Nurturing 7-Bank for Seven Years

November 19, 2008

SPEAKER
Takashi Anzai, President, Seven Bank Ltd.

PRESIDER
James Reed, President & CEO, Mizuho Securities USA Inc.; Director, Japan Society

Takashi Anzai of Seven Bank shared his experiences as the founding CEO of a new type of banking business, a bank that operates primarily through a network of ATMs.

The first 35 years of his banking career were spent at the Bank of Japan, Mr. Anzai noted. During the late 1990s, he spent many days traveling abroad to deal with the Asian financial crisis. He then turned to "the extremely difficult task of somehow resurrecting the functions of the Japanese credit system" as the country confronted the impact of billions in nonperforming loans held on the books of Japanese banks.

In November 1998, Mr. Anzai was named President of the Long-Term Credit Bank of Japan, at that point "the biggest global banking failure in history," he said. His task was to restructure and rehabilitate the bank under government control; 16 months later, LTCB, renamed Shinsei Bank, was sold to American private equity firm Ripplewood Holdings.

"I was then enjoying my life, with no master or boss to report to, when out of the blue I was offered the top position at a new bank" being organized Seven & I Holdings, parent of retailer Seven-Eleven Japan Co., Mr. Anzai said. Journalists were less than enthusiastic about the fledgling bank's prospects; friends in the industry "advised me not to accept the position, as it was not a viable business proposition."

Mr. Anzai didn't take his friends' advice. "I had begun my professional life in finance counting bank notes at the Bank of Japan," and heading up the new bank would mean being "in charge of a bank whose main business was operating a network of ATMs that automatically counted out bank notes to customers," he said. "Rather than ending my financial career as an undertaker processing the remains of a failed bank, I began to think that there was something rather appealing about, if you will, playing mother to a newborn bank."

It took nearly a year to get a banking license for the new firm, founded as IY Bank, Mr. Anzai said. Partner institutions were slow to sign up at first. But in the third year of operations, the number of alliances and the number of users rose sharply, and the bank began generating profits. By year five, the accumulated losses were cleared away.

Seven Bank accepts deposits, but its main business is the provision of ATM services to customers holding bank cards from allied institutions, including Japan Post and credit-card and consumer finance companies, he noted. The bank has alliances with some 500 financial firms; Seven & I Holdings is the controlling shareholder, with a 47.8 percent stake. Most of its 13,000-plus ATM units are set up at 7-Eleven outlets throughout Japan, with about one-third in the greater Tokyo area.

On the liability side, Seven Bank's balance sheet looks pretty much like that of a typical bank, but the asset side is quite different, Mr. Anzai said. As of September 30, 2008, about half of the ¥545 billion on the balance sheet was cash in ATMs and cash held as reserves against ATM cash. Seven Bank also holds call loans, or demand loans, representing temporary excess cash, as well as Japanese government bonds representing collateral required by the settlement system--"so neither of these is held for investment purposes," he explained.

"We are not making a profit from the interest rate spread between assets and liabilities, but profit by obtaining a transaction fee from turning over assets, which are mainly cash, with which we cover liability interest and costs. The balance sheet itself is more like that of a retail business than a bank."

Seven Bank ATMs have many security features, including a security camera, a recessed keypad, and a display that can't be read by anyone standing off to the side, Mr. Anzai said. Partner firms can tailor the display so that their own familiar name and logo appear on the screen as soon as the customer swipes his or her card. Customers can get cash and also refill electronic money cards, and travelers from abroad can get help by phone in English and several other languages.

"We do not want to disappoint our customers, who have made the effort to visit the store, only to find that there is no cash in the ATM!" Mr. Anzai exclaimed. To help tailor cash deliveries to each machine, the bank makes up its cash cartridges in 17 different configurations. 7-Eleven stores use the ATMs to transfer sales proceeds and other funds to company headquarters; with sales proceeds per store averaging some $6,000 each day and utility-bill payments another $7,000 a day, this limits the risk of cash shortages and reduces cash-reserve requirements.

When Mr. Anzai began at Seven Bank, he resolved that the bank would not compete just on price, but would focus on meeting expectations and creating a relationship of trust with customers, he said.

"As far as our customers are concerned, both deposits and cash are their financial assets, and if that transfer is not carried out smoothly in line with their expectations then they get angry! No banking business will succeed as long as customer trust is not won via an understanding of this essential point. In the worst-case scenario, failure to achieve this could possibly set off a run on the bank, or set off harmful rumors not only at Seven Bank, but also at partner banks."

Mr. Anzai also determined that partner firms should set their own transaction fees for their customers. "A company without pricing power is a rare occurrence anywhere in the world," he conceded. "However, our business has been based on the belief that even if the customer is charged a transaction fee, if Seven Bank thoroughly pursues a customer-oriented service that never fails to satisfy, then in the final analysis we do set prices."

