Matsui Securities, Japan’s oldest online broker, is replacing an internal system for processing securities lending with one provided by Broadridge Financial Solutions, with a local systems integrator, Intelligent Wave, connecting it to Matsui’s front office.
Shinichi Uzawa, managing director, corporate division at Matsui Securities, says the move is more than a response to updating an outdated back office process.
“Competition is fierce,” he told DigFin. “Other stock brokers have been cutting commission fees to zero. We have to diversify our revenue sources.”
Matsui’s two biggest rivals, SBI Securities and Rakuten Securities, announced in late 2023 they would offer zero-fee trading to their retail customers.
After a review, Matsui decided to call on outside expertise. It selected a US-based firm, despite traditional reservations about a foreign company being prepared to support Matsui over the long run.
Matsui was comforted by Broadridge’s existing client relationships with the likes of the Tokyo Stock Exchange and the Bank of Japan. The firm also decided Broadridge had the best solution.
First mover
Although SBI and Rakuten are the two biggest online brokers in Japan, Matsui Securities is the pioneer. A family-owned business incorporated in 1931, it was first to offer a full range of online brokerage services, in 1998. Its leaders did so responding to the government’s intention to liberalize broker commissions, which happened the following year.
This move propelled Matsui from a small, unremarkable shop into the leader of a new category, and today Matsui ranks somewhere between third- and fifth-largest online broker in Japan, depending on the metric.
In the 2023 fiscal year, the firm reported nearly 1.5 million customer accounts including about 256,000 margin accounts. Its total margin account balance was ¥309 billion (about $2 billion), with the firm handling stock trades worth a total of ¥37 trillion ($243 billion). It caters to individuals who are active stock traders with a taste for risk and punting on new companies.
Its revenues all come from either commission income on stock and margin trades, and net interest income from lending out securities on those margin trades. Matsui also has a small business in FX and mutual funds.
Stock lending squeeze
The securities-lending business accounts for 3.6 percent of total revenues, making this core to the business. Sec-lending is equally important to Matsui’s online competitors. Japan has a coterie of prime brokers and hedge funds eager to borrow stocks, and the high churn of online brokerage customers makes them a ready source of supply.
“Our lending business has a 20-year history,” Uzawa said. But that history also includes a tradition of managing all the processes itself – which in today’s digital age has become an expensive proposition.
SBI has about 10 million customer accounts and Rakuten another 9 million. These bigger rivals are taking advantage of rising interest rates to make money off holding customer assets and lending them out. No up-front fees enables them to attract even more customer assets.
Matsui and other online brokers have tried to respond via value-added services such as financial advice. That can only go so far, particularly in the low-touch world of online trading.
But another response is to become ultra-efficient, without abandoning its business model. Matsui decided to outsource the processing side of its lending business rather than manage this itself. “We have brought in partners who can support us,” Uzawa said.
Picking partners
The firm relied on Intelligent Wave to consult it on selecting a processing vendor. Uzawa cited Broadridge’s capabilities to support the lending business, as well as its cyber security and its competitive pricing.
James Marsden, managing director at Broadridge in Tokyo, says another factor for online brokers to upgrade their back offices is to prepare for when the United States adopts T+1 settlement times, which is slated for next month. It’s likely Japan will eventually follow.
Uzawa says the firm may consider expanding its vendor relationships to include managing the settlement of cash equities. For now, however, the firm intends to continue operating its existing system.
Marsden said, “Securities lending is an old business that seems simple, but it requires a lot of complex calculations, around fees, cash collateral, and dividends.”
He says the fintech’s large client base using its services allows it to scale, and thus price its services competitively. “We’ve done this elsewhere so it’s become a mutualized service.”
