During the weekend I presented the trends on FinTech and Tech Fin, my two favourite subjects. I’ll update on that shortly but I was also involved in a study the organisers – The European House Ambrosetti, a leading economics think tank based in Italy – conducted before the conference. The study looked at the bank of tomorrow. How would it look like? How would it operate? What changes would a bank need to make? and more.
The European House Ambrosetti conducted interviews with many leading Italian bankers, as well as experts such as myself, and produced a 150 page report in Italian, outlining the future. They also produced a shorter English language summary. Here is that summary:
Reference context: the main trends impacting on the banking sector
The context in which banks are operating is undergoing major changes due to both technological evolution and evolution in clientele (private individuals and businesses), which require new modes of dialogue and interaction.
In fact, the survey carried out by The European House – Ambrosetti and Openjobmetis involving a significant sampling of companies based in Italy, shows that the determinant characteristics for preferring one specific bank among those available are, above all, cost considerations, the quality of interpersonal relations, and “process factors” such as speed, flexibility and simplicity. In general:
- a gradual reduction in customer loyalty emerges (more than half of those responding to the survey stated that they do not have one bank they prefer over the others);
- interaction between companies and banks on a professional level is increasingly less-exclusive and -frequent (36% of survey respondents stated they had not had contact with a bank manager in the last month) and increasingly digital (over one-third of the companies interviewed declared they had dealt with banks using virtual channels—smartphones, tablets and PCs—more than 30 times in the last month).
Therefore, it is not surprising, in terms of the factors that could cause a company to change bank, that at the top of the list are economic conditions, the presence of a personal manager, an omnichannel strategy and the availability of new services. These are also aspects identified with the business model typical of Fintech companies already active in a range of banking industry sectors.
In fact, part of this new scenario are “non-traditional” players, such as Fintech and Big Tech companies, whose key business model features are a focus on the client and the use of technology. These companies prosper thanks to the intelligent use of data, which constitutes their main asset: knowledge—a patrimony typically intangible that is their true profit generator.
This intangibility is part of the current trend known as the intangible-rich economy, an economy in which intangible investments outnumber tangible ones, which profoundly changes the financial scenario both because of the difficulty in evaluating the value of these investments (which, by their very nature, can only be guaranteed by their ability to generate profits and are therefore difficult to finance), and because of a number of their specific characteristics such as scalability (the fact that, once the initial cost has been paid, the investment can be extended rapidly to the entire organization at virtually zero cost). This characteristic tends to favor large organizations rather than small- and medium-sized ones, which helps to explain:
- on one hand, the tendency, already in progress, towards concentration in the banking sector, with the further strengthening of “universal banks” (horizontal);
- on the other, the competitive challenge that this represents for European and Italian banks (in fact, the United States and Chinese banking operators are significantly larger than the major European groups and among the world’s top banks for capitalization there is no true “pan-European” bank).
The passage to an economy in which investment in intangible assets surpasses that in tangible assets is of primary importance for the banking system because it entails a major change in both the supply and demand of financial services, which could potentially include new “value added” services that historically lie outside the normal perimeter of banking institutions, but which are validated by a broader search and valorization of customer data.
The competitive scenario for the banking sector and the three key players in the new ways of “doing banking”
New trends are redefining the economic space and in every sector, including banking, new and unimaginable opportunities are opening up. In particular, three major forces are profoundly transforming the entire global scenario:
The new competitive arena polarizes the business models of players; major “universal” banks will tend to become even larger in response to competition from Big Tech companies and “specialty banks” will focus on specific business segments surrounded by a growing number of Fintechs that will find themselves competing or collaborating with the banks. In this scenario, the players most at-risk are the “medium” banks in terms of size and business focus and, therefore, nearly the entire Italian banking system.
Italian banks are, largely, still generalist and small compared with the extent of the global challenge. In addition, the tangible assets which, until a short time ago were a point of strength and an entry barrier for new competitors (IT legacy infrastructure and the network of bank branches) have been transformed into exit barriers due to the technological revolution currently underway, becoming a formidable obstacle on the road to innovation and putting at-risk the economic return of incumbent operators. The true asset on which banks can still rely on is customer loyalty. Even if the scenario changes, customers still want certainty regarding where their money is physically held.
Fintech companies are created to satisfy a specific need of a specific segment of customers and they grow rapidly on a global scale, limited only, occasionally, by the regulatory framework. These companies provide services with quantifiable benefits for customers (customer centricity), enabled by the intelligent use of data (technology). By their very nature, Fintechs often cover a range of financial services and almost always include value added services (VAS). For them, customers include the banking world itself, as shown by the number of Fintechs operating in banking support services.
