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Business trends

Fintech newcomers reshape Japan's lending landscape

New technology gives smaller businesses quicker and easier access to loans

Freee, which provides cloud-based accounting software, is making inroads into financial services that have been the domain of major banks. (Photo by Tsubasa Suruga)

TOKYO -- New financial technology companies are transforming Japan's lending sector, tapping artificial intelligence and other cutting-edge methods to ease a cumbersome loan process that hampers access for many businesses.

"Small and midsize businesses want to be able to apply for small loans conveniently, when they need it," Kenta Takechi, who is in charge of financial operations at Freee, told reporters here on June 24.

The company provides cloud-based accounting, human resources and tax reporting platforms. A Freee unit launched a service on June 24 that automatically suggests loans to clients, in partnership with Aiful unit Lifecard and Sumitomo Mitsui Card.

Internet-based lending services include transaction histories and other data not found in a balance sheet to predict a company's potential, which they then use to calculate interest rates and other terms. Such services are responsible for over $40 billion in lending in the U.S., but Japan's market remains in its fledgling stages.

Freee bases its suggestions on financial data collected from over 1 million businesses through the company's software since its launch in 2012. Artificial intelligence is used to predict a company's financial standing three months into the future, as well as the interest rate and loan limit it would be granted.

Yasuyuki Inagaki, who runs a bar and restaurant in Tokyo, took a loan suggested by Freee. He received 1.5 million yen ($14,000) at a 15% annual rate about 10 days after he applied.

"I run my business by myself, so I like to minimize administrative tasks as much as possible," the 47-year-old said. "It was helpful to know quickly that I passed screening."

Kenta Takechi, who is in charge of financial operations at Freee, explains a new service that automatically suggests loans to clients. (Photo by Karina Noka)

Other accounting platform providers are entering the field as well. Yayoi, a unit of leasing company Orix, began providing loans to clients through a subsidiary in December 2017. It lent about 400 million yen to over 250 businesses in its first year, less than 2% of which have failed to repay on time.

In traditional bank-based lending, bankers sit down with the applicants to glean any information not on balance sheets. But the process can be a heavy burden on smaller businesses, and they do not find out immediately whether they have passed.

Accounting software instead draws information from multiple bank and credit card accounts, and can track business transactions and other financial information in real time. The operators can screen a potential borrower more comprehensively.

Japan's three megabanks are eyeing the space as well. Mizuho Bank started lending online to smaller businesses in May. Borrowers can receive the loans, capped at 10 million yen with a term of up to one year, in as little as two business days. MUFG Bank launched a similar service June 24.

Internet-based lending platforms grew quickly in the U.S. after big banks turned off the spigot to smaller businesses following the 2008 financial crisis. OnDeck, which partners with JPMorgan Chase, has lent $10 billion since launching 11 years ago. The American market grew nearly tenfold between 2013 and 2017 to $42.8 billion, according to the University of Cambridge.

The Japanese market is estimated at 40 billion yen. But further growth also comes with risks, like an increase in nonperforming loans.

Meanwhile, major technology companies are taking aim at smartphone-based financial services. Telecommunications operator KDDI and flea market app Mercari debuted phone-based settlement services this year, joining the likes of NTT Docomo and Rakuten. Yahoo is collecting transaction histories from customers of PayPay, a smartphone payment service it runs with carrier SoftBank Corp.

Line has partnered with Visa to develop new service. Customers can obtain a Visa card through the Japanese company's smartphone app.

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