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Line crosses into banking with Mizuho tie-up

New venture to offer deposits and loans via smartphone

Takeshi Idezawa, left, the chief executive officer of Line, has been eager to expand the company's  financial offerings. 

TOKYO -- Line will launch digital banking services by 2020 in collaboration with Mizuho Financial Group, the chat app operator said Tuesday, aiming to break into a sector dominated by megabanks using its domestic user base of 78 million.

The two Japanese companies will establish a preparatory company in spring 2019, with Line Financial providing 51% of the 2 billion yen ($17.6 million) in capital and Mizuho Bank supplying the rest.

The entry of an internet platform whose customer base far outstrips those of megabanks presents a threat of a entirely different scale to the banking sector, potentially throwing a wrench into its business model long protected by regulations and established practices.

"The banking sector still has room for improvement," Line CEO Takeshi Idezawa told reporters on Tuesday. "We hope to improve the level of service across the entire industry."

Initially, the venture with Mizuho will let users remit small sums by smartphone and offer small loans for that purpose. The lack of physical locations and ATMs will keep operating costs low.

Unlike conventional banks whose lifeblood comes from settlements and loans, the new lender does not necessarily have to generate income from banking alone and thus may be able to drastically lower its fees. 

Line's entry could lower the barriers for young customers to seek out financial services. Line already offers insurance and stock brokerage services. Its entry into the banking sector could usher in an era in which customers can access all kinds of financial services with their smartphones. 

"If regulations are being used as an excuse" to avoid trying new things at other banks, "then that's where we can mount a challenge," Idezawa said when asked about the venture's chances of success.

Line's strength lies in its ability to develop services that suites customer needs. When it rolled out its chat app, skeptics said it would not be able to compete with e-mail providers. But "our services focused on customer needs have gained traction," said Idezawa. "The current situation in the banking industry is very similar."

Once the business is up and running, massive financial data it can collect from customers can also be a source of income.

For its part, Mizuho will offer know-how in loan screening, securing settlement systems and preventing money-laundering.

By working with Line, Mizuho hopes to cultivate a new generation of customers who grew up with smartphones.

 "We would like to approach young generations that investment banks are usually not familiar with," said Toshitsugu Okabe, deputy president of Mizuho Financial Group, parent company of Mizuho Bank.

"We aim to provide behind-the-scenes support" said Okabe, deputy president of Mizuho Financial Group. "And we will use the venture for data businesses," Okabe said. 

Uncertainty remains. Existing banks have spent a huge amount of resources on building systems that verify customer identity to block money laundering, for example. The new venture will be subject to banking regulations and thus will be forced to bear costs Line never had to as a platform operator. 

Other players such as Rakuten and KDDIhave also dabbled in the banking business, but due to regulations and business customs, they have yet to become a significant presence.

Line's focus on finance comes as the market for its chat app appears to be hitting a ceiling. Though domestic users increased by 10% in the year through September, its overseas base shrank by roughly the same amount to 87 million over that period. In response Line has focused on encouraging domestic customers to use the app more frequently by providing a range of everyday services.

Line apparently judged that obtaining a banking license was the quickest route to providing full-scale financial services. 

After establishing Line Financial in January, the company launched Line Smart Invest and Line Insurance in October, using its chat app Line as a platform. This month, the number of locations accepting payments via its Line Pay mobile platform hit 1 million.

Also on Tuesday, Line said it would work with Mizuho and consumer credit company Orient on a financing service that uses point-based credit scores for customers, aiming for the first half of 2019.

The chat app operator has also partnered with Tencent Holdings to let Chinese tourists in Japan use WeChat Pay at small and midsized outlets and eateries beginning in 2019.

But as with a number of startups, its range of functions was straddling the line between remittance provider and bank. Line users often keep money parked in their accounts after receiving transfers even though those accounts are not protected under the deposit protection law. Japan's Financial Services Agency is updating a regulatory system that currently treats banks and fund transfer operators differently.

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