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Japanese chat app operator Line is leveraging its huge popularity among young Asians to expand into financial services across the region.   © Getty Images

Japan's online banks gain ground on their conventional counterparts

Unshackled by huge costs, digital lenders woo customers with better rates and new services

TOKYO -- The most popular mortgage lender in Japan is not one of its big established banks, but an online-only company known as SBI Sumishin Net Bank.

The reason: low mortgage rates. SBI Sumishin can afford to lend at very low rates -- a 10-year fixed-rate home loan carries an interest rate of 1.17%, compared with the average rate of 1.28% for major banks -- because it has a lean cost structure and no branch network. SBI Sumishin also offers other benefits, such as free mortgage insurance and refinancing.

SBI Sumishin is a 10-year-old joint venture between SBI Holdings, an early spinoff of Masayoshi Son's SoftBank Group, and Sumitomo Mitsui Trust Bank.

Koichi Nakagawa, who oversees fintech services at SBI Sumishin, says small digital banks like his can outmaneuver Japan's established banks -- including Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking and Mizuho Bank -- because "not having branches gives us an edge."

With a staff of around 500 -- most of them in the Tokyo head office in Roppongi -- SBI Sumishin is able to be far more nimble than the established banks. For instance, it took only one week to decide to partner with Amazon in starting a chatbot service to provide voice-activated information on foreign exchange rates and bank account balances.

Still, online banks remain niche players in Japan. SBI Sumishin has 4.6 trillion yen ($43.3 billion) in deposits held in 3 million accounts, compared with 139 trillion yen held in more than 40 million accounts at the Bank of Tokyo-Mitsubishi UFJ.

Yoshitaka Kitao, president of SBI Holdings, has a strategy for overtaking traditional banks, however. The company has recently set up a 10 billion yen fund to invest in and revamp Japanese regional banks. He says the fund could expand to as much as 100 billion yen.

"Regional banks face multiple headwinds -- declining local populations, shrinking regional economies, a lack of talent for mobile and online banking. So we go in, take a stake and transform them into profitable banks," Kitao said in a recent press conference.

Competition is heating up among online players as well.

Chat app operator Line, a unit of South Korean search engine Naver, wants to take advantage of its massive popularity among younger people to expand into financial services across Asia.

A popular instant-messaging service with 73 million users in Japan alone and nearly 100 million in Taiwan, Indonesia and Thailand, Line allows users to send money to each other and make payments for online and offline purchases on mobile phones.

Line, which launched its popular chat app in 2011, thinks its advantage is its deep knowledge about smartphone users' needs and wants. "The U.S. may have led the development of internet services, but when it comes to online payments, Asia seems to be leading the world," said Hisahiro Chofuku, chief operating officer of Line Pay.

In January, Line announced that it will launch a mobile investment service in partnership with online brokerage Folio. It is also looking to expand its financial services to its users outside Japan as well. Services could include mobile payments, money transfers, investment and lending.

Its investment products are similar to those of China's Alipay, which offers the high-yielding Yu'e Bao savings plan. Yu'e Bao offers returns of 3-4%, but in Japan, there is no such investment opportunity since 10-year government bonds yield zero percent.

"Japan is two to three years behind China" in mobile financial services, said Chofuku.

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