Wed, 25 Jul 2007 14:55:02 -0500

In the battle between Bank of Tokyo-Mitsubishi (Tokyo, Yen 106 trillion in assets) and Sumitomo Mitsui Financial Group (Tokyo, Yen 94 trillion in assets) for UFJ (Tokyo, Yen 82 trillion in assets), the stakes include more than just UFJ's assets. Also at play are the banks' ability to offer outsourcing relationships to Japan's smaller, regional banks. As a result, the outcome will impact not only the financial institutions involved, but also the technology providers supporting them. Indeed, the technology company supporting the winner of the UFJ bidding war will benefit from economies of scale, which can be used to win business from smaller, regional banks.

Many of the largest U.S. banks, such as Citigroup, attempt to keep their technology providers at arm's-length, playing one against the other and retaining the ability to shift between solutions at will. By contrast, the largest Japanese banks have formed relatively deep relationships with their technology providers.

In the match-ups between banks and technology companies, Bank of Tokyo-Mitsubishi has ties to IBM Japan, UFJ is allied with Hitachi, and Sumitomo Mitsui Financial Group with NEC. Furthermore, various insurance and trust companies related to Sumitomo Mitsui Financial Group hold over one-third of NEC's shares, according to SEC filings.

In all three cases, the partnerships include a software transfer from the bank to the technology company, with plans to provide that to smaller banks via an outsourcing arrangement.

To serve the domestic banking market, IBM Japan created a subsidiary last year to offer regional financial institutions banking software licensed from Bank of Tokyo-Mitsubishi (see BS&T July '03). Similarly, UFJ and Hitachi entered into an outsourcing agreement last year using UFJ Bank's software assets, which would form the core of an outsourcing business. But if UFJ is acquired, the status of the UFJ-Hitachi deal would be unclear. "No doubt the merged bank will be concerned with eliminating redundancies, which is likely to have far-reaching implications for their suppliers, as well as for their own plans to sell technology to other FIs," says Neil Katkov, a Tokyo-based senior analyst for Celent Communications (Boston).

Most recently, NEC has created a majority-owned (51 percent) subsidiary, N&J Financial Solutions (NJFS, Tokyo), which will offer a wide range of solutions to financial-services organizations, including solutions for IP networking, cross-channel integration, core systems, CRM solutions, business intelligence and data warehousing. Additional financing comes from Sumitomo Mitsui Financial Group's banking arm, Sumitomo Mitsui Banking Group (which provided 5 percent) and its IT subsidiary, Japan Research Institute (44 percent).

The company's 330 employees consist of 190 people brought over from Sumitomo Mitsui Financial Group, who will concentrate on sales and marketing, and 140 from NEC, including the company's new president and CEO, Shin-ichi Yabe. "The company has an unique business core - IT know-how and business know-how," he says.

One of the primary areas of focus will be moving regional banks onto IP-based networks. "The traditional network environments need to be shifted to IP and broadband," says Yabe. "Japanese banks need to take care of these issues as soon as possible."

Along with new networks and an accompanying technology architecture, NJFS also offers two core banking solutions to its potential customers. The first is NEC's "BankingWeb21," which is geared toward smaller financial institutions. But the venture will also offer larger banks the core banking system used by Sumitomo Mitsui Banking Corporation itself. "We're able to provide SMBC's core banking system to Japan's banks, and to any other country's banks," says Yabe. Indeed, NJFS has launched partnerships with sales partners in the U.S., Korea, Singapore, Taiwan and mainland China.

NJFS has also formed an alliance with Decillion Solutions Group (Singapore), which provides outsourced SWIFT service bureau services to financial institutions in Southeast Asia. Decillion was acquired by NEC Solutions Asia Pacific in early August. By using an outsourced service bureau to connect to SWIFT, financial institutions in the region can begin exchanging messages and trades with SWIFT's global community at a low start-up cost, Yabe notes.

At the moment, NJFS and the IBM Japan venture are running neck-and-neck in the Japanese market. "These two are pretty evenly matched in terms of their market presence -- one megabank and several regional banks apiece," says Katkov. "The main competitive differentiator may well turn out to be commitment to the market."

Given the challenging position faced by Japan's regional banks, achieving lower costs through IT initiatives has become a growing priority. According to the Bank of Japan's "Tankan" short-term economic survey, Japanese banks are projected to spend $22.4 billion on IT investments from 2004 through 2006, which is about 14 percent higher than last year's level. Of that amount, approximately 37 percent is expected to come from "tier two" and "tier three" regional banks.