As fintech upends banking, Japan regulator expects more cross-boundary tie-ups

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) - Japan will likely see more financial tie-ups that extend beyond traditional boundaries similar to those signed between internet banking giant SBI Holdings Inc and regional banks, the country's senior financial regulator said.

Advances in financial technology could trigger structural changes in Japan's banking industry by breaking barriers between lending and other services, said Teruhisa Kurita, who oversees bank supervision at the Financial Services Agency (FSA).

"We'll likely see more such cases as industry boundaries start to disappear," Kurita said of SBI's string of tie-ups with regional banks. "There could be combinations we never thought about," he told Reuters on Friday.

Years of ultra-low interest rates and a dwindling local population have hurt profits of regional banks, prodding some to consolidate or sign business tie-ups with each other to survive.

Some have joined forces with SBI, a newcomer in the industry strong on on-line banking. SBI already owns stakes in a handful of regional lenders in a drive to create a nationwide group.

Kurita said while consolidation is among options, it was not the only way for regional banks to survive.

"I don't think it's a question about the number of banks," he said, when asked whether Japan's regional banking industry was over-crowded. "What's important is for each regional bank to be clear about what business model it is pursuing."

With more than 70% of regional banks suffering red ink or shrinking profits, the government has laid the groundwork for them to consolidate or seek new businesses.

Top government spokesman Yoshihide Suga, who is emerging as a strong candidate to as next prime minister, told Reuters more consolidation among regional banks was necessary.

"Conditions surrounding Japan's banking industry are very severe," Kurita said. "We're experiencing huge changes. Unless you adapt to these changes, it's hard to survive."

(Reporting by Leika Kihara; Editing by Stephen Coates)