by Noriyuki Morimoto
If a commercial transaction is settled by transferring hard cash, that settlement does not constitute a financial function. However, settlement of funds is no longer done through the exchange of cash except for small individual transactions. Funds are usually settled between the seller’s and buyer’s bank accounts through methods like remittance. In other words, settlements are made using a function of financial institutions most of the time.
Settlement of funds being an essential function in commercial transactions, apparently this function was established as an independent business from an early stage, such as in the form of currency exchange, because the direct exchange of cash between remote locations has been difficult for a long time. Then, for the sake of convenience, it became integrated into financial functions that also handle funds, such as the moneylending business. Therefore, for commercial transactions, settlement of funds must have been a function carried out by financial institutions from a long time ago.
Although settlement of funds has become a function of financial institutions, given that the original form of settlement is the transfer of cash, which is not a financial function, the fact that settlement is not a financial function should remain the same, even when the method of payment is changed. Even if financial institutions conduct the settlement of funds, that should not immediately mean that it is a financial function.
In other words, there should be a distinction between financial functions and the functions carried out by financial institutions. It should be reminded that first, financial functions can be and actually are provided by both financial and non-financial institutions, and secondly, financial institutions can and actually do provide both financial and non-financial functions.
Even though financial functions that formed a part of commercial transactions became independent, giving rise to financial institutions, and the financial functions are now carried out by financial institutions, commercial transactions that incorporate financial functions are still performed normally today. Financial functions still vastly extend beyond the functions of financial institutions.
On the other hand, given that a non-financial function such as funds settlement remains a non-financial function regardless of being integrated into the role of financial institutions, it is possible to be separated and become independent from the financial institution. This is an important element of FinTech that is currently being seriously discussed.
Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.