Report No.18
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Japan Entrepreneur Report No. 18 April 2004
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- Japan's entrepreneurial banks
- Mickey Mouse teaches bank to smile
- Todd Budge's Star rises
- Bits and bytes
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Japan's entrepreneurial banks
The teller greeted my request with the same astonishment one would expect
if the entire Harlem Globe Trotters basketball team burst into the bank
lobby to execute a full court press on the staff.
For a full 40 minutes I marveled as one employee after another rushed
upstairs and down, got on the phone and off, and hurried back and forth
to the service counter to apologize for the delay. They finally informed
me that, yes, the job could be completed in three days, and could I
please come back then?
It was one of my first financial transactions in Japan, asking a bank in
Utsunomiya to create a dollar-denominated bank check. That was more than
20 years ago, and times are different now; consumers routinely execute
foreign currency transactions. Yet Japan's banks still seem baffled by
any unusual request, and consumers remain dismayed with the depressing
uniformity of products and services offered in this bureaucracy-burdened
sector.
Some insiders say it's impossible for Japan's banks to be truly
entrepreneurial. From the perspective of Mikuni Akio, a respected
economic analyst and founder of Japan's leading independent bond-rating
agency, banks are captives of the Ministry of Finance (MOF) and the
Financial Services Agency (FSA). Primarily, they serve as tools for
implementing government policies, some official, some not. The banks
exemplify, Mr. Mikuni says, the Japanese bureaucracy's past success in
displacing both market risk and legal risk from the finance sector, which
depends heavily on bank lending. Mr. Mikuni dubs this phenomenon the
"socialization of market and legal risk."
Japan's bureaucracy traditionally sublimated market risk by not allowing
banks to fail as long as they toed the MOF line. It could remove legal
risk because administrative law--the behind-the-scenes "guidance"
provided by the MOF--rules the banking world, not the civil or commercial
law that purportedly applies to the rest of Japanese society, Mr. Mikuni
asserts.
For example, isn't it extraordinary that, with nearly simultaneous timing
between summer of 1999 and spring of 2000, Japan's top ten banks suddenly
announced mergers into four new, separate banking groups? That kind of
lockstep development would be unthinkable in a freely functioning market.
Read one of Mr. Mikuni's extraordinary books to learn more about risk
socialization and Japan's integrated industrial structure
(<www.amazon.com/exec/obidos/tg/detail/-/081570223X>). The point here is
that those willing to buck "tradition" can gain an edge simply by seeking
out and taking on the market or legal risk that convoy-minded competitors
prefer to be protected from.
Some Japanese banks have done just that, and they deserve to be called
entrepreneurial. Two of their stories follow.
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Mickey Mouse teaches bank to smile
Okano Mitsuyoshi may be a bank president, but Mickey Mouse taught him a
thing or two about business.
A Disneyland trip nearly 15 years ago opened Mr. Okano's eyes to a simple
but profound means to change how his bank employees serve customers: he
decided that staff should stand, not sit, when working.
Disney employees interact with customers at eye level, Mr. Okano noted.
Workers in department stores, restaurants, and hotels don't sit down
while customers stand, so why should bank employees? Even now, a decade
and a half after Mr. Okano's issued his "stand up" directive, employees
at most other Japanese banks remain seated while their customers stand.
This February, tellers at Resona finally began standing while serving
customers?but in an experiment implemented at only six of the bank's 358
branches.
Suruga Bank, the regional bank Mr. Okano leads, does most things
differently from its competitors idling in the MOF-directed convoy. For
example, it likes to make home loans to consumers who lack "desirable
borrower profiles." Other banks avoid these "undesirable" borrowers, who
include women, people who work for smaller firms, frequent job changers
working in technical positions or at foreign companies, and even
professional athletes, whose incomes are considered unstable.
This shunned group of would-be customers includes many competent,
successful people. Their unconventional work styles embody a modern
flexibility that actually makes them better credit risks than lifelong
salarymen, many of whom would find themselves helpless if their jobs
suddenly disappeared. Unable to obtain loans elsewhere, these
nontraditional borrowers flock to Suruga's "Dream Plaza" home loan
centers, happy to pay higher interest rates.
Other banks have criticized Suruga, saying it simply takes on riskier
customers and charges them higher rates, a strategy sure to eventually
rack up piles of bad debt.
But Suruga's business results suggest otherwise. The company trounces
its competition on key measures such as return on assets and the spread
between interest paid on deposits and interest earned on loans. What's
more, its borrowers are solid. In 2000 Suruga launched a smash hit home
loan specifically for single women, a segment ignored by tradition-bound
competitors. Not one borrower has yet defaulted on her loan.
