Risk Factors
Translation of "事業等のリスク" in Japanese Annual Securities Report for the year ended March 31, 2024 submitted on June 25, 2024
Note Regarding Reference Translation
This document has been translated from the Japanese language original for reference purposes only. In the event of any conflict or discrepancy between this translated document and the Japanese language original, the Japanese language original shall prevail in all respects. We make no representations regarding the accuracy or completeness of this translation and assumes no responsibility for any losses or damages arising from the use of this translation.
Risk Factors
To appropriately recognize and manage various risks related to management, the Rakuten Bank Group has established a framework under the “Basic Rules for Integrated Risk Management,” which were resolved by our Board of Directors. The framework includes a company-wide risk management policy, various risk management policies, and a risk management organization and system. Additionally, we have established a “Risk Management Committee” as a pre-deliberation body for Management Conference related to risk. We have also set up a risk management headquarters as a company-wide risk control department, along with control departments for various risks, to practice appropriate risk management. Management recognizes the following as “top risks,” based on discussions at the Risk Management Committee and management meetings, among those risks described in “(1) Risks related to the business environment”, “(2) Risks related to the relationship with Rakuten Group,” and “(3) Risks related to the Rakuten Bank Group’s business” in terms of their likelihood of manifesting and their impact on the Rakuten Bank Group. We have taken advance measures to address these “top risks,” to control the risks within possible ranges, to develop preventive measures, and to strengthen appropriate risk control and governance.
Top risks
| Risk events | Risk scenarios (examples) |
|---|---|
| Intensification of the competitive environment |
|
| Delayed response to technological innovation |
|
| Outbreaks of serious infectious disease |
|
| Relationship with Rakuten Group |
|
| System failures |
|
| Cyberattacks |
|
| Regulation by regulatory authorities, etc. |
|
| Inadequate response to risk management for financial crimes, anti-money laundering, and sanctions violations |
|
| Difficulty in securing human resources |
|
| Increase in interest rates due to changes in monetary policy |
|
Below is a list of major risks that management recognizes as having the potential to materially affect the financial position, results of operations, and cash flows of the consolidated companies, based on an analysis of “top risks” indicated above, given the business conditions and financial situation outlined in the Annual Securities Report. From the perspective of proactive disclosure, below we have also disclosed matters that do not necessarily fall under such risk categories but that would be considered important from the viewpoint of investment decisions.
Unless otherwise indicated, forward-looking statements below are based on the Rakuten Bank Group’s estimates as of the date of submission of the Annual Securities Reports (June 25, 2024), are subject to uncertainties, and may differ from actual results.
1．Risks related to the business environment
1) Risks related to the macroeconomic environment
The Rakuten Bank Group, which operates banking businesses in Japan and Taiwan, is affected by domestic economic trends as well as international economic movements, social circumstances, and geopolitical risks. If domestic and foreign interest rates decrease due to changes in monetary policies of central banks in various countries, interest income could decrease. Rakuten Bank encourages customers to use its accounts for everyday transactions such as receiving salaries and direct debits. By integrating both the receipt and payment of funds closely tied to daily life, and by providing a variety of convenient services such as foreign currency deposits, transfers, and international remittances, we aim to expand our fee-based income. However, if the usage of our services decreases due to the stagnation of economic activity, business activity, or a decline in personal consumption, there is a risk that customers may not make their accounts with us their primary accounts for everyday use as expected. Furthermore, a decrease in fee-based income could affect the operating performance and financial condition of the Rakuten Bank Group.
2) Risk associated with serious infectious disease outbreaks
Although the COVID-19 outbreak has largely subsided, with the downgrading of COVID-19 to a Class 5 infectious disease and the lifting of various travel and activity restrictions, unprecedented infectious diseases may again emerge and spread in the future. We will continue to monitor the occurrence and infection status of various infectious diseases both in Japan and overseas, as well as associated economic trends, and carry out appropriate risk management. However, if the economic situation were to worsen beyond our expectations due to a larger-than-anticipated spread of the virus or if an economic downturn were to be prolonged, we could experience lower revenue due to a decrease in demand for funds, a rise in credit-related costs, unrealized losses on marketable securities, etc., which could affect the operating performance and financial condition of the Rakuten Bank Group.
Recognizing that banking services are a form of social infrastructure, the Rakuten Bank Group has implemented various infection prevention measures to fulfill its social responsibility of providing payment, deposit, and lending services under any circumstances while striving to prevent the spread of infection. We will continue taking measures to prevent infections, such as installing partitions in offices, separating workplaces of employees in the same department, implementing shift work, and expanding teleworking, based on a system for ensuring the continuity of our existing business. However, if an infectious disease breaks out and a large number of officers and employees fall ill, our operational continuity could be disrupted.
3) Competitive environment
The Rakuten Bank Group engages in internet banking. Several other financial institutions in Japan also focus on internet banking, and certain other financial institutions that have advantages over us in terms of funds and the personnel to allocate to internet banking have shown signs of investing management resources in this business. Accordingly, competition among financial institutions in the field of internet banking could intensify. Furthermore, while Rakuten Bank mainly provides banking services to customers over the internet, some customers prefer traditional face-to-face banking services, so competition to acquire customers could intensify with financial institutions that have physical branches.
In addition, we are seeing movements into the banking business and the provision of financial services among companies from other industries, and the potential for competition exists even within Rakuten Group, especially in the area of cashless payment. While monitoring trends at financial institutions and other industries that could become competitors, the Rakuten Bank Group continues to provide services that meet customer needs. However, if these efforts do not produce the expected results, and if our services lose competitiveness, it could affect the operating performance and financial condition of the Rakuten Bank Group. Furthermore, we believe that Rakuten Bank can provide services that are more convenient and competitively priced than those offered by other internet banks by leveraging the Rakuten brand and Rakuten Points, and by utilizing the Rakuten Ecosystem through cross-referrals among other Rakuten Group companies. We will continue to enhance synergies of the Rakuten Ecosystem to acquire new customers and promote customer retention. However, should the Rakuten Ecosystem or Rakuten Points lose their competitiveness in the face of competition from other company groups, causing our services also to lose competitiveness, this could affect the operating performance and financial condition of the Rakuten Bank Group.
