Two of Japan's largest banks, Bank of Tokyo-Mitsubishi ($970 billion in assets) and Sumitomo Mitsui Financial Group ($860 billion in assets), are vying for control of UFJ ($751 billion in assets). The winner may achieve scale advantages in serving its customers, as well as an edge in providing outsourced services to Japan's smaller, regional banks.
All three banks have formed partnerships with technology companies: Bank of Tokyo-Mitsubishi with IBM Japan; UFJ with Hitachi; and Sumi-tomo Mitsui Financial Group with NEC. In each case, the partnership includes a technology transfer from the bank to the technology provider, with plans to market that technology to smaller banks.
To serve Japan's domestic banking market, IBM Japan created a subsidiary last year to offer regional financial institutions banking software licensed from Bank of Tokyo-Mitsubishi. Similarly, in July '03, UFJ and Hitachi entered into an IT outsourcing agreement, by which UFJ Bank's software assets would form the core of a modular computing system for banking.
But, if Bank of Tokyo-Mitsubishi and UFJ were to merge, the status of the UFJ-Hitachi deal would be unclear. "The merged bank will be concerned with eliminating redundancies, which is likely to have far-reaching implications for their suppliers, as well as for their own plans to sell technology to other [financial institutions]," says Neil Katkov, a Tokyo-based senior analyst for Celent Communications (Boston).
Most recently, NEC created a subsidiary, N&J Financial Solutions (NJFS, Tokyo), that will offer technology to financial services organizations, including solutions for IP networking, core computing, CRM, business intelligence and data warehousing. Additional financing was provided by Sumitomo Mitsui Financial Group's banking arm, Sumitomo Mitsui Banking Group, and its IT subsidiary, Japan Research Institute.
The company's 330 employees consist of 190 people brought over from Sumitomo Mitsui Financial Group, who will concentrate on sales and marketing, and 140 from NEC, including the company's new president and CEO, Shin-ichi Yabe. "The company has a unique business core - IT know-how and business know-how," he says.
One of the primary areas of focus will be moving regional banks onto IP-based networks. "The traditional network environments need to be shifted to IP and broadband," says Yabe.
NJFS also offers two core banking solutions to its potential customers. The first is NEC's "BankingWeb21," which is geared toward smaller financial institutions. But the venture will also offer larger banks the core banking system used by Sumitomo Mitsui Banking Corp. itself. "We're able to provide SMBC's core banking system to Japan's banks, and to any other country's banks," Yabe says. Indeed, NJFS has launched deals with sales partners in the U.S., Korea, Singapore, Taiwan and mainland China.
NJFS has also formed an alliance with Decillion Solutions Group (Singapore), which provides outsourced SWIFT service bureau services to financial firms in Southeast Asia. Decillion was acquired by NEC Solutions Asia Pacific in early August. By using an outsourced service bureau to connect to SWIFT, financial institutions in the region can begin exchanging messages and trades with SWIFT's global community at a low start-up cost, Yabe notes.
At the moment, NJFS and the IBM Japan venture are running neck-and-neck. "These two are pretty evenly matched in terms of their market presence ," Katkov says. "The main competitive differentiator may well turn out to be commitment to the market."
Given the challenges faced by Japan's regional banks, lowering costs through IT initiatives has become a priority. According to a short-term economic survey by the Bank of Japan, Japanese banks will spend $22.4 billion on IT investments from 2004 through 2006, about 14 percent more than last year's level. Of that total, approximately 37 percent is expected to come from "tier two" and "tier three" regional banks.