Open Review of Management, Banking and Finance

«They say things are happening at the border, but nobody knows which border» (Mark Strand)

Is credit business digitization a milestone or tombstone for “traditional” banks?

by Jacopo Paoloni and Madjid Tavana

Abstract: With “Fintech” (technological finance) we are generally addressing the phenomenon of the use of digital tools in the financial field, which has led to the conversion and implementation of old services and products, as well as the birth of new ones. In the banking sector, the digitization of processes has undoubtedly involved a considerable rationalization of costs – as well as important initial investments – and a radical change not only in the offer of services but also in the choice of skills of the current and future work force.

Summary: 1. Introduction; 2. The new banking market. Refinement or upheaval; 2.1. A new technical-production paradigm; 2.2. The factors behind an epochal change; 2.3. Fintech products and processes; 2.4. New players for a new credit market; 3. Future prospects for national banking intermediation.

1. The national banking system is still affected by the effects of the deep and recurring economic and financial crises that have afflicted the domestic economy since 2008 (of which the Covid-19 pandemic is only the latest in chronological order, preceded by the US-originated subprime mortgage crisis and the 2012 European sovereign debt crisis). Adverse economic times have inevitably imprinted their stigma on the balance sheets of banking companies, which, in the grip of growing volumes of non-performing loans and an extensive and tightened regulatory perimeter, are obliged to be even more selective in taking credit risks, as the danger is absorbing prudential capital beyond the permitted limits.

            Moreover, the effects of such severe turbulence have overlapped (and still overlap) with a radical evolution of the paradigm of the national and European credit business, both of an endogenous and exogenous nature to the system, highlighting the need to act in a new normal context. In fact, over the last decade Italian banks have experienced a period of deep changes on the economic, capital, operational, distribution and governance level, such as to lead to a progressive reconfiguration of the morphology of the entire financial-credit system as well as the role of certain actors. In this innovative context, the prevalent banking business models of the previous decades appear hardly sustainable in supporting the future development of the national economic-productive fabric (which is also in a process of rapid transformation).

            Considering that the low interest rates resulting from long-term accommodative monetary policies have exerted sustained pressure to contain the profit margin (although a sharp turnaround by the ECB has recently been observed), and that the cost of risk continues to be high especially due to the effect of value adjustments on impaired loans (the overall amount of which, however, has progressively decreased in recent years by virtue of the drastic “cleansing” operations carried out by the main national banks)[1], analysts and organizations institutional companies agree that the future of credit intermediation in Italy must necessarily be based on the following guidelines[2], which are intimately correlated and have significant effects on the overall corporate profitability (the latter must necessarily comply with the reference values ​​of Community competition): i) technological innovation and digitization of the core business (which inevitably requires the immobilization of a considerable amount of financial resources); ii) restructuring the business models; iii) adapting the governance models to current and forthcoming legislative and regulatory dictates both at national and EU level; iv) reducing production costs (in particular those not associated with indispensable investments in new technological infrastructures); v) the natural consequence being an inevitable increase in company size.

            Among the aforementioned, the digitization and computerization process is of crucial importance, as it not only permeates the entire credit-financial industry, but also affects, by incentivizing transaction disintermediation and the progressive yet radical shift of the operational center on FinTech services (so-called techno-finance), the virtually monopolistic regime held by banks for decades in supplying end customers with a multitude of more or less complex products.

2. The new banking market. Refinement or upheaval?

2.1. The digitalization process of the credit-financial sector, generically known as the digital economy, is based on the creation of an evolved ecosystem which revolves around the distribution of innovative technologies, the speed of circulation of information and the ease of transmission of knowledge. The final outcome of this process is obviously achieving a significant increase in operating efficiency by virtue of the net reduction in production, research, organizational coordination costs and transaction costs as a result of the construction of the services offered on a technological and algorithmic basis, against the background of a radical overcoming of the pre-existing operational and technical-organizational barriers.[3]

            Innovative processes have already been affecting the credit-financial sector on a global level (as well as most of the economic-industrial sectors) for a long time, and the production of destabilizing effects on consolidated market structures is a cyclical circumstance (for example about 20 years ago, within the aforementioned sector a certain apprehension had arisen with regard to the employment and business structures due to large-scale introduction of ATMs), thus the innovative scope of the pervasive digitalization process currently underway is undeniable (and far from being completed) and incomparable in qualitative and quantitative scope when it comes to the recent past, furthermore increasingly aligning almost all aspects of the credit and finance sectors.