4) Technological innovation in the industry
The Rakuten Bank Group engages in the internet banking business, which is characterized by rapid technological advancement and change, with services utilizing new technologies being introduced frequently. Rakuten Bank constantly researches the latest technological and market trends, strives to introduce services with high technical superiority, and considers improvements to existing systems, as part of its measures to maintain competitiveness. However, if any factor were to delay our response to such changes, our services could become obsolete and our competitiveness could decrease. Additionally, even if we are able to adapt to changes, the adoption of cashless payments by our customers may not proceed as expected, or costs may increase due to improvements in existing systems or development of new systems. These trends and the adeptness of our response could affect the operating performance and financial condition of the Rakuten Bank Group. Moreover, a technology could be developed that would disrupt the business operations of the Rakuten Bank Group. If such technology were to become widely adopted, it could affect the operating performance and financial condition of the Rakuten Bank Group.
2． Risks related to relationship with Rakuten Group
1) Control or significant influence by Rakuten Group, Inc., over matters to be resolved at the General Meeting of Shareholders
Rakuten Bank is a consolidated subsidiary of Rakuten Group, Inc. (listed on the Prime Market of the Tokyo Stock Exchange). To ensure transparency and fairness in decision-making, Rakuten Bank has appointed outside directors as more than half of its directors. Additionally, we have established a Special Advisory Committee composed of independent officers (meaning outside directors and outside auditors who are unlikely to have conflicts of interest with general shareholders). This committee verifies the necessity of transactions and appropriateness of transaction conditions, among other things, from the perspective of protecting minority shareholders when deciding on management policies based on requests from Rakuten Group, Inc. relating to group business strategies, personnel matters related to the Rakuten Bank Group and Rakuten Group, and executing transactions and other acts with Rakuten Group, such as the conclusion of a master management agreement and a non-exclusive brand licensing agreement. Rakuten Bank is obligated to either consult with the committee in advance or report to it after the fact. Rakuten Bank has signed a master management agreement with Rakuten Group, Inc. Considering the risk of conflicts of interest between Rakuten Group, Inc. and our shareholders under this contract, Rakuten Group, Inc. has agreed to respect the independence required of a listed subsidiary. However, Rakuten Group, Inc. may significantly influence the management of the Rakuten Bank Group in decisions requiring shareholder meeting resolutions, such as the appointment or dismissal of directors and auditors, changes to the Articles of Incorporation, and the determination of important Bank policies. In the master management agreement, Rakuten Group, Inc. agrees to respect a structure that ensures proper governance checks, such as actively appointing directors from outside the Rakuten Group, and to respect our authority regarding the personnel affairs of our employees. The agreement does not stipulate any items that require prior approval or consultation with Rakuten Group, Inc., and reports from Rakuten Bank to Rakuten Group, Inc., are conducted as necessary and within the scope that does not violate laws and regulations based on the agreement. Additionally, the agreement stipulates that in the event of a deterioration in our business condition, Rakuten Group, Inc., will take necessary measures to ensure the sound and appropriate operation of our business. If the business condition of Rakuten Group, Inc. worsens, the agreement stipulates that Rakuten Group, Inc. will not ask Rakuten Bank for support, such as capital investment or financing.
The details of the main relationships between Rakuten Bank and Rakuten Group, Inc. and other affiliated companies can be found in sections “2) Concurrent appointment of officers” through “7) Business relationships with Rakuten Group companies.”
2) Concurrent appointment of officers
One of Rakuten Bank’s directors, Hiroshi Mikitani serves concurrently as an officer of Rakuten Group, Inc. and other key subsidiaries. To achieve further growth following our listing, we believe it is essential both to pursue synergies with Rakuten Group and to expand our business with customers outside the Rakuten Group. Mr. Mikitani offers profound insights into the banking business due to his background at the Industrial Bank of Japan, Limited and his experience as a Director of Rakuten Bank. Moreover, his roles as Chairman and Representative Director of Rakuten Group, Inc., Rakuten Card Co., Ltd., and Rakuten Mobile, Inc. enable him to have a comprehensive understanding of the entire Rakuten Group business. In terms of strengthening our business with customers outside the Rakuten Group, Mr. Mikitani has a broad network both in Japan and abroad, as he serves as the Representative Director of the Japan Association of New Economy. We believe his extensive achievements, experience, and broad network will contribute to the pursuit of further synergies between Rakuten Group and Rakuten Bank and help expand our business foundation outside the Rakuten Group, so we invited him to take his current position. As Mr. Mikitani’s appointment is a personnel matter relevant to both the Rakuten Bank Group and Rakuten Group, we consulted the Special Advisory Committee in advance and received a statement of opinion with no objections from all members in attendance.
3) Secondment and concurrent assignment of employees
Rakuten Group, Inc. actively facilitates personnel exchanges within the group, considering operational efficiency, business necessity, talent development, and the potential career paths of its employees. Rakuten Bank also accepts seconded employees from other companies within the Rakuten Group, including Rakuten Group, Inc. As of March 31, 2024, we had 99 employees who were seconded from other companies within the Rakuten Group. As they make up about 10% of our total employee population, we do not believe we are overly dependent on seconded employees.
For executive-level positions such as organizational heads responsible for their own organizations, we have switched from secondment to transfer from the parent company, in order to ensure independence and management stability. We continuously monitor secondment relationships and make decisions on the term of secondment under Rakuten Bank’s initiative. We conduct secondments from Rakuten Bank to other companies within the Rakuten Group only when we deem them necessary for our business.
