Banking on the Internet in Japan
[Jay Dvivedi, Shinsei Bank's Tech Architect]
Social media is not really a component of Shinsei Bank's remarkable advent in Japan. In fact, Jay Dvivedi, Shinsei's CIO who joined from Citibank and was principal designer and architect of the bank's internet-based system, eschews blogging and social media in his response to one of my questions.
But Shinsei has embraced Internet technologies in a way that no other bank on Earth seems to have done. It has placed the customer at the center and adjusted services to the customer's convenience. The bank had used online technologies to get closer to the customer, and thus, is a prime candidate for the SAP Global Survey. Joi Ito has called Jay his hero, which holds more than a little credibility with us and in most social media circles.
'Shinsei' literally means rebirth and in fact the bank was reborn from Japan's 50-year-old Long Term Credit Bank (LTCB) which went under in the year 2000. I'll let Jay pick up the story from there.
1. You used technology to build a very different banking entity. What assets did you maintain from the old LTCB and what did you discard?
We are under a new name, “Shinsei,” but we are the old bank with over 50 years of history and very deep relationships plus 2 million new customers. A key design criteria was to retain our old banking assets and add to it an extremely large investment bank. We had to ensure that the old be in complete harmony with the new.
However, in terms of hardware and network we have nothing of the old. Everything is new.
The way we do it is we create a parallel environment which mimics the old. It’s what we call "parity." New systems behave like old ones. The employees and customers don’t see any change in functions and features; all products, all rules and all processes remain exactly the same. This work was done in about a year. Leveraging the new platform, we overlay on that a product-set which can outrun the competition.
2. Can you give me some sense of the size and scope of Shinsei today in terms of customers, deposit, etc. How many physical branches do you have? What percentage of your customers are Japanese?
Shinsei Bank across all its businesses has total assets of approximately JPY 11.8 trillion ($112 billion USD). The key lines of business are institutional banking, including investment banking; retail banking, and consumer and commercial finance. Historically, we were an institutional bank, to this we have added a retail customer base of 2 million customers and in our consumer finance business we have around 8 million customers. The bank has around 30 financial centers to service customers. An overwhelming majority of our customers are Japanese and our heritage is all Japanese.
3. Shinsei’s strategy was to create a customer-focused bank. Your vision and contribution was to use standard and inexpensive technology to accomplish this. What does Shinsei do differently than other Japanese banks? How do you become more customer-focused when you have fewer branches per customer than most Japanese banks?
A key principle is that our service should be easily understood. We try to see at it as, “How does it look to the customer outside.” We ensure we don’t create any forms so that when a customer walks in we don’t confuse him.
If you walk into the bank you will be greeted by a person who will talk to you on what you’d like to do. The transaction is conducted and we give you a receipt. To open an account and set up a relationship, all you have to do is sign a simple form and you have access to all our products and services.
We offer zero-cost ATM transactions, zero-cost fund transfers and a large variety of mutual funds. Our structured deposit product offering in its first one year of launch collected over $10 billion USD.
We have very satisfied customers. We have been No. 1 or 2 in customer satisfaction in surveys done by Nikkei, Japan’s leading business newspaper, for several years.
We have simplified the mortgage process. The customer fills in an application giving us just the basic information. Who they are, the type of house they are buying, the amount of loan etc .Based on this information the machine generates templates of specific documents, including samples. The customer can spread it on their dining table and match it with what they have and send it to us. They don’t have to wait till they have all the documents. The machine assembles all the documents electronically and process the loan, giving customers a very fast turnaround.
Nikkei ran a story about three years ago on our housing loan product, rating it the best in the market. We run the entire loan process under machine control and at the time the article was written, we were processing approximately 400 loans per day.
Our approach is very different from any other bank, anywhere. We look at the entire company as a large computer. This begins when we are in front of the customer and then continues all the way through all stages including the accounting and reporting. We focus on using machines for everything that we do. We have three classes of machines: (1) machines that run the processes, (2) machines to control transactions and (3) machines to control the machines. Most banks will have several dedicated networks, one for data, one for telephone calls, and another for ATMs. We have only one and for that we use the public Internet. This is very different from what other banks do.
Professors David Upton and Brad Staats of the Harvard Business School have written an article “Radically Simple IT” in the March issue of HBR that describes what we do.
We don’t use officers to check transactions, machines check the transaction. We don’t use supervisors to manage the workforce; machines display the flow and status of work with complete transparency so people can manage themselves. If you walk inside the company you will see everything visually as if you are in a manufacturing plant for some machines; the displays tell you what is the work, where are the people, the picture of assembly line, what is the wait time, what are the queues. Its all visible to our staff and there are one or two team leaders to watch.