The European House – Ambrosetti has carried out an in-depth analysis of the value propositions and business models adopted by the top 250 Fintech companies on a global level (assessed each year by CB Insights, the most complete international database in this field), from which it emerges that:
- most Fintechs deal with collection and payment services and banking processes (both 25% of the sample). It is hypothesized that, above all in the area of banking processes, it will be possible to experiment with new approaches and introduce innovative methodologies;
- the concentration of companies in the retail area is high (42% of the sample) since these companies come from B2C to facilitate the customer-bank interface, and the technologies enabled by smartphones and apps were initially aimed specifically at the B2C segment;
- there is a significant focus on commercial customers (30% of the sample), especially regarding collection and payment of B2B and VAS (21 companies), in which Fintechs provide SMEs with even complex services, relieving them of a number of management responsibilities and aiding them in developing their business;
- on the other hand, the concentration of institutional customers (including banks) in the customer facing macro-category is low and it accounts for 3% of the sample; these customers are mainly targeted by the 63 Fintech companies in the B2B support area (core banking and infrastructure), which account for 25% of the sample.
Big Tech companies
“GAFA” (Google, Amazon, Facebook and Apple) as global players and “BAT” (Baidu, Alibaba and Tencent – at the moment concentrated primarily on the Chinese market) generate profits thanks to an extended knowledge of their customers and are, therefore, in a position to easily extend their activity into the financial services area. Suggesting that Big Tech companies would not enter en masse in the financial services sector because of the lower profitability – compared to that to which they are accustomed to, – is not a convincing argument. In fact, there are Big Tech companies that are already providing financial services and not only in the payment area, but for example, financing the working capital of the companies present in their marketplaces.
In addition, another factor which could impact on the future development of non-traditional banking operators and the technological “oligopolists” is the effect of over-regulation: the potential increase in the complexity (and, therefore, costs) of the regulatory and legal system, which banks must currently adhere to and which could also be applied to these players on the national/supranational market.
The challenge of transforming into “Banks of the Future”
Whatever the shape of the future financial ecosystem and the type of relationship – competitive, cooperative or mixed – between the different actors (banks, Big Tech and Fintech companies), it is certain that banks will have to take the challenge of self-transformation very seriously, in two respects:
- On one side, the transformation of customer relations, with the bank becoming truly customer-centric. For example, smartphones have become a privileged channel for accessing financial services. In 2017, the share of users who utilized the Internet or mobile banking in Italy was 62% of the entire clientele, compared with 43% in 2012, while visits to physical bank branches fell from 1.5 to 1.05 times per month between 2012 and 2016.
- On the other, digital transformation, with its implications of new technology and open IT architecture. In fact, the advent of new digital technologies—such as Artificial Intelligence, Application Programming Interfaces (APIs), Blockchain, Cloud Computing, 5G and the Internet of Things—will accelerate the change in the provision of financial services in terms of simplicity, availability, security, reduction in the cost of services offered and ability to gather more precise feedback, more quickly.
Both these aspects will have a strong impact on human resources, both in recruiting the new digital talents required for the transformation, and in the transformation of in-house personnel, without which it will be impossible to attain the number of people required for the change, as well as defining new organizational models.
Given this scenario, what is the possibility that Italian banks can survive and prosper? What mechanisms can be activated? What specific features of the Italian banking market can be used as a driver for growth? And, finally, what “policy package” could help to safeguard the future of Italian banks (education policies, policies for professional training and concrete employment-related policies)?
Recommendations for managing the transition and policy implications
In light of the analysis performed and the information gathered by the Steering Committee that guided the Ambrosetti Club research as well as from major business leaders and financial sector experts interviewed in Italy and around the world, The European House – Ambrosetti developed 10 recommendations for policy makers and the banking sector leadership:
- Eliminate the forms of (regulatory) “penalization” which make it less profitable for banks to invest in intangible assets.
- Stimulate a package of services in support of small- and medium-sized companies looking to invest in intangible assets.
- Draw up a homogeneous regulatory structure (level playing field) on a European level for financial and other operators.
- Define new collaborative models to guide the sector’s digital transformation.
- Provide mechanisms to facilitate the spread of Open Innovation in the banking sector.
- Monitor the risks to governance and security within the new competitive context.
- Reinforce the attractiveness of incumbent banks towards “digital talent” by rethinking the “job pact”.
- Promote the evolution of the national educational system to improve its ability to provide individuals with the right competitive skill levels.
- Spread the “culture of permanent professional training” as a driver for individual professional development.
- Provide for financial incentives to limit the qualitative/ quantitative effects of the competitive transformation.
If you’re not familiar, The European House Ambrosetti is one of the world’s leading think tanks. Best known in Italy, it operates a global operation focused upon research and consulting around economics and the future.