4) Risks associated with the use of the Rakuten brand, etc.
Rakuten Bank has entered into a master management agreement with Rakuten Group, Inc., and based on this agreement, we have signed a non-exclusive brand licensing agreement to use the “Rakuten” brand. Consequently, we pay a brand license fee to Rakuten Group, Inc.
If the non-exclusive brand licensing agreement ends or is cancelled or altered for any reason, such as our no longer being a subsidiary or affiliate of Rakuten Group, Inc., we may face restrictions on or the inability to use the “Rakuten” or other brands. This could affect our ability to acquire clients through the Rakuten Ecosystem, result in a decline in the name recognition of services we offer, and cause revenue to decline if service usage stagnates. This could affect the Rakuten Bank Group’s operations, operating performance, and financial condition.
Additionally, the overall brand of the Rakuten Group could be affected if negative impressions arise due to administrative actions involving Rakuten Group, Inc., any other Rakuten Group companies, or the Rakuten Bank Group, if instances of scandal result in mistrust toward products and services, or if inaccurate or speculative information is reported and disseminated. This could prompt user defections, leading to a decrease in revenue, and potentially affecting the operations, operating performance, and financial condition of the Rakuten Bank Group.
5) Risks associated with business alliances among Rakuten Group companies
Rakuten Bank is pursuing synergies with the Rakuten Ecosystem and taking measures to acquire new customers and enhance loyalty to Rakuten Bank by leveraging the Rakuten Group’s strong customer base of over 100 million IDs (as of March 2024). We have various partnerships with Rakuten Group, Inc., such as point program collaborations, account links with Rakuten Securities, Inc. (Money Bridge), bank agency outsourcing, financial product brokerage operations, and so on. We also outsource bank agency operations to Rakuten Card Co., Ltd., Rakuten Life Insurance Co., Ltd., and Rakuten General Insurance Co., Ltd. among others. Key details of these partnerships are described below, from “i. Applications to open accounts via the Rakuten Group” to “iii. Rakuten Points.”
i. Applications to open accounts via the Rakuten Group
Approximately 70% of Rakuten Bank’s new account openings in FY2023 came via banner ads for Rakuten Bank posted on the websites and apps of various Rakuten Group companies. We believe that Rakuten members who utilize the Rakuten Ecosystem have a high likelihood of becoming active after opening an account, given their use of services offered by the Rakuten Group. This dynamic allows us to potentially keep the cost of acquisition per active customer low. Therefore, we have strategically focused on obtaining account opening applications from Rakuten members who utilize the Rakuten Ecosystem. Moving forward, in addition to continuing to focus on obtaining account opening applications via the Rakuten Group, we aim to expand account acquisitions from channels outside the Rakuten Group as Rakuten Bank’s brand recognition increases, as well as from employees of our corporate clients. As a result, we anticipate a gradual increase in the proportion of account opening applications obtained from channels outside the Rakuten Group.
However, if we were to no longer be a subsidiary or affiliate of Rakuten Group, Inc., the terms of our advertising activities within the Rakuten Group could change, or we may become unable to continue our advertising activities as before. As a result, it could become difficult for us to continue suppressing acquisition costs per active customer, which could impact the business, operating performance, and financial condition of the Rakuten Bank Group.
ii. Account links with Rakuten Securities, Inc. (accounts linked through Money Bridge)
As of the end of FY2023, about 80% of Rakuten Bank’s personal deposit balance came from accounts linked through the Money Bridge program with Rakuten Securities, Inc. Money Bridge accounts are widely used by our customers due to the convenience of deposits and withdrawals, and we believe the preferential interest rates on Money Bridge ordinary deposits have earned customer support. We are considering gradually expanding preferential interest rate measures other than Money Bridge for ordinary deposits to meet diverse customer needs. As our business expands, we expect the proportion of deposits aimed solely at the preferential interest rates of Money Bridge to decrease progressively. Funds from the deposits in the Money Bridge accounts that are not used for securities investments with Rakuten Securities, Inc. are used for everyday customer needs and the like, with much of the deposit balance of Money Bridge accounts being allocated to meeting customers’ everyday needs.
Should Rakuten Bank cease to be a subsidiary or affiliate of Rakuten Group, Inc., the conditions of our collaboration may change, or we might become unable to continue collaboration, which could prevent us from enjoying the same benefits as before. In such a case, the Rakuten Bank Group’s operations, operating performance, and financial condition may be affected.
iii. Rakuten Points
We have a customer benefit program called the “Happy Program,” through which we award Rakuten Points to customers based on their use of our services and their deposit balance. We also have a program that returns a certain percentage of debit card usage amounts to customers in the form of points. Furthermore, through various campaigns and programs, we offer points to customers who meet certain conditions during a specific period. We also participate in the Super Point Up program (hereinafter, the “SPU program”), a point program of Rakuten Group, Inc. We offer customers the benefit of increasing the Rakuten Points that can be earned on Rakuten Market. Specifically, we provide 1) 0.3x reward points for payments made with Rakuten Card on Rakuten Market when the Rakuten Bank account is set as the direct debit account, and 2) additional 0.2x reward points for setting the Rakuten Bank account as the direct deposit account of payroll.We cover the full costs of the Rakuten Points that we provide to these customers. To account for the Rakuten Points awarded to customers, we deduct the cost of Rakuten Points from revenue at the time we recognize revenue from transactions in which Rakuten Points are directly linked to a transaction amount or a number of customer transactions. Other point-related costs are recognized as sales promotion expenses at the time they are incurred. We incur no costs on Rakuten Points allocated to customers that can be used in whole or in part for service charges when using our services, as we claim the equivalent value of the used points from Rakuten Group, Inc. Additionally, we have an agreement on the use of Group core assets with Rakuten Group, Inc. to use the system related to Rakuten Points. Based on this agreement, we pay point system usage fees (as specified in “7) Business relationships with Rakuten Group companies”) to Rakuten Group, Inc. for 1) awarding Rakuten Points to our customers, and 2) applying Rakuten Points towards service charges, etc., when our services are used by customers.
