Innovation and the Future of Finance
Remarks at the Paris EUROPLACE Financial Forum in Tokyo
Haruhiko Kuroda
Governor of the Bank of Japan
I. Paris International Expositions in the 19th Century -- Exploring the Future through
New Technologies --
It is a great honor to have the opportunity to give a speech at the Paris Europlace Financial
Forum today.
Nowadays, rapid innovation in information technology is significantly changing financial
services, and even the economy and society as a whole. It seems that people are thrilled to
watch, with hope and a little anxiety, how such innovation will change the world landscape
and affect the role of human beings.
Similarly, there was a time in the past when people had strong interest in how new
technologies would change the future. Particularly in the late 19th century, with the
development of heavy industry, the popularization of electricity, and mass production of
new materials such as iron and glass, people wondered how such technological progress
would change the economy and society. During that period, Paris hosted international expos
as many as five times. These expos presented prospects of the 20th century that new
technologies could open up, and brought these technologies closer to ordinary people.
Indeed, many major structures using new materials and construction methods were built at
the time of these expos, namely, la tour Eiffel, la Gare d'Orsay, le Pont Alexandre III, and le
Grand Palais. They continue to be symbolic landmarks of Paris today. Moreover, very
interestingly, Bordeaux wine classification was also introduced at the 1855 Paris Expo, and
it seems that creating such a "database" has helped French wines become the world's
leading brand.
The Paris Metro was also opened during the 1900 Paris Expo. The subway has played a
major role in urban transportation systems since the early 20th century. I am particularly
attracted by the Art Nouveau decorations at the entrances of the Paris Metro. Art Nouveau
widely adopted new materials such as iron and glass, combined with the delicate artistic
sense of human beings, and created a path for the future of fine art and architecture.
II. Innovation in Information Technology and FinTech
Undoubtedly, the Paris Expos in the late 19th century presented "visions" and "prospects" of
how science and technology could lead to economic and social development and improve
people's daily life in a wide range of fields, such as urban architecture, transportation, and
fine art. They thereby contributed to the broad application of science and technology in the
20th century.
I believe we can also make use of such historical analogies for maximizing the value of
on-going rapid innovation in information technologies. If many people could share the
visions and prospects as to how these new technologies could contribute to making the
world better and what they could bring to our daily life, the benefits would be substantial.
Namely, we can intimately feel the benefits of new information technologies and cope with
the associated anxiety through sharing these visions and prospects. If so, it would become
easier to facilitate collaboration among various entities in applying these new technologies
to improve financial services and develop the economy.
In this regard, application of new information technology toward financial innovation,
called "FinTech," will present the following visions or prospects that will open up the
frontiers of financial services. I would like to encourage wide-ranging stakeholders to make
efforts to realize them.
First, FinTech will facilitate the delivery of financial services customized to suit individual
users around the world. More specifically, in emerging and developing economies, where
financial infrastructure such as bank branches and ATMs are underdeveloped, the Internet
and smartphones are spreading very rapidly. In these countries, FinTech enables the
provision of financial services by using the Internet and smartphones as new access tools.
Therefore, emerging and developing economies are eager to promote FinTech in order to
accelerate "financial inclusion." Moreover, big data and artificial intelligence (AI) makes it
possible to customize financial services in accordance with the needs of individual users.
Second, FinTech will contribute to increasing the efficiency of financial operations and
services and raising productivity through the application of information technology.
FinTech also has the potential to create new networks between financial services and
wide-ranging industries, such as the Internet of things (IoT), e-commerce, and the sharing
economy. By fostering the development of new sources of growth, FinTech could
contribute to boosting growth potential through enhancing productivity, which is now a
common policy challenge to developed countries.
Furthermore, FinTech will improve our daily life and address various social challenges
from the financial aspect. For example, as population is aging in Japan and many other
developed countries, it is becoming increasingly important to make financial transactions
easier and safer for the elderly and to protect them from fraud. In this regard, biometrics and
AI could be effective tools. In addition, new technologies such as AI and big data analysis
may enable rapid credit assessment and low-cost remittance services. They could facilitate
easier access to lending and remittance services for financially vulnerable people. Moreover,
robot advisers utilizing AI may provide easy-to-access asset management services with
lower costs, and thereby promote "the shift from savings to investment," which is a
long-standing policy challenge in Japan.
In this way, FinTech could contribute to raising growth potential and addressing social
challenges, not only in emerging and developing economies but also in developed countries.
On this basis, major cities such as Paris and Tokyo consider FinTech as one of the major
driving forces in the efforts of promoting financial services and industries. In November
2016, the Metropolitan Government of Tokyo established the "Advisory Panel for Global
Financial City Tokyo," in which a senior official of the Bank of Japan participated. In the
discussion there, FinTech, as well as fostering asset management services, were considered
core drivers for promoting financial activities in Tokyo.