We do the same thing with our customers. If you apply for a housing loan then the entire process beginning with the application and documents as the customer assembles and sends them is made visible to them. In this way the customer sees what we see.
4. Your first year is legendary. You built your entire Internet banking system in one year, when it was estimated it would take you three. You also came in at an astounding 90% under budget. Tell me how you did this?
The Internet to us is not banking. If you visualize that we are building a large city, then the Internet to us are the highways and everything in the company works on the internet. Our telephone calls are through the Internet. Our call center runs through the internet and we have no PBX because we use software. So internet banking is not the right context.
Most large banks have a system where they present a small window of that over the internet to their customers, and call it internet banking. Our system is so designed that what we have inside, customers see from the outside. The capability, the information that is available either inside or outside is the same. If you use the ‘highway’ analogy, the internet is just another path for customers to come to the bank. We are not solving the same problem that most other large banks are attempting to do. By defining the problem we are solving differently we simplify it enormously. Simpler problem take less time to sort out.
Our cost advantage is 1:1000. This comes from using low cost standard components. If you compare the cost of a mainframe disc versus a Dell PC disc, mainframe memory versus PC memory, the source of our cost advantage will be very clear.
5. You actually dumped the old bank's mainframe and replaced it with server farms of standard Dell Computers. You off-shored data to India and you decentralized data storage. How safe is that? How does that impact costs? How quickly can you scale?
This is not what we did.
In 2000, the government of Japan sold the LTCB to a consortium of overseas investors. The new management led by our then-Chairman Yashiro had committed a timeline to rebuild the bank’s foundation of one year. Our challenge was to devise work methods that would get the job done. If we had waited to mobilize the huge number of people needed for this task, we would have a huge vulnerability, getting visas, getting people to move, finding housing and so on. So we had a few hundred people come to Japan backed up by ten times that number in India and other locations.
We broke down the work and transported it by Internet to wherever people were and assembled it in the virtual space. By working with multiple teams, doubling them on critical parts, we removed any single point of failure and ensured there was no risk.
Internet is just the transport medium. By itself it has no risk. We control where the people are, what they access and no customer data is ever sent outside of Japan.
Our ability to scale up and work at very high speeds comes form our use of small discrete machines. Unlike the mainframe, which combines everything into one and is actually a big risk, each small machine is discrete and work is organized around them such that there is no single point of failure. Work is spread out. It is literally like a factory making machines or cars and the machines are deployed like equipment in a factory.
6. The bank talks about being transparent to customers about technology. Can you expand upon just what that means and why customers should care?
We are transparent to our customers through our processes and technology. This is to make sure that given our lack of experience - we have only seven years of history - we don’t mess things up for the customer. Everything about the customer that we know, the customer knows and is able to see. When they execute transactions, they do so under their own control. We remove the possibility that one of us makes a mistake.
7. Can you tell me a story of how the Shinsei system greatly benefited a customer that could not have occurred without your Internet-based system?
Let’s look at how we have grown, what our customers think of us. We have over 2 million new customers, over $50 billion USD in new assets in just seven years. Remember, we have only 30 branches in all of Japan. We could not have done this without the type of technology we deployed.
We have a large automaker for whom we process auto loans. Two years ago they were very unhappy with our service quality and were ready to walk out. By leveraging the methods and techniques we were able to deliver a completely new capability that delighted them in just six months. They have now asked us if we would be willing to work with them in other countries. That is the kind of impact we have achieved.
8. What lessons are there at Shinsei for other technology officers in other enterprises worldwide?
Technology officers would do well to read the HBR article I mentioned to get an idea of our methods and adopt them. They can simplify greatly the problem they are trying to solve and get tremendous speed and cost advantages.
We are working with leading educational institutions to codify our methods and offer them as part of their courses. I must point out that what we do is not new. We have used industrial engineering techniques used for decades in manufacturing and applied them to the service industry.
9. This interview is part of my survey on social media’s impact on culture and business. I could not help but notice there is no social media component to your story. Will there be in the future? Would you not want to use social media as banks like Wells Fargo in the US do to get closer to customers and build community?
Our model is one of being highly conservative and of being where the customer is and where they want us, when they want us.
We have tried to create that model where you can call us on the phone, or you can walk over to any of our centers. Everything that you can do in person you can do over the Internet. Everything is available on all the channels. We don’t have a physical community space because we basically believe, “We will be where you are.”
As I said, our customer sessions are highly interactive where the customer is in full control of his or her own account in all its dimensions. It’s almost as if they were moving behind the teller’s desk, to locate their ledger while they are doing their transactions. We wrap the bank as well as the technology around the customer, whether at home or on the telephone, or when they come into any of our physical centers. Technology is focused around one customer, repeated 2 million times.
