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Business deals

Japan bank SMFG dives deeper into digital finance with SBI deal

Alliance to target young clients with smartphone banking

Sumitomo Mitsui Financial Group is spending roughly half a billion dollars to buy a 9.91% stake in SBI Holdings.

TOKYO -- Sumitomo Mitsui Financial Group aims to overhaul digital banking and investment services, and capture a new generation of clients, through its new partnership with top Japanese online brokerage SBI Holdings.

By entering into the capital and business alliance, announced Thursday, SMFG looks to tear down barriers within the group and offer integrated services to more than 80 million customers. Collaboration between retail banking and investment operations is key to this strategy.

In fiscal 2022, plans are to develop smartphone services combining account transfers, securities trading, credit card payments and consumer finance, for example.

Young people will be the main target of this venture. The smartphone applications will be simplified for working-age traders, and there will be a common points program for younger clients.

This renewed focus on the younger customer base will likely serve as the breakthrough for this business model. SMFG, and main domestic rivals Mizuho Financial Group and Mitsubishi UFJ Financial Group, have long offered banking and investment services to clients on both sides of the equation.

But the three groups are strong in face-to-face marketing, and investment clients are mainly those who are wealthy or retired. The traditional approach faced limits in expanding the customer base.

At SMFG group company SMBC Nikko Securities, customers appear to be chiefly 50 or older. But 40% or so of SBI Securities' customers are in their 20s or 30s. SMFG expects to bring in more young clients through its tie-up with SBI.

SMFG said Thursday that banking unit Sumitomo Mitsui Banking Corp. has 27 million customers and that credit card unit Sumitomo Mitsui Card has 50 million. The deal with SBI brings in the brokerage's 8.5 million retail customers, SMFG added.

Among retail traders in their 20s and 30s, 86% have made trades on the internet, according to a 2021 survey by the Japan Securities Dealers Association. For those 70 and up, the share was 69%. Only 4% of those 70 and older made trades on smartphones, compared with 52% for 20- and 30-somethings.

At this point, the working population does not own much in terms of assets.

"Even if it's a major internet brokerage group, it would be a pretty difficult decision to spend 80 billion yen [$587 million] for a 10% stake," an executive at a financial institution said.

At the same time, a banking group will inevitably experience negative growth if it fails to shift toward a younger customer base. There is also the potential market created by the generational wealth passed down to younger family members.

MUFG turned online brokerage kabu.com into a subsidiary back in 2007. But the unit, now called au Kabucom Securities, has just 1.4 million or so accounts -- a far cry from the 7 million to 8 million of rivals SBI and Rakuten Securities.

Mizuho Securities teamed up with SoftBank in 2020 to launch PayPay Securities. By investing in SBI, SMFG seeks to quickly narrow or close the gap with the two other banking groups in the online brokerage space.

U.S. financial giants are moving swiftly into digital operations. Bank of America offers one-stop app software to manage bank accounts and investments. Goldman Sachs launched a robo-advisory service for retail investors last year.

Amid competition in the online brokerage industry, it has become impractical to profit from service fees simply by offering internet stock trades. A shift to high-value-added digital services will be necessary for SBI to stay competitive.

At the same time, SMFG's stake in SBI will be less than 10%. Nor do the two necessarily share precisely the same vision for the future. SBI is pursuing partnerships with smaller regional banks, and its group even includes a pharmaceutical company.

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