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Appendix Summary of Issues

Call for Opinions and Information

April 21, 2016

The Study Group on the Integration of Industry, Finance and IT (Study Group on FinTech) has thus far held 10 meetings. At the meetings, it discussed the potential of FinTech for creating innovation, new industries, and capital flows that grasp the global trends, and exchanged views on related challenges in policies and measures.

Furthermore, at the meetings, the Study Group held dialogues with a variety of players and experts in the fields surrounding FinTech, and advanced discussion in an omnibus form in which participants were not fixed members but rather invited by subject each time, so that the study group would be able to examine the current trends in the field from multidirectional perspectives.

Through the discussions thus far, the following issues have been identified. In order to further deepen the analysis and examination of these issues from an even wider perspective, we would like to call for information and opinions related to each issue from relevant parties in Japan and abroad.

* We also welcome the provision of evidence (facts and analysis such as data and case examples).

[Project plan] Further deepening discussion and analysis (to be reinforced by the opinions and information submitted), the Study Group will formulate a final report by early summer of 2016. Note: Please refer to Reference 1 illustrating the project plan. [Providing information] This is an official call by METI for information and opinions on the issues in Appendix which sort issues into 11 areas. Note1: Information on a limited scope of issues will also be acceptable. Note2: We also welcome the provision of evidence (facts and analysis such as data and case examples). - Closing date: Monday, May 23, 2016

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- Submitting information: Please send relevant information via e-mail or post to the following address.

E-mail: fintech@meti.go.jp Postal Address: Secretariat of the Study Group on FinTech Industrial Finance Division, Economic and Industrial Policy Bureau, METI 1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-8901

[Other information] - Please provide the information by e-mail or post and include your name, address (in the case of a company or association, please provide the name, name of a representative, and principal office address) and other contact information (your telephone number and e-mail address). If necessary, METI may inquire about the details of the submitted information. - Please note that the name and reference information submitted may be published, excluding address and private contact information. - If you do not wish to publish the submitted information or wish to remain anonymous, please inform METI of this fact with the reference information submitted. [References] Reference1: Project plan Reference2: Summary of Minutes of the Study Group on FinTech

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[0] Structure of the 11 Issues The 11 issues identified in the Study Group are as follows.

[1] The scope and significance of review of FinTech

“FinTech” is a term combining “Finance” and “Technology.” It is understood as a movement embodying innovative financial services generated using technologies including IoT, big data, and artificial intelligence, significantly changing the state of finance and money flow.

FinTech businesses are generating innovation that fills the gap between the new needs among users and existing financial services in the context of losing confidence in banks triggered by the recent financial crisis and the development of IT. The fields they cover are wide-ranging, including settlement/money transfer, family budget management, corporate accounting, asset management, capital raising, lending, and insurance. As technologies worth noting, there are block chain, artificial intelligence, big data, and so on.

In addition, FinTech not merely promotes the development of IT in financial services but also has a significant impact on society. It is expected to (1) bring about a revolutionary change in industry structure/system and value creation mechanism in financial services, and (2) provide new value through digitalization while expanding opportunities of financial services to the users .

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In considering the impact FinTech will have on the economy and society and measures to cope with it, it is necessary to understand international experiences, their background, and causes. It is also important to recognize the specific (social) challenges and cultural differences between countries (Japan and other countries in particular) in examining the scope and significance of FinTech.

Please provide reference information and opinions related to the following.

① What impacts and significance of FinTech in terms of economy and society should be focused on (companies, policies, regulations etc.) in particular from the global perspective, and what should be considered to cope with them?

② In particular, how should the impacts and significance of FinTech be understood in the context of Japan? What are the social issues and consumer needs that should be taken into consideration to understand them?

③ How should the time-frame be considered in which FinTech has a large impact on society?

[2] Environment and background surrounding FinTech As the environment and background surrounding FinTech businesses, it has been pointed out that there are (1) changes in expectations among consumers for financial services triggered by losing confidence in existing financial institutions after the recent financial crisis, (2) emergence of players who utilize state-of-the-art IT and offer services which can meet the expectations of consumers. More specifically, these include (3) the environment where a new player/service can reach out to customers relatively easily, along with changes in the lifestyle of consumers and the dissemination of smartphones, and (4) the dramatic decrease in costs for development and provision of services with the dissemination of cloud services and the development of API.

Please provide reference information and opinions related to the following.

① (from the global perspective) What are important factors in terms of the environment surrounding/promoting FinTech business? What are

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challenges to overcome and potential/realized needs to consider? Market needs, characteristics of consumers, business trends, technology,

infrastructure, financial conditions, government policy, etc. ② What are the particularly important points in terms of the environment

surrounding FinTech businesses in Japan?

[3] B to C FinTech services in the B to C (Business to Consumer) sector focus mainly on providing financial services in a less expensive and more convenient fashion by utilizing innovative technology and business models. The Study Group discussed digitalization and the potential for new business creation in various fields including personal financial management (PFM), asset management (e.g., robo-advisor), settlement/money transfer, P2P lending, crowd funding, and insurance utilizing telematics technology and wearable devices. In relation to these services, Japanese households’ very high portion of cash and

deposit and low rate of investment in household asset portfolios were pointed out as an important issue. It was discussed that there are needs to simplify procedures to open an account for DC/NISA, to improve financial education, and to standardize data format. The importance of making efforts to win the trust of clients through measures such as the protection of personal information and consumers was also pointed out.

