Japan Net Bank“Japan’s First Internet Only Bank”

Hayriye Gönenli & Melike Yılmaz20 May 2010 – Boğaziçi University

• AGENDA:I. IntroductionII. Company Background

a. Profiles of Shareholdersb. Business Principlesc. Servicesd. Organization and IT System

III. Industry Backgrounda. The US Online Banking Experienceb. New Banking Regulations in Japanc. Consumer Banking in Japan

IV. Targets and Competitorsa. Results and Targetsb. Competitors

V. Strategic Issuesa. Alliancesb. Scalability vs Investment

VI. A thorny Path to a Golden LandVII. Questions and Answers

Japan Net Bank

I. The Introduction:– Yoshiyuki Miyai wanted to establish a completely

new standard of banking in Japan – that of Internet-only banking.

– As president of JNB, the first Japanese online bank with no physical branches, Miyai emphasized that customer satisfaction should be the focus of JNB’s business

– The customers should enjoy convenient access to accounts, competitive rates, customisation and secure transmission of information over the web.

Japan Net Bank

II. The Company Background:– July 1999, Sakura Bank, a major Japanese Bank,

and Fujitsu, an electronics giant, announced their plan to create an Internet-only bank

– Sept 2000, JNB was established with capital of US$167 mio.

– Oct 2000, JNB began its operations– The senior management of JNB consisted of 5

directors, including the president, Yoshiyuki Miyai.

Japan Net Bank

II. The Company Background:a. Profiles of Shareholders:

Sumitomo Mitsui Banking Corp. (60%stake): The result of merger btw. Sumitomo Bank and Sakura Bank, SMBC is among the largest banks in the world with commercial and investment banking services

Fujitsu Limited (10%stake): The company is one of Japan’s top two PC makers and a leading maker of servers, software, storage devices and peripherals such as printers and scanners. Its IT services include systems installation and management.

Japan Net Bank

II. The Company Background:a. Profiles of Shareholders:

Nippon Life Insurance Co.(10% stake): The world’s third largest insurance company. Its products include individual and life insurance products.

Mitsui & Co. Ltd.(5% stake): Japan’s largest general trading company and act as a go-between for buyers and sellers who imported and exported goods. One of its subsidiary is Curiocity Internet Shopping Mall and DoCoMo AOL, an internet access provider with 500.000 subscribers.

Japan Net Bank

II. The Company Background:a. Profiles of Shareholders:

Nippon Telegraph and Telephone East Corp.(5% stake): NTT East is the regional telephone companies in Japan. The parent company NTT Corp. İs the largest telecommunications company in Japan.

NTT DoCoMo, Inc. (5% stake): NTT’s wireless subsidiary with paging, maritime and in-flight phone services and wireless internet service, i-mode.

The Tokyo Electric Power Co.,Inc. (5% stake): World’s largest private electric power company also with telephony and Internet services.

Japan Net Bank

II. The Company Background:b. Business Principles: An Internet specialised bank with

customer centric principle. JNB characterizes its financial services by 4C’s:

Convenient: Seamless financial functions and 24/7 accessibility. Multiple access channels with ATMs and i-mode

Competitive: Attractive interest rates and fees Customised: Every customer has her own specific info page in

the web. They can receive email notifications of transactions details.

Confidential: JNB customers’ private info is strictly secured, it can’t be used w/o customer’s agreement. Info transferred through the network is encrypted. The database and servers storing the info are protected by a firewall and an access surveillance system.

Japan Net Bank

Japan Net Bank

II. The Company Background:c. Services: JNB’s staple services include ordinary

deposit, term deposit, money transfer, small-size consumer loan, cash card and credit card. It’s access channels include the Internet, dial-up, mail order, telephone, ATMs and i-mode mobile internet service. The only physical channel is the JNB Head Office in Tokyo. Deposits and withdrawals of cash can be carried out through ATMs or the Head Office.

Japan Net Bank

II. The Company Background:d. Organisation and IT System: JNB maintains a

flexible, team-like structure. It has a very low cost base. 3 departments: Planning, IT and salesFlexible and open IT system with Fujitsu. It can be divided into 3 parts, as normal banking IT system, like an accounting and loan system; management information system, including customer relationship management; and multiple channel customer interface.

III. The Industry Background:a. The US Online Banking Experience:

March 2000, 97 US Banks had fully transactional Web sites. October 1995, the first internet-only bank in the world, Security

First Network Bank, was started in US. Pure Internet start-ups were expected to have lower operation

costs because they didn’t need to have physical branches and they save operating costs by reducing inefficiencies of paper drawn transactions, mothyly statements, credit card statements and bills.

