OPEN BANKING

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Naoki Kanehisa Partner
naoki.kanehisa@aplaw.jp
Kenichi Tanizaki Partner
kenichi.tanizaki@aplaw.jp
Atsumi & Sakai, Tokyo and London

Open Banking in Japan
Amendments to Japan’s Banking Act in 2016 and 2017 have enabled banks to form or acquire FinTech
companies and, in order to promote collaboration between banks and FinTech companies or subsidiaries,
also imposed an obligation on banks to make efforts to open up their application programming interfaces(‘APIs’). It is expected that, through subsidiaries jointly funded by banks and FinTech companies, or throughcollaboration with FinTech companies that are external third parties, these changes will help to advanceOpen Banking in Japan. Naoki Kanehisa and Kenichi Tanizaki of Atsumi & Sakai, provide details on theimpact of the amendments to Japan’s Banking Act and the development of Open Banking in the country.
FinTech companies within
a banking group
The Amended Banking Act of 2016
Japan’s Banking Act strictly regulates thescope of business that banks and theirsubsidiaries are permitted to be engaged
in. Because of these strict regulations, itwas pointed out that it might be difficult forbanking groups to engage in innovative
businesses or make investments in
FinTech companies in response to thesurge in FinTech companies. Under
these circumstances, the predominantview is that a framework that enables
more flexible business expansion forbanking groups should be established.
In line with this trend, the Amended
Banking Act of 2016 allows banks to holdas subsidiaries ‘companies engagedin activities which contribute to or are
A Cecile Park Media Publication | July 2018

expected to contribute to advancementof banking activities performed by abank or improvement in the bank’s users’convenience using information andcommunication technologies or othertechnologies’ (defined as a ‘Banking
Activity Advancing Company,’ which
includes FinTech companies). According
to the amended Banking Act, banks are
permitted to expand into new innovative
businesses through such subsidiaries.
This amendment enables, for example,
a bank to invest in and hold, as a
subsidiary, an operating company for
an EC mall (e-commerce market), as aresult of which the bank would be able
to obtain a vast amount of transaction
data which it could then use for theassessment of creditworthiness. This
amendment may also lead to adopting

advanced technology through investmentin, or acquisition of, companies handling
data processing, companies developing
systems using AI, or companies
developing apps for smartphones.
Moreover, through such advanced
technology obtained from a Banking
Activity Advancing Company, abank would be able to provide newservices that provide benefits forthem, such as the discovery of needs
for financing transactions, enhanced
investment management, andhousehold accounts services, etc.
Recently, major banks have held‘hackathons’ that have made use ofparts of the banking system and thishas resulted in discoveries leading
to the establishment of new IT
companies. Using these hackathons,11OPEN BANKING

When carrying out API interconnection, or
collaboration with an electronic settlement agent,
it is necessary for both FinTech companies andbanks to scrutinise whether the business operated
by an electronic settlement agent falls under
the definition of a bank agency business.

continued

many startups have been establishedand have commenced operations.
A bank is required to obtain individual
authorisation from the Financial Services
Agency (‘FSA’) to hold an investment ina Banking Activity Advancing Company
as a subsidiary. The purpose of thisrequirement is to maintain a regime
under which banks or banking groups
are, in principle, permitted to be engaged
in only a limited scope of businesses.
Trends among major banks inresponse to the 2016 amendment
Japanese banks (mainly major banks)and IT companies have already jointly
established companies, making useof the introduction of the Banking
Activity Advancing Company.
Sumitomo Mitsui Financial Group has
established several Banking Activity
Advancing Companies. One of theseis a company operating a personalverification platform business using
multiple biometric identification factors.
Another is a company incorporated
with a major IT company as a Banking
Activity Advancing Company within
the Sumitomo Mitsui Financial Group,
which, by using the know-how andresources of both groups, has asits main business the planning,development, data analysis and digitalmarketing etc of apps and services.
Mitsubishi UFJ Financial Group has alsoestablished several Banking Activity
Advancing Companies. One of them hasdeveloped a new user interface making
use of IoT devices, including voicerecognition, motion detection systems,and AI, which has led to the developmentof a next-generation financial userinterface (‘UX’) and a more comfortableand frictionless user experience. This
company has already formed strategic

