Haruhiko Kuroda: Information technology and financial services - the
central bank's perspective
Remarks by Mr Haruhiko Kuroda, Governor of the Bank of Japan, at the FinTech Forum,
Tokyo, 23 August 2016.
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Introduction
It is a great pleasure to welcome all of you to our first meeting of the FinTech Forum.
I. Information technology and financial services
Today's Forum focuses on information and financial services. Indeed, financial activities
make full use of wide-ranging information technologies created throughout human history,
and financial industries have almost always developed parallel to advances in various
techniques and infrastructure related to information processing.
Money, which constitutes the basic infrastructure for financial activities, physically
symbolizes information pertaining to value in the form of metal or paper by using relevant
technologies, thereby enabling the exchange and preservation of value. Moreover, money
attaches information on "price," which is based on a widely-shared common "scale," to
various goods and services. Such price information has worked as a critical signal leading
to efficient resource allocation in the economy. Furthermore, "ledgers" and "double-entry
bookkeeping," whose developments were accelerated by paper and printing technology,
enabled efficient and centralized management of information, including various prices.
Using double-entry bookkeeping ledgers, firms and individuals became able to share the
information necessary for conducting economic activities.
Financial services have developed with the support of such information infrastructure.
Financial intermediation, such as bank lending, has made full use of borrowers' information
shared through ledgers and corporate accounting. Payments and settlements of business
transactions as well as financial transactions in modern economies and financial markets
have largely been processed through bank deposit transfers and securities transfers based
on centralized ledgers and book-entry systems.
From the perspective of information processing, payments and settlements relieve economic
entities from burdensome information management, such as credit risk management of
accounts receivables stemming from past transactions. This allows entities to concentrate
their resources in forward-looking economic activities. Through financial intermediation,
financial resources are allocated to investment in projects with higher productivity. The
bundling and integration of refined mechanisms of information processing into financial
services have contributed importantly to the development of economic society.
II. Recent innovation in information technology and "FinTech"
Today, we are observing very rapid innovation in information technology. Due to the spread
of the internet, smartphones and social networks, the amount of data and information
disseminated through various networks has expanded exponentially. Innovation in
information technology makes it possible to process and analyse such "big data" speedily.
Also, information related to retail transactions of goods and services, which was left unused
in the past, is now gathered through loyalty cards and e-money cards and utilized for
business purposes. Moreover, new forms of economic activities comprising the "sharing
economy" have been realized thanks to new information technology. In this process, idle
resources dispersed throughout the economy are identified and organized on the micro-level
and matched with people's needs.
Such innovation in information technology has the potential to generate innovation,
especially in financial services, and such financial innovation linked to information
technology is expressed in the word "FinTech." It is not at all surprising that information
technology has a major influence on financial services, considering the close and inherent
relationship between the two as described above.
Payments, settlements, investment judgement and risk management, which constitute the
core of financial activities, can be regarded as information processing. Therefore, progress
in information technology and AI can be expected to significantly influence them. Moreover,
"blockchain" and "distributed ledger technologies," the flagship technologies in FinTech,
challenge the conventional concepts of ledgers kept by a trusted third party in a
centralized manner. Given that the development of financial services has been supported
by ledgers as the basic infrastructure for information, the dramatic changes in how ledgers
are kept may have the potential of significantly changing the structure of financial services.
III. Importance of information security
While innovation in information technology and FinTech has the potential to extend the
frontiers of financial services, we must bear in mind that information security is becoming all
the more important due to these innovations.
When searching the internet to shop for goods, various related goods and advertisements
pop up to recommend associated purchases. As frequency of use increases, these
recommendations and advertisements capture more and more information on the tastes and
preferences of customers. This is made possible by high-speed processing of big data, and
this innovation in information technology enables the development of profiles on individual
customers. However, if such information is abused, in the worst case, the abuse can do
substantial harm to society, and can cause anxiety among users in general. As such,
advances in information processing underscore the importance of information security.