But they were lacking brand recognition and physical presence In early 2000s, net-only banks weren’t doing well ,they had only

200.000 customers. Only 9.4 mio people had ever banked online, and of those 3.1 mio had discontinued the service mainly due to too time consuming to use and poor customer service.

They also suffered from massive advertising feesand finally some had been incorporated into banks that initially established them, while others teamed up with other banks.

Japan Net Bank

III. The Industry Background:b. New Banking Regulations in Japan:

1997, Japan government began the famous “Big Bang” deregulation of the financial market; one of the resulting measures was that non-bank companies could become significant partners in financial ventures.

Prior to that, the country had not issued a new bank licence for almost half a century.

Among the new banks that appeared as a result were those that only had an internet presence and JNB was first of its kind to start operations.

Sony Group and the retail giant, Ito-Yokado, were due to open Net Banks in mid 2001.

New banks in Japan were required by the authorities to make a profit within 3 years. JNB planned to meet the requirement through acquiring 1 mio accounts in three years.

Japan Net Bank

III. The Industry Background:c. Consumer Banking in Japan:

– Average deposit per person as $47000

– 125 million people living in Japan

– Low interest rates :– 0.02 % - ordinary deposits– 0.1 % - term deposits

– Low credit card usage because of – Culture– Inflexible payment terms– Poor marketing

Japan Net Bank

III. The Industry Background:c. Consumer Banking in Japan:

– Customers prefer payments by cash or money transfers

– Therefore ATMs are very important

– Less than 50 % Internet penetration as compared to USA

– High popularity of i-mode: internet service allowing internet functions to be carried out via handsets

Japan Net Bank

IV. Targets and Competitors:a. Results & Targets:

Japan Net Bank

IV. Targets and Competitors:a. Results & Targets:

– Main source of profits as interest on loans

– Has very challenging targets

– Confident since it will not repeat the failures of its US counterparts with the help of

– Widely distributed ATMs– Efficient and advanced money transfer system in Japan

Japan Net Bank

IV. Targets and Competitors:b. Competitors:

– Brick and Morter Banks– Traditional ones with dealing customers face to face– Favored by conservative culture of Japan– Variety of value-added services– More and more ATMs and online banking options– High operating costs

– Sony Bank– Internet-only bank– Shareholders as Sony Corp, SMBC and JP Morgen Chase&Co– Very similar strategies with JNB

Japan Net Bank

IV. Targets and Competitors:b. Competitors:

– IY Bank– Internet-only bank based on ATM usage– Alliances with Ito-Yokado supermarkets and Seven Eleven

convenience stores- ATMs there– Ito-Yokado business group as a major shareholder– Benefiting from the customer base of that group– Alliances with major commercial banks in Japan for the ATMs

– eBank– Internet-only bank– Specialized in payments for small value purchases– Charges lower commissions

Japan Net Bank

V. Strategic Issues:a. Alliances:

Japan Net Bank

V. Strategic Issues:a. Alliances:

– As Miyai explained it by saying that“It could be possible without alliances, just to start the bank

itself... But it would have been difficult to broaden or expand the business by leveraging the alliances’ customer bases”

– Important for– Increasing customer bases– Low marketing expenditure

Japan Net Bank

V. Strategic Issues:b. Scalability vs Investment

– Unpredictable customer behavior on the Internet– Successful marketing may boost demand– Customers still expecting high service quality

Leading to need for:– Scalability– Accurate demand forecast– Wise investment

Japan Net Bank

VI. A Thorny Path To A Golden Land

– Competition from traditional banks as well as other new comers

– Need for IT systems and HR that are ready for demand flactuations

– Make use of its alliances

Japan Net Bank

VII.Questions and Answers:– Question 1: Explain the IT system of Japan Net

bank.– Answer 1: The IT system of JNB is flat and open. It

can be divided into 3 parts, as normal banking IT system, like an accounting and loan system; management information system, including customer relationship management; and multiple channel customer interface.

Japan Net Bank

VII.Questions and Answers:– Question 2: Explain why scalability is an important

issue for internet-only banks as well as other online companies?

– Answer 2: Customer behavior on the Internet is unpredictable. Demand may increase dramatically in a case of good marketing campaign or good company news. Company’s IT and HR structures may have difficulties in coping with the increasing demand and customers may still expect high quality service. To prepare for such a scenario company’s operations should be scalable.

Japan Net Bank

Questions?

Thank you !!