important management resource.

The large-scale asset transformation function of collecting deposits from millions of depositors, maintaining a certain reserve requirement ratio, and executing loans of hundreds of billions of yen, sometimes trillions of yen, is the greatest mission of indirect financial institutions, and this requires not only the accumulation of technology, but also overwhelming business scale and credit information accumulated over many years (credit big data?). Can these be easily obtained by fintech ventures?

Also, among the major businesses of securities companies, fintech ventures barely seem to exist yet in primary market businesses. Furthermore, algorithmic trading and artificial intelligence trading are the very expertise that securities companies have already cultivated over many years, and it can also be considered that customized versions of these for individuals have recently emerged (not completely new innovations).

So is fintech a buzzword and a "devil's temptation" that creates a bubble without substance? I personally feel that this is also different. Currently, indirect financial institutions including Japan's commercial banks cannot increase their loan balances as desired. On the other hand, there are still many economic entities, particularly small and medium-sized enterprises, that are experiencing funding shortages, and it is difficult to say that the original function of finance—intermediating between surplus fund sectors and funding shortage sectors to enhance the fund efficiency of the economy—is being fulfilled. Various causes can be considered for this, but if such gaps exist in the market and existing players cannot resolve them, it is inevitable that new players will emerge.

Based on this current understanding and the ambitious efforts of various fintech ventures, we have organized the "5 Unstoppable Trends by IGNiTE" (our company's hypothesis) in the fintech domain. Based on such predictions, we would like to continue monitoring fintech trends going forward.