Moreover, the development of information technology has simultaneously refined the tactics
of hackers and cyber-attacks. Particularly in the financial industries with global networks,
once such an attack occurs in one location, its negative influence may spread across the
board. The Bangladesh Bank heist in the beginning of this year was the case that
abovementioned risk was materialized.
For the sound development of FinTech, information security is a key. FinTech has various
characteristics, such as advanced information processing utilizing big data and AI.
Additionally, FinTech is characterized by an "openness" of networks, with the expansion
of new media and instruments, including internet and smartphones, enabling ready access
to financial services. This enhanced accessibility to financial services benefits customers
and adds to their convenience. On the other hand, as financial networks become increasingly
"open," potential target points for cyber-attacks also tend to increase. Therefore, how to
simultaneously manage "openness of financial networks" and "information security" is a big
challenge for FinTech.
Financial services can be regarded as the processing of information for creating value in the
linkages between economic entities over time and space. This is demonstrated in the
payments and financial intermediation that connect various entities, such as
senders/receivers and lenders/borrowers. In this sense, such activities must always be
supported by people's "trust." Since FinTech is illustrated as a technologically advanced form
of financial services, the importance of trust also applies to FinTech. For the development
of FinTech, it is imperative to firmly maintain people's trust in financial services while
facilitating the creativity and innovation needed to meet the needs of people. If information
security problems were to repeatedly occur in a part of FinTech services, public trust toward
FinTech in general would be eroded even though such problems are caused by a limited
number of entities. People's anxiety for new services would hinder the sound development
of FinTech overall.
The information technology behind FinTech, if properly applied, should and can also
contribute to enhancing information security and the safety of financial transactions. For
example, seal stamps and PINs, which are traditional measures for verification in financial
transactions, are accompanied by certain risks, such as theft and identity theft. In this regard,
biometric authentication utilizing new technology may contribute to reducing these risks
and strengthening the security in financial transactions. Thus, it is critical for relevant parties
to make utmost efforts to use technological innovation for enhancing security in financial
transactions. FinTech will thrive and grow when users associate it not only with convenience
but also with safety and trust.
IV. Initiatives at the Bank of Japan
FinTech has various implications for central banking. FinTech has a wide influence on
payments, settlements and financial services, and could stimulate various economic
activities, including e-commerce and "sharing economy" businesses. Also, FinTech can
encourage mutual feedback between financial activities and high-end technologies, including
cryptographic techniques. Moreover, financial literacy and education are needed to promote
the sound development of FinTech. The Bank of Japan is ready to lead research and
analysis on FinTech, in view of the possibility that the Bank itself may apply FinTech
technologies to its operations in the future.
Given the far-reaching implications of FinTech, the Bank established its "FinTech Center" on
April 1 in the Payment and Settlement Systems Department. The Bank has also built up a
"FinTech network" comprised of a wide range of staff drawn from the relevant departments
of the Bank. This FinTech Network, for which the FinTech Center functions as the secretariat,
promotes the sharing of information and expertise related to FinTech in a cross-sectoral
manner within the Bank. The Bank, as the central bank of Japan, is ready to make its best
efforts to support the sound development of FinTech in order to enhance the welfare of
financial service users as well as economic activities.
In today's Forum, we welcome a rich variety of participants. When we look back at history,
we see that communication and positive feedbacks among various entities from different
cultures, such as cross-border trading between Europe and the Orient during the
Renaissance, led to the development of banking as well as double-entry bookkeeping. In a
similar vein, in order to promote the development of the new financial services that we have
come to call FinTech, it is extremely important to realize positive and interactive
communication among a broad spectrum of entities that go beyond the traditional financial
industry to include IT enterprises, retailers, start-ups and others. I sincerely hope that today's
Forum will contribute to all the participants in terms of sharing new insights and perspectives.
Thank you for your attention.