Strategies for innovation in the Japanese banking industry

Abstract

In this study, I identify and discuss innovation strategies for the Japanese banking industry, with special focus on the R&D process through which banks are seeking to create new e-business opportunities. Traditionally, it was thought to be difficult to undertake well-organized R&D activities in a service industry because the intangible nature of banking services made it difficult to conduct R&D in a typical laboratory setting. Therefore, many service firms did not organize formal R&D activities. Furthermore, Japanese banks faced environmental obstacles to innovation, including government regulations, non-performing loans, and legacy assets that were difficult to abandon, such as the backbone banking system supported by major mainframe architecture. Today, emerging Internet technologies are at last triggering R&D activities among Japanese banks, and they are achieving some success in this field. This thesis identifies empirical R&D methods that have become more commonly used by Japanese banks, as well as the problems encountered in the effort to generate creative and effective ideas, screen them, perform trial-and-error iterations, and manage tests on real-life situations to gain customer input. I identify four factors that can help banks achieve innovation: managing institutional matters, managing legacy assets, acquiring a better understanding of customer needs, and organizing reality tests early to obtain feedback and make appropriate responses. The thesis begins by introducing some formal, empirical R&D methods. Next, I describe the business and technology environment of the Japanese banking industry, and depict the difficult situations that hamper innovation in the industry. Then, I review various organizational issues facing

(cont.) R&D in banking, followed by an analysis of the actual R&D processes taken in actual cases undertaken by the Bank of Tokyo-Mitsubishi.