If Rakuten Bank ceases to be a subsidiary or affiliate of Rakuten Group, Inc., the terms of the said program may be changed, or it may be impossible to continue the program. In such a case, replacing the point benefits with cashback of equivalent economic value might be an option. If the effect of such a replacement measure falls short of the Rakuten Points benefits, this could affect the Rakuten Bank Group’s business, operating performance, and financial condition. With regard to the results obtained from Rakuten Points benefits, the profits obtained from the use of Rakuten Points and the costs associated with such use are regularly verified according to specific conditions, and the results are reported to the Special Advisory Committee. Although the likelihood is limited, if the results obtained from Rakuten Points benefits fall short of the costs required to provide Rakuten Points benefits, this could affect the Rakuten Bank Group’s business, operating performance, and financial condition.
6) Risks associated with securitization transactions backed by monetary claims within the Rakuten Group
Rakuten Bank purchases trust beneficiary rights backed by monetary claims within the Rakuten Group, such as Rakuten Card Co., Ltd.’s credit card receivables and Rakuten Mobile, Inc.’s subscriber fee receivables. The total balance of these trust beneficiary rights as of the end of FY2023 amounted to 2,292,482 million yen. While we are expanding our personal loans and business loans and increasing our investments in government bonds, government-guaranteed bonds, corporate bonds, and foreign bonds, considering the creditworthiness of our investees and spread, if we were to cease being a subsidiary or affiliate of Rakuten Group, Inc., opportunities to securitize group companies’ monetary claims may decrease. This could affect the Rakuten Bank Group’s business, operating performance, and financial condition.
7) Business relationships with Rakuten Group companies
The Rakuten Bank Group conducts transactions with various companies within the Rakuten Group. Taking into account the independence of the Rakuten Bank Group, when engaging in transactions and other actions with Rakuten Group, including the conclusion of a master management agreement and a non-exclusive brand licensing agreement with Rakuten Group, Inc., we consult with the Special Advisory Committee beforehand or report to it afterwards regarding the business necessity of the transaction and the appropriateness of the transaction conditions, among other things. We follow procedures based on the approval authority stipulated in internal regulations, and we have built a system to ensure the soundness and appropriateness of the transactions.
The main transactions between Rakuten Bank and the Rakuten Group in FY2023 were as follows.
(Transactions between Rakuten Bank and Rakuten Group, Inc.)
| Transaction type | FY2023 | Method of determining transaction terms, etc. | |
|---|---|---|---|
| Transaction amount (Millions of yen) |
Year-end balance (Millions of yen) |
||
| Payment of sales promotion expenses | 10,549 | ― | Rakuten Bank bears the actual amount of point costs incurred in connection with the granting of Rakuten Points. Rakuten Points, which are directly linked to the amount and number of transactions with customers, are deducted from revenue at the time of revenue recognition, and the transaction amount includes the amount equivalent to such deductions. |
| Payment of brand license fees | 1,305 | ― | The rate is based on a certain percentage of Rakuten Bank Group gross profit, which is rationally determined upon consultation with Rakuten Group, Inc. |
| Payment of point system usage fees | 2,338 | ― | The rate is determined based on a certain percentage of the amount of Rakuten Points granted, which is rationally determined upon consultation with Rakuten Group, Inc. |
| Rental fee payments | 444 | ― | The price is equivalent to market prices in the neighborhood. |
(Transactions between Rakuten Bank and Rakuten Card Co., Ltd.)
| Transaction type | FY2023 | Method of determining transaction terms, etc. | |
|---|---|---|---|
| Transaction amount (Millions of yen) |
Year-end balance (Millions of yen) |
||
| Interest income on trust beneficiary rights | 17,455 | 2,152,451 | The amount is rationally determined in consideration of general market conditions and upon consultation with Rakuten Card Co., Ltd. The ending balance column shows the balance of trust beneficiary rights underwritten. |
| Subrogation payments received | 7,991 | 208,037 | Transactions are conducted under the same general terms and conditions as arm’s length transactions. The balance at the end of the period shows the balance of guarantees for personal loan receivables. |
| Payment of guarantee fees | 12,062 | ― | This represents the payment of guarantee fees for the portion of Rakuten Bank’s card loan balance that is guaranteed by Rakuten Card Co., Ltd. The transaction terms are determined in consultation with Rakuten Card Co., Ltd., taking into account the rate of guarantee fees generally used in the industry. |
(Transactions between Rakuten Bank and Rakuten Securities, Inc.)
| Transaction type | FY2023 | Method of determining transaction terms, etc. | |
|---|---|---|---|
| Transaction amount (Millions of yen) |
Year-end balance (Millions of yen) |
||
| Settlement and financial instrument brokerage commissions, etc. | 4,881 | ― | The general terms and conditions used are the same as for arm’s length transactions. |
(Transactions between Rakuten Bank and Rakuten Life Insurance Co., Ltd.)
| Transaction type | FY2023 | Method of determining transaction terms, etc. | |
|---|---|---|---|
| Transaction amount (Millions of yen) |
Year-end balance (Millions of yen) |
||
| Premium payments | 1,563 | ― | The general terms and conditions used are the same as for arm’s length transactions. |
(Transactions between Rakuten Bank and Keiba Mall, Inc.)
| Transaction type | FY2023 | Method of determining transaction terms, etc. | |
|---|---|---|---|
| Transaction amount (Millions of yen) |
Year-end balance (Millions of yen) |
||
| Receipt of settlement fees, etc. | 1,924 | ― | The general terms and conditions used are the same as for arm’s length transactions. |
3． Risks related to the Rakuten Bank Group’s business
1) Risks in business strategy
Rakuten Bank aims to expand its operations by increasing its customer base and leveraging this customer base to increase fee income and interest income. However, the following factors could affect the Rakuten Bank Group’s business, operating performance, and financial condition.