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business alliances with, and begun
businesses with, several dozen regionalbanks to provide its services. Following
the recent diversification of work styles(working from home, second jobs,working beyond the standard retirementage, etc.), the MUFG Group is paying
particular attention to more people
in the workforce becoming detachedfrom Japan’s lifetime employment
system and becoming ‘crowdworkers’(a new employment system that allows
workstyles to be adjusted to fit lifestylesand life stages) so that they can maintainthe desired work-life balance. In order torespond to such diversification of workstyles, the MUFG Group incorporated aBanking Activity Advancing Company
to provide financial services suitable forworkers with diversified work styles, suchas sole proprietors and freelance workers.
Collaboration with third party
FinTech companies
The Amended Banking Act of 2017
In order to encourage banks to makecustomer data available to third parties,
the Amended Banking Act of 2017,
which came into force on 1 June 2018,enables the FSA to develop a registration
system for electronic settlement agents
providing payment initiation services
and/or account information services,which is expected to be simpler thanthe existing system applicable to funds
transfer service providers, to promote
innovation and ensure user protection.
The Amended Banking Act of 2017 also
imposes obligations on banks to makeefforts to open up their APIs to electronic
settlement agents by 2020. Before thisamendment was introduced, only a
few banks had opened up their APIs toFinTech companies and, as a result, it
was necessary for FinTech companies
to use account scraping methods toaggregate customers’ information fromthe deposit accounts of customers
provided by the banks. The FSA’s main
aim is to enhance the effectivenessof open APIs by encouraging banks
to develop their API systems and topromote the smooth circulation of private
sector data concerning individuals,
through prohibiting discriminatory
treatment among service providers(i.e., electronic settlement agents).
Major points from the Amended
Banking Act of 2017 are as follows:(a) Adoption of a registration systemfor electronic settlement agents.
The following service providers
are defined as ‘electronic
settlement agents,’ and, as such,
became subject to registration:(i) Providers of electronic money transfer
services, which convey moneytransfer instructions to relevantbanks according to depositor’s
entrustment by way of using electronic
data processing systems; and(ii) Providers of account information
management services, which obtainaccount information in relation to adepositor from banks and providethat information to the depositor
according to the depositor’s
entrustment by way of using
electronic data processing systems.
(b) Obligations of electronic
settlement agents:
Electronic settlement agents, whencarrying out electronic settlement
agency services, are required to clarify
to users such things as their own
authority, complaints procedures andhelp desk services, and to take thenecessary measures to avoid giving
rise to the misconception that such
PAYMENTS & FINTECH LAWYER

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services are being provided by banks,
as well as security management, andmanagement of external vendors. In
addition, electronic settlement agents,
prior to carrying out electronic settlement
agency services, are required to executewith banks an agreement regarding
electronic settlement agency services
which includes certain requisite items.
(c) Measures required to betaken by banks:
Upon the execution of theaforementioned agreement with anelectronic settlement agent, eachbank is required to stipulate andmake public the criteria with which
the electronic settlement agent mustcomply. The bank must also endeavour
to establish a system for carrying outinterconnection through an API by adeadline determined by Cabinet Order,
within two years from the enforcementof the Amended Banking Act.
Security and user protection are also
important aspects for API interconnection.
Banks are currently considering theseissues by referring to the ‘Report ofReview Committee on Open APIs,’
drafted by the Japanese Bankers
Association, and the ‘API Connection
Checklist (preliminary version)’published by the Center for Financial
Industry Information Systems (‘FISC’).
Banks are also obliged to establish
and make public their policies
regarding collaboration andcooperation with electronic settlementagents, which they have done.
Banks’ approach to Open Banking APIs
According to the ‘Policy regarding
collaboration and cooperation
with electronic settlement agents,’
published by financial institutions, 130
Japanese banks have expressed their
A Cecile Park Media Publication | July 2018

intention to introduce an open API.
We anticipate that the collaborationand cooperation between banks
and FinTech companies will increase,and that more innovative financial
services will be offered to customers.
Establishment of guidelines forbank agency businesses
When carrying out API interconnection,or collaboration with an electronic
settlement agent, it is necessary forboth FinTech companies and banks toscrutinise whether the business operated
by an electronic settlement agent falls
under the definition of a bank agency
business. If, hypothetically, it falls under
the definition of a bank agency business,then it will require a licence from the FSA(which requires more onerous criteria
than those required for registration as anelectronic settlement agent), in addition
to the registration as an electronic
settlement agent. However, whethera business falls within the scope of a‘bank agency business’ is not always
clear under the current Banking Act.
Accordingly, the FSA is attempting to
improve the existing situation whichmakes it extremely difficult for FinTech
companies using open APIs to sharedata or revenue with banks due torestrictions on bank agency businesses.
To achieve this objective, the FSA has
established a guideline regarding bankagency businesses and, in the form of a
reply to a public comment, is clarifying
which acts fall under the scope ofbank agency business. This guideline
indicates that a business may not be abank agency business in cases where(i) the fee payable to a system provider
from a bank is paid as compensation
for a usage charge for the system
furnished by the system provider, (ii)the fee payable to the service provider
from the bank is paid as compensation

for advertising, and (iii) the fee is paid
to a service provider from a bank as afee attributable to the service provider.
Several concerns from apractical perspective
When the Amended Banking Act of2017 came into effect, the FSA provided
its interpretation and elaborated on
certain implications regarding thedefinition of ‘electronic settlement
agent,’ and based on these, the scopeof ‘electronic settlement agent’ isregarded as over broad. For example, acollection agent which is entrusted by adepositor to withdraw a certain amountfrom the depositor’s bank accountmight be an ‘electronic settlement
agent,’ which incurs obligations toregister with the FSA and executean agreement with banks regarding
electronic settlement agency services.
It is hoped that the FSA will clarify its
views and resolve this confusion.
Future regulatory trends
It is reported that the FSA has started
to consider establishing a new legal
framework by revising relevant lawswith the goal of popularising FinTech.
It intends to regulate and supervise
services such as settlement andremittance with one law and enablebanks and internet service providers tocompete with each other on the same
basis. If, by using leading edge IT, costs
can be reduced, it would be expectedthat the cost for financial services will
decrease and that lower cost financial
services will benefit customers. These
discussions within the FSA are focusedon the development of an open API
friendly environment which will requirethe reorganisation of existing regulations
and the development of systems byparticipating financial institutions,although FinTech companies will still
be subject to a registration system.

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