Suruga's most crucial decision, executed almost 20 years ago, was to
flout the industry's lockstep strategy--or rather its absence of strategy.
Across the board, Japan's banks were taking the diversified conglomerate
approach to banking, trying to be all things to all people. They served
businesses and consumers without strategically differentiating themselves
with original products or target customer groups.
Suruga, on the other hand, focused with laser-like intensity on consumers,
or what banks call the "retail" business. Today that consumer customer
base accounts for more than two-thirds of its outstanding loans--a far
higher ratio than competitors, who, in typical fashion, are now uniformly
struggling to catch up in the retail segment. It's also worth noting
that when Suruga decided to overhaul its information systems, it gained
an edge by looking to foreign players--namely EDS and IBM Japan--rather
than domestic systems integrators.
Finally, Mr. Okano succeeded in purging age and seniority-based
prejudices from his organization and cultivating a corporate culture of
spontaneity and fairness. The new atmosphere fostered a steady stream of
unique products, such as a personal loan card aimed squarely at employees
of rival banks. Such cards, used to take out small, uncollateralized
cash loans from banks or consumer credit unions, are extremely common in
Japan.
With annual interest rates exceeding 25 percent, the cards can be an
embarrassing statement about the borrower's financial responsibility, so
bank workers avoid this type of borrowing relationship with their own
employers
Mr. Okano's greatest success, though, may have been getting his employees
to think and act "unbanklike." He accomplished this in part through
aggressive hiring outside the finance sector. In some instances he even
secluded new employees from internal bank operations, an unusual attempt
to keep key staff untainted by conventional, i.e. outmoded, bank wisdom.
In fact, today he prefers to think of Suruga as a "money theme park"
rather than as a mere bank.
Sounds like he did take a lesson from Mickey.
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Todd Budge's Star rises
Todd Budge was puzzled. Returning to GE's Tokyo office for his third
stay in Japan, he was struck by how little banking had changed during his
seven-year absence.
Consumer banking products and services were identical. Banks still
"processed" customers like automobile chassis on an assembly line: upon
entering a bank, customers pulled tickets from an automated dispenser
while tellers slowly called their numbers.
Budge saw two strange things. First, customers stood while bank
employees sat comfortably. Second, 70 percent of a typical bank's floor
space was dedicated to employee seating and back office operations, while
only 30 percent was available for customer use. In a service business
purportedly devoted to client satisfaction, these two customer-unfriendly
practices struck him as exceedingly odd.
That day's insights became part of a life-altering venture when a
headhunter invited Budge to join the team that acquired and was revamping
the insolvent Tokyo Sowa Bank. Until then, he'd never imagined himself
becoming the first foreigner to head a Japanese bank or the youngest bank
president in Japanese history. Soon, however, he was both.
When the 42-year-old Budge arrived at the newly-established Tokyo Star
Bank, he found its somber atmosphere and poor employee morale instantly
depressing. He understood how the arrest of the bank's former president
and chairman, combined with the stigma of takeover by a foreign "vulture
fund" could darken the atmosphere. But those two factors alone couldn't
account for the deep malaise he sensed.
Budge learned the real reason behind the employees' persistent dark mood
when he met with powerful resistance to his proposal for cross-functional
reform teams. A decades-old document describing job scope, authority,
and responsibility in excruciating detail prohibited staff in different
sections from making certain decisions together unless they were of the
same rank. Budge, a strong believer in the power of simplicity, soon saw
that the document, which he dubbed the dot-chart, tethered employees to
prescribed roles, stifled risk-taking, and enforced a culture of
management by authority rather than empowerment.
"I've worked at a number of companies," Budge later wrote about the
document, "but I had never seen such a complex set of job descriptions.
This dot-chart was not only a convoluted mess of position descriptions,
responsibilities, and authorizations, it contained nothing about the
goals toward which employees should strive."
Yet employees cited the dot-chart as the bank's most important asset, the
operational core without which work would surely grind to a halt. In
deeper discussions with staff he realized that, rather than directing
employee energy outwardly toward customers, the dot-chart culture focused
employee attention on internal rules and the bank's near-military command
structure. The result: the bank lacked a customer-focused vision and
purpose.
One of Budge's first moves was to abolish the bank's dot-chart and
seniority-based employment structure, replacing it with a performance-
based personnel system with clear evaluation criteria. More important,
Budge and his management team set a clear vision for Tokyo Star Bank,
with both quantifiable internal goals and an inspiring promise to
customers: "Financial Freedom."
