Japanese megabanks on the defensive as Rakuten internet bank accounts top 10

TOKYO — Internet-only banks are gaining momentum in Japan. In January, Rakuten Bank Ltd. topped 10 million accounts — the first Japanese internet bank to do so — and other banks are following its lead, as they see their account numbers and total deposit balances increase.

This is all happening against a backdrop of advantageous interest rates made possible by low operating costs, and the coronavirus outbreak, but will the locus of power change in the banking industry? And what strategies do megabanks have to compete with the rising internet banks?

“Consumers’ shift online is a huge opportunity for us,” Rakuten Bank President Hiroyuki Nagai said at Rakuten Inc.’s Feb. 12 financial results briefing. While Rakuten Bank is still lagging behind megabanks, which have around 20 million to under 50 million accounts, it increased its account numbers by 1 million in seven months — the shortest period to reach the figure to date — and the pace of new account openings continues to accelerate. In December 2020 the bank’s total deposit balance topped 5 trillion yen (approx. $45.64 billion), which is about the same amount as mid-tier regional banks.

In the beginning, Rakuten Bank pulled in customers with a popular service linking accounts to internet securities giant Rakuten Securities. With no operating outlays for physical branches or bankbooks, Rakuten Bank was able to offer an ordinary deposit interest rate at 0.02% — about 20 times higher than the megabanks — and this goes up to 0.1% if a customer links their account to a Rakuten Securities account.

Additionally, Rakuten Bank has benefitted from the boost in Rakuten’s e-commerce business due to the coronavirus pandemic. Using a Rakuten credit card to pay for shopping on Rakuten’s e-commerce site, and setting the bank account from which the money will be withdrawn to a Rakuten Bank account allows the shopper to get extra points that can later be used to deduct money from their bill. According to Rakuten Bank, over 60% of people who open new Rakuten Bank accounts do so through the Rakuten shopping site and other Rakuten services. One impressed senior megabank official said, “Rakuten Bank has capitalized on the ‘Rakuten economic sphere’ to create a successful banking business model.”

As of the end of December 2020, SBI Sumishin Net Bank Ltd.’s total deposit balance had increased by 12.6% from the same period the previous year, reaching 6.1 trillion yen (approx. $55.8 billion). A public relations official for the bank said, “We’re at a cost advantage compared to megabanks because we do not have any physical branches, and that money can be used to undergird deposit and housing loan interest rates.”

Japan Net Bank, like Yahoo Japan Corp., is under the umbrella of Z Holdings Corp., (ZHD). The bank has beefed up its collaboration with companies under the ZHD umbrella, making it possible for its customers to borrow money through the PayPay mobile payment app. The number of Japan Net Bank accounts topped 5 million in February of this year. With the rise in the number of people who do not want to touch cash due to the spread of coronavirus infections, the number of those using the PayPay app surpassed 35 million in January. Of the newly opened accounts at Japan Net Bank, approximately 40% set up by individuals, and around 50% set up by corporations, have been opened via PayPay. In April, the bank is set to rename itself PayPay Bank, and make…