Please provide reference information and opinions related to the following.

① What kind of changes will the provision of BtoC FinTech services such as household asset management, settlement/money transfer, P2P finance and insurance bring to the flow of funds? In particular, what movements in which sectors should be focused on? Why? What are important movements in BtoC FinTech from a global

perspective? What are the expected changes from now on, and what are the problems to be solved?

What are important movements in BtoC FinTech in the context of Japan? What are the expected changes from now on, and what should the government and companies consider in order to best cope with these

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changes? Can FinTech resolve problems in the fund flow in Japan? If so, what are

the challenges towards its realization?

[4] B to B Some business targeted (B to B) FinTech services mainly to serve SMEs (small and medium-sized enterprises). The major challenge for SMEs in Japan is to cope with labor shortage and to improve productivity. There is an expectation that FinTech may offer a means to overcome such challenges. On the other hand, there are also problems, such as lagged digitalization as shown by the low use rate of online banking and electronic certificates necessary for completing administrative procedures online. Overall, paper-based operation in many SMEs was pointed out as a major obstacle to exploit the potential benefit of FinTech services.

Problems in fund-raising especially by SMEs are also pointed out. It is difficult for startup companies to obtain credit and raise necessary funds for operation.

It is expected that FinTech services will provide solutions to these problems, through increasing the efficiency in back office operations, improving the fundraising environment and coping with the diversification of payment methods. For instance, the introduction of the automation and speeding up of accounting work (such as sorting, bookkeeping, and the clearance of debts and credits) through cloud accounting, etc. and of payment agency services (card payment services using smartphones, etc.) facilitates the acceptance of various payment methods such as using credit cards. Further, with credit decision making utilizing dynamic data such as daily transaction information, it becomes possible to meet the needs for capital, including that for the working capital of SMEs without a long history of business. On the other hand, it was also pointed out that FinTech is something to provide a tool, but it is important to ensure the accounting system of companies and capital policies of the companies to make use of such tools.

Please provide reference information and opinions related to the following. It is expected that the utilization of FinTech can improve work efficiency and

quality and facilitate fund-raising. What are the challenges for companies (SMEs, in particular) to enhance the possibility of business management

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innovation? What are the obstacles to the realization of innovation? What are the current situation and challenges companies, in particular

SMEs, are facing in their business management, capital management and fundraising from a global perspective?

What are the current situation and challenges Japanese SMEs are facing in particular?

In which fields will FinTech have the largest impact on companies’ business management innovation?

What are challenges toward the realization of business management innovation through using FinTech?

[5] Competition and cooperation between the existing financial institutions and startup companies

Regarding the customer services and information systems of existing financial institutions, the Study Group identified the current structures where it is difficult to make agile reactions. Meanwhile, the characteristic of startup companies is to provide services promptly at low cost by specializing in certain fields. However, it was also pointed out that entry barriers are traditionally high in fields related to savings and core systems of the banking sector.

As for the relationship between existing financial institutions, startup companies and companies in non-financial sectors, the Study Group identified several types of cooperation. They include (1) the improvement of customer convenience with limited and complementary use of FinTech by existing financial institutions, (2) the establishment of an ecosystem related to FinTech startups, (3) the promotion of open innovation through cooperation with other business categories, and (4) cooperation such as building a platform with the existing financial institutions. The provision of API by existing financial institutions was given as an example of cooperation.

On the other hand, there were also opinions pointing out that a competitive environment is a prerequisite for any cooperation, and it is necessary for each player to find business rationality in enhancing such cooperation.

Please provide reference information and opinions related to the following.

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What is most important regarding the cooperative (and competitive)

relationship between existing financial institutions, FinTech startups and companies in other (non-financial) business categories? What kind of relationship is desirable for promoting innovation, and what

is necessary to establish an environment therefor?

[6] Utilization of information Recently, diverse information has been collected, shared and coordinated with the utilization of big data, which will create additional value and change the industrial structure. For example, there are loan providers utilizing dynamic data such as payment information, and insurance services elaborating their assessment of accident risks using various kinds of dataset. In the Study Group, the results of an experimental project of financial EDI (Electronic Data Interchange) were presented where the effects of information collaboration are verified.

Information security and personal information protection are raised as important issues. More in-depth discussion is called for on the prerequisites of information collection and sharing, such as who owns the information and the scope and depth of sharing. Further, issues such as the review of the handling of personal information, striking the balance between security and convenience in data utilization were discussed.

Please provide reference information and opinions related to the following. Emergence of new business models is expected through the utilization of

(financial) information. What are the important factors in handling and utilizing financial information, the current state of FinTech businesses and financial institutions in this regard, and challenges to overcome? What are the business models worth noting that utilizes financial

information? What is the source of earnings? What kind of convenience is realized for users with the utilization of

financial information? What are the concerns? What are the challenges for realizing efficiency in obtaining and utilizing

information? What kind of activities and frameworks are needed?