- Rakuten Bank considers the number of accounts and the deposit balance to be important management indicators. While we strive to expand our customer base by promoting the convenience and price competitiveness of our services, the growth of these indicators could slow or stagnate if our services grow less competitive vis-à-vis those of other internet banks. This could affect the Rakuten Bank Group’s business, operating performance, and financial condition. Additionally, the number of customers using internet banking via smartphone apps is increasing. While we aim to continuously improve the convenience and functionality of our smartphone app to meet customer needs, an inability to respond appropriately to these customer needs could affect the operating performance and financial condition of the Rakuten Bank Group.
- Rakuten Bank does not have its own network of branches or ATMs. Accordingly, we provide cash deposit and withdrawal services to customers by entering into contracts with other financial institutions for the use of ATMs. If the relationships with these financial institutions were to worsen, if any problems were to occur in the systems connecting to other financial institutions, or if for any reason it became difficult for other financial institutions to provide services that meet the needs of our Bank, these factors could affect the operating performance and financial condition of the Rakuten Bank Group.
- The Rakuten Bank Group is actively considering entering new businesses within the scope of the Banking Act in order to secure new revenue opportunities. However, it is possible that if the Rakuten Bank Group enters into business areas where it has not previously operated, or into highly competitive fields, it may be unable to expand its business or achieve the results initially expected. This could affect the operating performance and financial condition of the Rakuten Bank Group.
2) Risks related to overseas business
Rakuten Bank operates a banking subsidiary in Taiwan. This subsidiary is subject to local laws, self-regulatory measures, and inspections by local regulatory authorities. It is also affected by the political and economic environment in Taiwan. Including the dispatch of officers, we have established governance, compliance, and risk management frameworks for the subsidiary as a member of the Rakuten Bank Group. However, if the subsidiary violates laws or self-regulatory measures, the local regulatory authorities could impose penalties, fines, or business improvement orders, suspension of business orders, or cancel permits. This could affect the operating performance and financial condition of the Rakuten Bank Group. Changes in the political and economic environment surrounding the subsidiary or unforeseen events like natural disasters could also affect the performance and financial condition of the Rakuten Bank Group. Moreover, changes in exchange rates could reduce the profits of the Rakuten Bank Group. If the subsidiary’s capital is significantly impaired due to the aforementioned factors, Rakuten Bank may, as the parent company, be requested to provide support, including capital increases.
3) Risks related to the Medium- to Long-Term Vision
Rakuten Bank formulated and announced its Medium- to Long-Term Vision on April 28, 2022. However, the execution of growth strategies and the achievement of goals in the Medium- to Long-Term Vision are subject to various risk factors and uncertainties, including those described in the “Risk Factors” section. Furthermore, the Medium- to Long-Term Vision is based on various assumptions made at the time of formulation, such as our understanding of the economic and business environment at that time. If these assumptions do not materialize as expected, executing the growth strategies and achieving the goals set out in the Medium- to Long-Term Vision could prove difficult. This could have a significant impact on the Rakuten Bank Group’s operating performance and financial condition.
4) Risks related to natural disasters, pandemics, etc.
The occurrence of an earthquake, typhoon, tsunami, torrential rain or other natural disaster, fire, power outage, power shortage, extreme weather conditions, war, terrorism or other criminal acts, or pandemics could have a significant impact on the Rakuten Bank Group’s operating performance and financial condition.
Should disasters or pandemics occur, economic activity may stagnate, potentially reducing demand for the services provided by the Rakuten Bank Group. Furthermore, the Rakuten Bank Group’s headquarters, branch offices, data centers, or other facilities could suffer direct or indirect damage from these disasters or pandemics, causing damage to physical structures and people. Communication networks and information systems might not operate normally, potentially complicating the continuation of the Rakuten Bank Group’s operations. Additionally, the Group may have to alter its business operations, such as by limiting or suspending the attendance of officers and employees depending on the situation, to ensure their safety. This could potentially lead to a decline in services.
The Rakuten Bank Group has established a business continuity plan (BCP) to prepare for the occurrence of such disasters and pandemics. We strive to minimize such risks by conducting regular training aimed at making business continuity more certain. However, if the scale of the disaster or pandemic exceeds our expectations, the BCP may prove insufficient, and risks could manifest, making it difficult or impossible to continue operations. This could have a significant impact on the Rakuten Bank Group’s operating performance and financial condition.
5) Risks related to climate change
Global efforts to reduce greenhouse gases, which are implicated as a cause of climate change, are accelerating in response to the Paris Agreement adopted in 2015. Climate change risks can be divided broadly into physical risks associated with climate change and transition risks associated with the expansion of various regulations due to the transition to a decarbonized society. Physical risks include potential economic stagnation due to extreme weather events such as typhoons and heavy rains, and an increase in credit-related costs due to damage to collateral value. As we transition to a decarbonized society and work to reduce CO2 emissions, carbon taxes and various regulations could be imposed in Japan and Taiwan, where the Rakuten Bank Group operates. Rakuten Bank has established a Sustainability Promotion Council as a cross-departmental meeting body and is working to strengthen its commitment to sustainability, including through the transition to a decarbonized society. However, these initiatives could prove unsuccessful or insufficient, or the cost of complying with various regulations could increase. This could have a significant impact on the Rakuten Bank Group’s operating performance and financial condition.