Transforming the bank's culture and setting a clear vision for Tokyo Star
were Budge's top priorities, but operations needed a drastic overhaul as
well. The bank's aging mainframe-based computer system was safe and
reliable--and completely inflexible. Vendors dumbfounded the new bank
president when they told him, in all seriousness, that they couldn't
consider system changes budgeted at less than 100 million yen. Meanwhile,
employees had barely progressed beyond the abacus; an intranet was
finally in place, but e-mail use was sporadic and many employees lacked
PCs.
Calling on a group of brilliant Indian engineers located in Tokyo and
Bangalore, Budge's team replaced the stodgy mainframe system with an open
architecture network and PCs for all employees. Then they set to work
revamping the bank's workflow with process management techniques.
Customer application procedure was one clear candidate for improvement.
Previously, different products such as home loans, credit cards, and
personal loans required separate application forms and submission
procedures. By identifying commonalities, Budge's team came up with a
standardized application form and submission and review processes that
could be quickly deployed for a variety of new products and services,
reducing costs and time to market.
In tandem with these operational improvements, the team commissioned
market research to help them craft new product and service strategies.
The outcome was a reality bomb.
"The survey results were shocking," wrote Budge. "The majority of the
respondents said 'banks do absolutely nothing for me'."
In years past, consumers regularity visited banks to deposit and withdraw
money and to pay bills electronically. But now ATMs were installed in
nearly every convenience store in Japan, and Internet banking services
were increasingly available. A bank's usefulness as a transaction depot
was fading quickly. Also, banks made poor impressions on consumers, who
left frustrated by long wait times.
Yet research suggested that those same consumers were hungry for advice
about growing their assets, financing home purchases, and preparing for
retirement. What's more, they expected banks to offer relevant
recommendations and solutions. Budge realized that competitors were
utterly failing to address these concerns.
The path forward was clear. Tokyo Star Bank refurbished and recast its
branches as "financial lounges," dedicating two-thirds of floor space to
consumers. It scrapped the linear, assembly line approach to engaging
visitors, instead stationing concierges at branch entrances to greet
customers, inquire about their needs, then lead them to private
conference areas where they could discuss concerns with "financial
coaches." Emphasizing the retrofitted organization's new focus on
consultative banking, ATMs and automated devices were tucked in private
corners at the rear of each facility.
Matching the infrastructure improvements, the bank launched a string of
innovative new products, including Japan's first deposit-linked mortgage.
If a borrower has both a home loan and a ten million yen deposit with
Tokyo Star, for example, he pays no interest on ten million yen of his
outstanding loan balance.
Budge's hard work and dedication has paid off. Tokyo Star Bank achieved
its trillion yen deposit target ahead of schedule and earned $107 million
in the year through March 2003, a far cry from the $2 billion loss it
recorded two years earlier.
Even so, Budge is the first to admit that his bank still has a long row
to hoe in achieving world-class speed, efficiency, and service quality.
But he is bullish on prospects for both Tokyo Star and Japan's banking
industry.
"There are still enormous business opportunities in Japan's banking
sector," he says. "A bank's role is to take on risk, not to avoid it.
Japan's banks are too fixated on their borrowers' past. The future is
what's important."
Now Todd Budge has written a Japanese language book detailing his
experiences. See it at <www.amazon.co.jp/exec/obidos/ASIN/4198618372>.
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Bits and bytes
The name on the passport in the grainy terrorist video shown on NHK
television the morning of April 9 was written in kanji, but it was clear
enough, and reading it chilled me: Imai Noriaki, the young social
activist I had interviewed by e-mail in July of last year.
Thankfully, Imai and his colleagues returned safely to Japan, but for
nearly a week the Iraqi conflict took on a sickening new dimension. I
had used only a portion of Imai's comments for an article last year and
now the full text of his remarks seemed eerily prescient. A complete
translation, along with my rants about Iraq and the media, can be seen at
<www.timclark.net/articles/Japans_911_v1.1.0.htm>.
Red Herring has launched a new column about venture capital in Asia (see
it at <www.redherring.com>). Sure hope they start featuring more about
Japan. Anyone know where they can find good material?
Russell Willis will speak at the next Entrepreneur Association of Tokyo
meeting on Tuesday May 11, 2004. See <www.ea-tokyo.com> for details.
One reader's comment on last month's debt collection article
(<www.japanentrepreneur.com/200403.html>): "Sounds like change is past
due in the industry." Thanks, this rag needs more humor ?
Tim Clark
Senior Fellow
SunBridge Corp.
Voice (U.S.) 503.235.4419
Fax (U.S.) 503.235.4429
clark@sunbridge.com
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