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What are the points to be considered and what efforts and frameworks are necessary for handling financial information from the perspective of user protection and the sound development of industry?

What are the issues to be considered from the perspective of connecting financial information with processes/information in non-financial sectors?

[7] Financial IT system The financial industry in general has been utilizing information technology from a relatively early stage. However, it is pointed out that the investment in IT system has been mainly focused on regulatory compliance, repair and maintenance. In the Study Group many participants suggested that the focus of the investment should be changed to proactive efforts towards the creation of added value, such as improving convenience for clients.

The Study Group also pointed out that the existing system of Japanese banks is tightly-coupled and centralized, and with high consistency and creditworthiness based on strong requests from society, i.e., consumers. It is therefore difficult to add new services in a flexible manner, and the cost for such provision is rather high. There were suggestions that in order to cope with FinTech under such circumstance, a new system balancing quality and cost may be necessary rather than repairing the existing system. There were also opinions pointing out the need for a change of business model among the existing IT vendors.

Please provide reference information and opinions related to the following. Will the emergence of FinTech (companies) force the restructuring of the

financial IT system? How should the existing system in financial institutions, the challenges in collaboration, and the ideal system and human resources in the future be considered? What is the current situation of the systems of the existing financial

institutions and FinTech startup companies, and what are the differences between them? What are the differences between Japan and other countries?

What are the challenges and solutions for the introduction of new

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services and systems?

[8] Block chain as new technology While the block chain is already utilized as the base technology for virtual

currency, the potential of utilization in various other areas is also being pointed out. Demonstration experiments have been undertaken at financial institutions and stock exchanges all over the world.

The block chain is a combination of cryptographic technology, an authentication method of transaction, and a distributed database system. Its characters (consistency, availability, divided tolerance) are rebalanced depending on the purpose of the use case (public/private).

The Study Group identified major effects of the introduction of the block chain as (1) high durability against breakage, (2) low maintenance cost, and (3) low risk of falsification. On the other hand, problems in terms of safety, privacy, data credibility and universality were also pointed out.

Please provide reference information and opinions related to the following. What kind of changes will block chain technology bring to financial services? What are the trends to be noted regarding block chain technology and

services utilizing it? What kind of utilization in operation and services is expected in the

financial field? What are the challenges?

[9] Innovation The Study Group discussed the necessary conditions for enhancing innovation

through FinTech, including: (1) the improvement of the fund-raising environment for startup companies, (2) a mechanism to reduce the cost of failure to allow technical and business experiments, (3) development of attractive services, (4) conquering precedents and taking risks in creating innovation, (5) development of an environment with an awareness of international perspectives (avoiding technological isolation), (6) development of an environment for nurturing startups in Japan, and (7) creation of teams with diversity.

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Please provide reference information and opinions related to the following. What should the government and companies do in order to make FinTech

(services) competitive internationally and to create innovation? What are the efforts worth noting in Japan and abroad when promoting

innovation by FinTech? What are the efforts to be taken in both public and private sectors

toward the internationalization of FinTech companies (outbound and inbound)?

[10] Human resources

It is pointed out that in Japan there are fewer M&As and low human resource mobility, both of which are necessary for open innovation. Human resources with both the financial and technical skills necessary for FinTech business and those who can promote data utilization are also in short supply.

In addition, the development of human resources to support FinTech businesses, such as venture capitals and lawyers, is also a challenge that needs to be addressed.

Please provide reference information and opinions related to the following. What are the challenges in terms of human resources in order to make the

FinTech industry competitive in the international market? What should the government and the private sector do in order to overcome such challenges?

[11] Business environment and policies The Study Group discussed the development of a business environment tailored

to the diversification of business models and technological development by FinTech referring to examples of authorities in other countries and differences in financial legal framework.

The problems in current rules identified are the high compliance cost, lack of

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equal footing, and the regulatory arbitrage. As for the actions to be taken for technological innovation, the need to speed up the actions taken by regulatory authorities and to set principle-based regulation was pointed out. As an example, measures such as streamlining the identification process when opening an account with technological development was given.

The actions to be taken by companies and the importance of self-regulation were also discussed. There were opinions noting the importance of compliance for financial services and appropriate self-regulation by the private sector, while the government presents the principle is effective. The potential of RegTech utilizing new technology was also mentioned.

It was pointed out that the balance between customer convenience and user protection, and the balance between the regulation and promotion of new business/support from authorities, are important for considering any measure. As for the direction of developing a desirable business environment, ideas were presented such as regulation with higher transparency, integration of consultation desks that cover both the government and industry groups, and the establishment of an environment allowing for the trial and error of various ideas.

Please provide reference information and opinions related to the following. How should the future and ideal image of financial services look like? What should the government and companies do from the perspective of

developing a desirable business environment in order to make the FinTech (industry) competitive in the international market? What kind of policies should be taken in order to respond to new

technology and services? From this perspective, what movements in and outside of Japan are

worth noting?