6) Risks related to information systems
The Rakuten Bank Group conducts its banking business through a communication network that connects computer systems. However, vulnerabilities or defects could arise in the information systems of third parties, such as Rakuten Bank Group, other Rakuten Group companies, or external service providers or business partners, due to issues with or defects in the hardware or software on networks or computer systems. Additionally, mistakes by officers and employees could disrupt regular service provision, or lead to the loss of important data and leaks of confidential information.
To prevent and mitigate these risks, we have strengthened our surveillance system and introduced a variety of technical and physical measures, such as diversifying communication networks, having a backup system, and establishing data centers at multiple locations. However, if such risks manifest, the Rakuten Bank Group’s system could cease operation temporarily, and we may be compelled to compensate customers for damages caused by the system stoppage. We could also receive administrative sanctions from the supervisory authorities, which could damage the Rakuten Bank Group’s social credibility, affecting the operating performance and financial condition of the Rakuten Bank Group.
7) Risks related to cyberattacks
The Rakuten Bank Group provides services through a communication network that connects computer systems. Therefore, it is possible that we may not be able to ensure the availability, confidentiality, and integrity of information systems due to malfunctions, defects in hardware or software on the network or computer systems, phishing emails or computer viruses that launch attacks on customers, or unauthorized intrusions into the Rakuten Bank Group’s computer systems from outside. Such events could result in the unauthorized use of the Rakuten Bank Group’s services, loss of critical data, and theft.
To prevent and mitigate these risks, we have strengthened our supervisory system and implemented a variety of technical and physical measures. However, the manifestation of such risks could damage the Rakuten Bank Group’s social credibility, cause customer attrition, result in claims for damages, and lead to administrative action from the supervisory authorities. These could affect the operating performance and financial condition of the Rakuten Bank Group.
8) Response to financial crimes
The Rakuten Bank Group, which is characterized by non-face-to-face transactions over the internet, rigorously confirms transactions at the time accounts are opened. In addition, Rakuten Bank monitors the status of account usage after an account has been opened, seeking to preempt any financial crimes related to its accounts and focusing on depositor protection. However, if Rakuten Bank’s measures fail to successfully counter the rapid sophistication and complexity of criminal methods, its social credibility could be damaged, harming the reputation of the Rakuten Bank Group. Furthermore, the execution of additional measures to counter advanced criminal methods could involve costs that would affect the operating performance and financial condition of the Rakuten Bank Group.
9) Risks related to leaks of personal information
The Rakuten Bank Group, which engages in the banking business, holds customer information, including personal information. As a “business operator handling personal information” as stipulated in the “Act on the Protection of Personal Information,” we have established a system to appropriately comply with the provisions of the law, such as the public disclosure or notification of the purpose of using personal information, taking sufficient care in managing personal data, and properly responding to requests by individuals to disclose the personal data we hold. In addition, we have stipulated these matters in the “Detailed Rules for the Protection of Personal Information” and are making our officers and employees thoroughly aware of them. Furthermore, when external contractors handle Rakuten Bank’s personal data, we enter into contracts that include matters defined as “content related to security management to be included in outsourcing contracts” in the All Banks Personal Data Protection Council’s “Guidelines concerning Security Management Measures for Personal Data,” and we strictly manage customer information containing personal information. However, if an information leak or similar incident were to occur and result in substantial damages to our customers, the Rakuten Bank Group could suffer a decline in social credibility, leading to customer defections and claims for damages. Moreover, administrative actions could be taken by regulatory agencies, affecting the operating performance of the Rakuten Bank Group.
10) Risks related to litigation
The Rakuten Bank Group, which operates in Japan and Taiwan, provides a wide range of high-value services. In the course of these operations, system failures or other issues could harm or infringe upon third-party intellectual property rights, possibly leading to lawsuits for damages and potentially necessitating compensation for any harm caused. The Rakuten Bank Group consistently strives to provide appropriate and lawful services through measures such as seeking advice as needed from external experts, including attorneys, and consulting with regulatory authorities in advance. However, the potential for litigation cannot be ruled out entirely. The materialization of such risks could result in significant losses and damage to the social credibility of the Rakuten Bank Group, which, depending on the content of the litigation and the amount claimed, could affect the operating performance and financial condition of the Rakuten Bank Group.
11) Reputational risks
The Rakuten Bank Group’s business is built on the trust and confidence of its customers, including depositors. Accordingly, we believe it is important to maintain and enhance this trust. As such, we define reputational risk as the risk of our operations being hindered by various risk events that actually occur in relation to Rakuten Bank’s operations, or that are due to reports or rumors resulting from events not in accordance with the facts. We have established a system to manage such risks. However, if the reputation of the Rakuten Bank Group is called into question in the media or rumors are spread through posts on internet message boards, customers could believe such rumors and change their view of the Rakuten Bank Group, even if the rumors are different from the facts. This could affect the operating performance and financial condition of the Rakuten Bank Group.
12) Regulation by the regulatory authorities, etc.
Rakuten Bank has been granted a license to operate a banking business under Article 4-1 of the Banking Act, and under this license it engages in various businesses, including deposit collection, foreign exchange, and lending. While there is no specified effective period or other time limit set out in laws and regulations for engaging in the banking business, Article 26 of the Banking Act prescribes the conditions for suspension of business, and Article 27 of the same law provides for the revocation of licenses. If these conditions apply, Rakuten Bank may be ordered to suspend its business or have its license revoked.
At present, we are aware of no facts that would trigger these events. However, if in the future our operations are suspended or our license is revoked for any reason, the main business activities of the Rakuten Bank Group could be disrupted, substantially affecting our business, operating performance, and financial condition.