III. Initiatives at the Bank of Japan and the Central Bank's Perspective
The Bank of Japan is actively promoting FinTech from the standpoint of a central bank. In
April 2016, the Bank established the FinTech Center within its Payment and Settlement
Systems Department. The Bank has also built up a Bank-wide "FinTech Network" to share
information and expertise related to FinTech.
Also, the Bank has held four FinTech Forums so far. In these Forums, we have focused on
topics of high interest, such as information security, open innovation, distributed ledger
technology (DLT), and big data. In November 2016, the University of Tokyo and the Bank
of Japan held a joint conference focusing on the future of money. Moreover, in April this
year, the Bank organized a conference on AI.
Furthermore, in order to gain deep understanding on new information technologies and their
impact, the Bank has been conducting various research activities, including the joint
research with the European Central Bank on DLT. In parallel with these activities, senior
officials of the Bank, including myself, have been delivering speeches focusing more on IT
innovation and FinTech as well as their impact on finance and the economy, in order to
convey the Bank's views on these issues.
When we try to examine the impact of FinTech on finance and the economy from a central
bank's perspective, I think the following four points are important.
First, entities which provide financial services are becoming widespread. One of the major
characteristics of FinTech is that various new players such as IT companies and start-ups,
which are different from traditional financial institutions, are entering financial service
businesses. It would be informative to examine how these new players could influence the
structure of financial service provision, financial markets, and risk-sharing among various
entities. From a central bank viewpoint, we need to closely monitor the impact of these new
entrants so that new technologies will enhance the efficiency of payments, settlements, and
financial services, while ensuring their safety and stability.
Second, new styles of systemic importance may emerge under the development of FinTech.
Since the global financial crisis, efforts have been made to classify big banks as
systemically important financial institutions, or SIFIs, based on factors such as the size of
the balance sheet. Based on these efforts, various financial regulatory measures have been
taken so that their systemic importance would not threaten financial stability. Recently,
however, entities that provide global IT platforms to many entities and accumulate huge
volumes of big data have become increasingly powerful and influential in wide-ranging
businesses including financial services. In addition, high-speed, high-frequency transactions
in financial markets are expanding, and if many market participants come to use similar
algorithms in conducting such transactions, this might involve the risk of amplifying
one-way market developments. Based on these changes in environment, rather than the size
of balance sheets of banks, factors such as global IT platforms, the huge volumes of big data,
and widely used algorithms might become more systemically important from the viewpoint
of financial stability.
Third, as the utilization of big data is becoming more important in the provision of financial
services, data security, privacy, and the consensus of stakeholders on data utilization will
become even more critical. Thus, financial service providers and stakeholders are required
to pay due attention to data protection and privacy, in order to maintain public confidence in
innovative financial services utilizing new technologies.
Finally, as application of AI to financial operations is becoming widespread, ensuring
governance in AI's decision-making and accountability to customers using AI-related
services may also become critically important. If customers are concerned that AI's
decision-making might turn into a "black box" and poses risks to them, such customers'
anxieties would hinder the application of AI to create innovative financial services. In this
regard, efforts to ensure the governance and accountability of AI are meaningful to "wipe
out" people's concern about new technologies.
IV. Closing Remarks
In promoting FinTech, France and Japan seem to have common challenges as developed
countries.
In the case of emerging and developing countries, basic financial services are
underdeveloped, and market growth can be expected to a certain extent, simply by
introducing and promoting these basic services. On the other hand, both in France and
Japan, basic financial services are already embedded in people's daily life. Thus, in order to
make FinTech bloom in these countries, it is strongly needed to create innovative financial
services with high added-value beyond already-available services. In addition, financial
institutions are required to take forward-looking measures to reform their own structures in
order to make effective use of FinTech. Without such efforts, the countries where traditional
financial services already prevail might lag behind in the field of FinTech.
In this regard, let me introduce another important aspect of the Paris Expos in the late 19th
century. At that period, Japan was in the middle of a big transition phase, from the Edo
period to the Meiji era. Nonetheless, Japan very actively participated in the Paris Expos. It
seems to me that Japanese people, who were in the midst of a big historical turning point,
were driven by their strong motivation to learn as much as possible from European
countries, which were already the most industrially-advanced countries in the world. I feel
that Japanese people really wanted to obtain prospects for the future and to gain clues for
reform. At the same time, many ukiyo-e prints were brought to France from Japan. The
interaction between Western and Oriental arts and the consequent "chemical reactions" led
to the creation of new fine arts, namely, Japonisme and Impressionism, which remarkably
incorporate both Western and Oriental cultural backgrounds.
These histories vividly illustrate that interactive dialogue, which is sometimes carried out
across borders, and chemical reactions brought by cross-cultural exchange play critical roles
in innovative creation. Needless to say, both France and Japan have their own history and
culture, and are now playing leading roles in science and technology. I firmly believe that it
is extremely beneficial for these two countries to strengthen dialogue also in the areas of
financial innovation and FinTech.
The Bank of Japan would like to further deepen exchanges with the Banque de France on
financial innovation and FinTech.
Thank you for your attention.