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East Meets West Up Close and Personal

Shinsei Bank’s Reincarnation

It’s quarterly review time at “A-Z Bank” [fictional name]. The members of the board of directors are assembled to discuss reports about what their competitors are up to. The news is not what they’d expected to hear.

They knew other mega-banks in Japan were experiencing the same intense pressure from being behind schedule, dealing with difficult glitches in the monumental task of implementing upgrades to their IT platforms and applications. They were ready with excuses. And alternate action plans. They knew there would be tough decisions to make. And more yen needed.

But the report about rival Shinsei Bank was like a hornet’s nest in the plush boardroom. Until today’s stinging news, they didn’t even consider the “reborn” 1998-insolvent bank a serious rival.

Shinsei’s CEO and chairman, Masamoto Yashiro, just couldn’t wait to tell the world that the bank had adopted i-flex solution limited’s FLEXCUBE Universal Banking System, and it allowed Shinsei to enter the Japanese retail banking market at one-third the time and at one-tenth the cost of a comparable mainframe deployment. It took less than a year to build the entire system. And they’ll save 40 percent on applications maintenance costs because they’re using packaged applications instead of the highly customized apps the other Japanese banks use.

A hornet aims a well-placed sting: Shinsei Bank is using the Web to power its back-office transactions. A-Z Bank and the others in Japan are still using the Web as a storefront.

Then comes another painful sting: Shinsei’s ATM transactions are 40 times faster than other Japanese banks and even customers of other banks can use the Shinsei ATMs free of charge.

How are they able to afford the costs of these services and remain competitive? Of course, it could be just media frenzy. All this talk about a strategic plan. Shareholder value. Measurable results from IT investments. But everyone knows a conventional approach and longstanding leadership makes for sound management.

The fatal sting was the quote from a news story: The FLEXCUBE solution also allows real-time transaction information and real-time corporate risk management across all channels (Internet, PDA, ATM, etc.). Very few banks in the world – and no other bank in Japan can offer this.

A-Z’s board members suddenly feel naked. Vulnerable. At risk. It’s difficult to save face when you’re naked.

Wayousecchuu

Shinsei’s former name was Long Term Credit Bank of Japan (LTCB). Like the other Japanese banks, it had insurmountable bad loans. LTCB failed in 1998 but was bought and run by the government under its bank bailout programs, then sold in 2000 to U.S. investor group Ripplewood Holdings. At the end of fiscal 2001, Shinsei turned a profit of $740 million in net income. It had one of the cleanest balance sheets in Japanese banking, with cash for growth.

Shinsei Bank is wayousecchuu – a blend of Japanese and Western styles. CEO Yashiro says it’s “a hybrid, maintaining Japanese cultural ideals of commitment, equality and harmony, while incorporating Western models of efficiency and competition.” Shinsei’s attitude at the outset of its rebirth was to adopt the best global ideas and practices in banking. It adopted Western reporting and corporate governance.

Now it links goals to shareholder value. Its CEO says the bank is focused on “achieving a high return on assets, just as Western banks do.” Shinsei now uses risk management and assessment functions in its lending practices.The bank adopted performance-based rewards to ensure ongoing innovation and strong leadership. It believes in outsourcing – utilizing external IT and people resources so the bank can focus on its core activities.

LTCB was an investment bank. Shinsei retained that focus but also in 2001 entered a Japanese retail banking market that was already crowded. To attract and retain customers, Shinsei has to be the best. With the FLEXCUBE solution, Shinsei launched Internet banking. It also established a Wealth Management Division.

The reborn bank’s first steps in entering the competitive retail banking market were to move from its legacy mainframe computers to an open system, install packaged applications, launch Web-enabled services and reengineer back-office processes. The objectives were achieved through FLEXCUBE, the flagship product of i-flex solutions, specializing in products and services for financial institutions. FLEXCUBE, ranked among the world’s two top-selling back-office banking systems, is installed at more than 100 banks throughout the world; but Shinsei is the first Japanese user. The record-time implementation for all of Shinsei’s 27 branches was performed by the joint teams of Shinsei Information Technology and i-flex.

The bank’s western-style management concepts and business practices initially raised consternation in the Japanese cultural approach to business. With successes, it’s getting even more attention. FinanceAsia ranked Shinsei as #20 in the top 200 Asian Banks survey (published in August 2002), and the Fitch bank ratings agency declared that Shinsei’s “capital is superior in both quantity and quality to all of the major Japanese banks.” More importantly, while most Japanese banks are still operating in the red, Shinsei’s shareholders received a return on average assets of 0.7% in 2001.

Epilogue

Someone in the meeting at A-Z Bank figures out a way to restore polite smiles and confidence that they are more advanced than rival banks. He mentions The Bank of Saga, Ltd., known for not having recklessly lent money to speculators during Japan’s “boom” years. At the entrance to the bank’s headquarters tea-ceremony room is a 3,000-year-old camphor board on which is inscribed a Zen proverb: “For a fisherman to live, enough is a bamboo fishing rod.” The bank’s Web site states that on managing director’s meeting days, all members sit on the floor in the tea-ceremony room and, while tasting tea, recognize this proverb as the essence of sound management for the bank.

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