In addition to the above, the Rakuten Bank Group is subject to various regulations under the Banking Act, such as large-scale credit supply restrictions, scope of business restrictions, and the arm’s length principle, as well as other financial-related laws and regulations such as the Financial Instruments and Exchange Act and the Trust Business Act. We are also subject to supervisory guidelines related to these laws and regulations issued by supervisory authorities, and self-regulation by industry groups. In relation to this, we are supervised by regulatory authorities and self-regulatory organizations, and such supervision includes measures such as administrative sanctions, guidance, on-site inspections, interviews, and the collection of documents both on-site and off-site. In the event that administrative measures, guidance, or inspections are implemented by supervisory authorities due to violations of laws and regulations, discrepancies in legal interpretations, or other reasons, or if sanctions are imposed by self-regulatory organizations on the Rakuten Bank Group, or in the case of revisions or introductions of new financial laws and regulations, supervisory guidelines, and self-regulations that could affect our services, the Rakuten Bank Group’s business, operating performance, and financial condition could be affected.
13) Risk of deterioration of the capital adequacy ratio
Rakuten Bank calculates its capital adequacy ratio in accordance with the “standards stipulated by Article 14-2 of the Banking Act for the purpose of determining whether banks have sufficient equity capital given their holdings of assets and other instruments (Notification No. 19, the Financial Services Agency of Japan, 2006).” As a domestic standard bank, Rakuten Bank is required to maintain a capital adequacy ratio of at least 4%.
We strive to maintain an adequate and sufficient capital adequacy ratio, taking into account the circumstances presented in this “Risk Factors” section. However, should the various risks listed herein manifest, or if regulations were to change, our capital adequacy ratio could decrease. Furthermore, if the capital adequacy ratio falls below 4%, administrative measures, including a halt in all or part of our operations, may be imposed by the Financial Services Agency, which could affect the operating performance and financial condition of the Rakuten Bank Group.
14) Risks related to ratings
Rakuten Bank has obtained credit ratings from rating agencies. However, should a rating agency lower Rakuten Bank’s credit rating due to factors such as Rakuten Bank’s performance, changes to its reputation, or developments at its parent company, Rakuten Group, Inc., this could lead to the deterioration of transaction conditions for fundraising, the requirement of additional collateral for market-related transactions, and the possibility of existing transactions being cancelled. These factors could affect Rakuten Bank’s capital and fundraising activities, as well as the operating performance and financial condition of the Rakuten Bank Group. Moreover, if Rakuten Group, Inc. or any other company within the Rakuten Group has its credit rating lowered, this could also affect the operating performance and financial condition of the Rakuten Bank Group.
15) Risks related to human resources
The Rakuten Bank Group engages in banking operations centered on internet banking that requires high levels of expertise. As a result, in our efforts to recruit and cultivate skilled personnel, we inevitably compete with other financial institutions, as well as internet service providers and system-related companies. The inability to secure the necessary personnel could reduce Rakuten Bank’s competitiveness and affect the operating performance and financial condition of the Rakuten Bank Group.
16) Compliance risks
The Rakuten Bank Group is governed by various laws, such as the Banking Act, the Financial Instruments and Exchange Act, the Trust Business Act, and the Companies Act, as well as the rules set by supervisory authorities and self-regulatory bodies. The Group regards compliance with these laws and regulations as a critical management responsibility and is committed to strengthening its compliance framework and ensuring adherence to these laws and regulations. However, if officers and employees fail to comply with these laws and regulations, or engage in fraudulent activities, the Group could be subject to administrative sanctions by supervisory authorities, application of penalties, and a loss of trust from customers. This could affect the operating performance and financial condition of the Rakuten Bank Group.
The Bank has established anti-money laundering and anti-terrorist financing measures demanded of financial institutions in accordance with the Guidelines on Measures to Prevent Money Laundering and Funding of Terrorists issued by regulatory authorities. We have also put in place measures against the risk of engaging in transactions that violate or are at risk of violating economic sanctions or that are disguised to evade such sanctions, as outlined in the Compliance Requirements for Foreign Exchange Brokers and Traders and the Guidelines for Compliance with Foreign Exchange Laws and Regulations for Foreign Exchange Brokers and Traders (hereafter, “sanctions risk management measures”). While we believe we have sufficient anti-money laundering and sanctions risk management measures in place at present, we intend to continue working to maintain appropriate systems. However, if violations were to occur due to these anti-money laundering and sanctions risk management measures failing to function effectively, or if our anti-money laundering and sanctions risk management measures were judged not to meet the level required by the regulatory authority, we could be subject to administrative sanctions by the supervisory authorities, penalties, and a loss of trust from customers, which could affect the operating performance and financial condition of the Rakuten Bank Group.
17) Credit risks
The Rakuten Bank Group holds loans and bills receivable from individual and corporate customers, marketable securities such as government and corporate bonds, as well as trust beneficiary rights backed by monetary claims within and outside the Rakuten Group. If economic conditions deteriorate, or if the creditworthiness of debtors or bond issuers worsens significantly, the creditworthiness of the original assets of the loans, bonds, and trust beneficiary rights held by the Rakuten Bank Group may decline, potentially leading to defaults on principal and interest payments. As a result, we could be required to book more allowance for these loans and trust beneficiary rights, as well as losses associated with a drop in the market price of held securities.
The Bank undertakes a variety of efforts to reduce credit risks. For loans to individual customers, we conduct credit management, including by developing credit ratings using external credit bureaus. For corporate customers, we conduct credit management by continuously monitoring clients’ business conditions. For the trust beneficiary rights we hold, we monitor the performance of the underlying assets. For the marketable securities we hold, we regularly check issuers’ business conditions as well as market prices. Nevertheless, an unexpected downturn in economic conditions or a deterioration in the debtor’s business environment, as well as an increase in loans for which the repayment of principal and interest is defaulted due to a possible rise in the Bank’s lending interest rate following the Bank of Japan’s termination of the negative interest rate policy in March 2024, could cause loan-loss-related expenses to increase, affecting the operating performance and financial condition of the Rakuten Bank Group.