"In other words, we believe our greatest rivals are not our peers in the same industry, but our customers."

Why has Seven Bank succeeded? Most of all, it's "the strength of 7-Eleven Japan," he said. Stores are close to where people work, live or pass by; some have over 1,000 customers a day on average. In the beginning, the bank put its ATMs only at 7-Eleven stores that were expected to have a lot of ATM users, but by the third year, Seven Bank set up ATMs at every 7-Eleven store in Japan.

Each partner institution connects to Seven Bank by way of a separate line; each partner "can independently select the way in which the line is connected, and offer their own unique array of ATM services," he explained. Seven Bank also hires out its services to operate ATMs owned by other banks.

In 2007, Seven Bank chose to go public on JASDAQ. "We had no fund-raising needs," Mr. Anzai said. "I believed it was desirable to list during a period when the overall market was settled." Because 7-Eleven is such a well-known consumer brand, he expected the Seven Bank IPO to attract individual investors in large numbers. And with their interests in mind, "we could not allow a situation to develop whereby we listed at a high level only to see our share price fall later and slump."

"We did not, however, foresee that the global credit system would be beset with such a serious crisis as that we are presently experiencing," he commented.

"It is our firm belief that the bank has become an established part of the social infrastructure. In particular, there has been a reawakened awareness that the greater the concerns for the failure of banking functions, the greater the importance of the secure, quick and efficient conversion of deposits to cash," Mr. Anzai continued.

Seven Bank is now expanding its ATM network outside of 7-Eleven stores, to include airports, rail and subway stations, highway service areas, hospitals, hotels and shopping centers, Mr. Anzai noted. In his view, Seven Bank's growth will slow because of the economic downturn, but the impact on the bank will be delayed:

"Consumption restraints will begin with the reining in of big-ticket purchases of merchandise, such as house and automobile purchases, which will result in a decline in demand deposit transfer transactions, and will then shift to reduced purchases of household electric goods and TVs, as well as unnecessary travel, which will see a decline in credit card usage. Then, finally, daily household goods, such as foodstuffs based on cash purchases, will be the subject of purchasing constraints," he concluded.

***

The first audience question came from a member of the brokerage industry:

First, I will confirm that your ATMs are the most convenient places in Japan to get money when you're a tourist.

Second, I think your share price might be the only, or one of the only, share prices that have actually risen in Japan this year. What are your thoughts on how you've been able to go up when everything else has gone down--other than your unique business strategies and so on?

"Share price is not my business. Your business," Mr. Anzai said to the amusement of the audience.

"I'm endeavoring to get customers, more and more. That's all. I don't know whether my share prices will go up or down."

What are your thoughts on the future of combining Internet banking with ATMs?

Seven Bank does offer Internet banking, Mr. Anzai said, but "the banking business is about human trust. Still, people have some wariness and concern about what's invisible, which is netbanking. People do prefer to see that actual branch or ATM."

Is the Seven Bank model transposable outside Japan?

Yes, but it has to be "a country where people love to use cash," Mr. Anzai replied.

In the U.S., Citibank ATMs are in 7-Eleven outlets and "they're profitable, but their usage ratio is pretty low," though there's potential for growth in the U.S. given the current climate of doubt and mistrust that makes banks reluctant to lend even to each other.

"We haven't studied a system for spreading" the Seven Bank model to other Asian countries, Mr. Anzai continued; Taiwan has a similar system, and 7-Eleven stores in Korea "already have a very complex and advanced network" that's not part of Seven Bank's ATM network.

"China is good potential, and I believe they don't approve us to get into the Chinese market," he added dryly.

As you went through the process of shaping Seven Bank's business model, are there certain retail-business elements that you decided to omit, and if so how did you come to these decisions?

Colleagues, customers and investment bankers offer many different ideas, "but my job is to reject these thoughtful and friendly and kind offers," Mr. Anzai said. "I still want to stick to the initial target and initial brand image."

"As we are accumulating our capital, many people are asking, how about M&A? If we can do that, of course we'll do that, but if we cannot and it's not attractive, we don't." On two earlier trips to the U.S. in 2008, he said, many urged that he consider adding more leverage--"but now, this time in November, nobody asks me to do so."

Compare your experiences as "funeral manager" for LTCB and as an entrepreneur starting up Seven Bank: Which is the more difficult task and which do you like better?

It was harder to create a new bank, Mr. Anzai said. Finding a new investor for LTCB was difficult, and so was the media gauntlet: "Newspapers, TV, everyday from morning to night, my home was surrounded. No privacy!"

--Katherine Hyde