Additionally, the derivative transactions we conduct to hedge market risk and foreign exchange risk involve counterparty risk. If a counterparty fails to fulfill its obligations, this could affect the operating performance and financial condition of the Rakuten Bank Group.
18) Interest rate risk
The Rakuten Bank Group holds financial products that include marketable securities such as government bonds, government-guaranteed bonds, corporate bonds, and derivatives. These are subject to price fluctuations due to changes in interest rates. In our operation, we conduct asset-liability management (ALM) comprehensively across all funding operations to optimize our asset/liability composition and maintain an appropriate level of capital adequacy. Notably, we pay attention to such factors as interest rate sensitivity, fund liquidity, and market liquidity. However, changes in domestic and international financial policies, including the Bank of Japan’s elimination of long-term interest rate control (yield curve control) in March 2024, downgrades in bond ratings, turmoil in domestic and international markets, deterioration in the financial and economic environment, and other factors could cause interest rate volatility. This could result in unrealized losses and losses on sales, which could affect the operating performance and financial condition of the Rakuten Bank Group.
19) Foreign exchange risk
The Rakuten Bank Group holds assets and liabilities denominated in foreign currencies. While it conducts hedging transactions as necessary to mitigate foreign exchange risk, abrupt changes in exchange rates could result in significant exchange losses, which could affect the operating performance and financial condition of the Rakuten Bank Group.
20) Settlement risk
The Rakuten Bank Group engages in diverse transactions with numerous financial institutions both in Japan and overseas. In the event of a large-scale system failure, disaster, or financial system instability triggered by political turmoil, there is a risk that settlements with financial institutions we trade with may not be conducted or may be delayed. There is also a risk of settlement difficulties in certain transactions with non-financial institutions due to a deterioration in the financial condition of these counterparties. Additionally, in securitization schemes involving trust beneficiary rights that Rakuten Bank purchases, there may be cases where the series of settlements related to the composition and purchase of trust beneficiary rights are not executed as planned, requiring us to recover the purchase amount paid.
The Rakuten Bank Group has established systems to respond quickly in the event of system failures or disasters, such as the dispersed installation of backup servers for important systems like the core banking system, and conducts regular training. In addition, we regularly monitor and conduct stress tests of liquidity during business hours, have a management system to prevent payment delays in the Rakuten Bank Group, and employ a system to grasp the financial condition of non-financial transaction partners as necessary when conducting certain settlement operations with them. Moreover, we have established internal regulations and manuals for recovering the purchase price of monetary claims bought, and we implement operational measures to avoid bearing excessive recovery risk in relation to our own capital. However, should these measures prove insufficient or become ineffective due to situations that deviate from the Rakuten Bank Group’s expectations, the operating performance and financial condition of the Rakuten Bank Group could be affected.
21) Liquidity risk
Rakuten Bank provides banking services that utilize the internet. We offer 24/7 service (except during system maintenance periods) for ordinary deposit withdrawals at ATMs, termination of time deposits, and remittances and transfers to other financial institutions. Given these characteristics of our deposits, we have established a liquidity risk management system, including on-hand liquidity. While we give substantial consideration to liquidity, unforeseen events that lead to deterioration in the economic environment or that negatively affect our reputation could potentially lead to a significant outflow of funds at a faster pace than expected, which could affect the operating performance of the Rakuten Bank Group.
22) Administrative risk
The Rakuten Bank Group strives to establish and operate a robust administrative system through initiatives such as the establishment of internal regulations related to administrative tasks, systematization of operations, thorough re-examinations during administrative processing, post-checks within departments through self-inspections, and efforts to improve operations. Nevertheless, we recognize the possibility of administrative incidents or misconduct occurring, such as officers and employees failing to follow the administrative procedures stipulated in internal regulations, particularly in tasks that require human intervention.
Also, the Rakuten Bank Group could experience a rise in the number of transactions due to the rapid expansion of its customer base, as well as an increase in administrative work due to the introduction of new services. Such upsurges could raise the potential for administrative errors or backlogs, as business execution measures fail to keep pace. This situation could affect the operating performance and financial condition of the Rakuten Bank Group.
23) Risks related to the effectiveness of risk management
The Rakuten Bank Group has formulated a risk management policy, and has built and operated its management structure on this basis. However, the financial market has the potential for sudden and large-scale fluctuations and turmoil. Predicting this volatility accurately is difficult, which may result in risk management not functioning effectively. Furthermore, Rakuten Bank’s risk management may fail to function effectively due to the rapid expansion of its business and fields of business. These factors could affect the operating performance and financial condition of the Rakuten Bank Group. To avoid or mitigate these risks, in principle, we conduct inspections every six months to ascertain changes in the risk profile associated with the expansion of our business and fields of business, and to verify the comprehensiveness of risks to be managed and the validity of risk management methods.
4． Risks related to Rakuten Bank’s shares
Rakuten Bank listed its shares on the Tokyo Stock Exchange’s Prime Market on April 21, 2023. This move was an effort to enhance the liquidity of our shares through a public offering and the sale of our shares by Rakuten Group, Inc. Due to the sale of the Bank’s shares by Rakuten Group, Inc. in December 2023, the Group’s ownership ratio of the Bank’s shares has fallen to 49.26%. Moving forward, we plan to continue improving liquidity by raising growth capital in line with our business plan through public offerings and by increasing the number of outstanding shares through requests to our parent company, Rakuten Group, Inc., for the sale of some of its holdings. However, if liquidity worsens due to changing market conditions or other circumstances, trading in our shares on the market may stagnate, which could adversely affect the supply-demand balance of our shares.