            As anticipated in the introduction, and as officially defined by the ECB and the Financial Stability Board in 2017, the term Fintech comes from the words “finance” and “technology” and can be literally translated into the generic formulation of “technology applied to finance”, with this ultimately meaning “financial innovation made possible by technological innovation, which can materialize in new business models, processes or products, producing a decisive effect on financial markets, institutions or the offer of services.”[4]

            However, this constricting terminological delimitation does not fully grasp its meaning and even less its practical-applicative scope, given that fintech is not only a strictly cross-sectoral phenomenon, but above all because investments in technology and knowledge allow to realize, effectively and economically, the radical rewriting of the technical-operational methods of carrying out traditional credit-financial activities (such as payment and investment services, asset management, insurance activities, etc.) as well as the design of new services and more efficient business models having a significant impact on the structures of the markets and institutions operating therein.

            Therefore the fintech phenomenon can only simplistically and approximately be considered a normal and physiological evolution of financial services, while in reality it is more appropriately a large set of innovations only incidentally observable in the credit-financial field, which are made possible by use of new technologies both in offering services to end users and in internal processes of financial operators and which in these contexts are radical and innovative to the point of rising to the rank of a new technical-production paradigm.

2.2. The development process of the digital economy, both in general and with specific regard to the financial-credit sector, is conventionally attributed to the following drivers:[5]

1) Supply-side factors, within which the following are identified:

– so-called Digital DNA. Financial technology suppliers are often start-up companies or agile and digitally-expert IT giants, oriented to conducting substantially simplified operations based on the analysis of huge amounts of data;

– effective support activities by venture-capital funds. The ease with which the aforementioned companies can benefit from adequate and long-lasting loans has been (and still is) one of the factors enabling the growth and development of the fintech phenomenon, moreover contributing to significantly decreasing, and in some cases altogether cancelling sector barriers;

cost advantages. New competitors have a remarkable ability to penetrate the credit market without the need to rely on the classic branch system (increasingly used by pre-existing “traditional” operators – so-called incumbent – also for historical and social reasons, and that constitutes a heavy burden if considered in the perspective in question), but rather aiming at the usability and accessibility of its products given by the availability of high-speed and high-capacity data-networks as well as the presence of vast databases and customized data-sets on needs and expectations of the individual customer;

gentle regulation. New digital businesses, especially in the banking services sector, are still subject to sector regulations and related regulatory regimes that tend to be milder and less widespread[6] than those to which traditional market players are subjected. This different regulation translates, on the one hand, into an incentive for growth as well as the realization of huge profits for fintech companies, on the other it favors the risk of arbitrage and damage to the property rights of customers. In fact, it is clear that technological innovation in the financial field is the harbinger of a cluster of “emerging” risks of both an operational and strategic nature, which inevitably add up and interpenetrate the risks typically associated with ordinary financial and credit activities. Moreover, the high speed and pervasiveness of the technological changes introduced by the new market players, as well as their cross-sectoral nature, makes it particularly difficult for regulators and supervisory authorities to “keep up” with the ongoing market evolution;

– New segments and consumer groups. The digital economy, unlike traditional credit players, aims to reach diverse subjects, mostly (but not only) people, the so-called unbanked, i.e. only marginally affected by the policies of traditional credit actors (therefore not necessarily characterized by reduced creditworthiness) and in any case only with reference to basic functions and low added value, through specific cross-selling and expansion strategies of one’s own customer -base (with this meaning the subjects loyal to a particular supplier from which they repeatedly purchase all the products / services offered);[7]

– Development of a real data platform economy focused on the use of increasingly complex and articulated infrastructural resources, with a resulting increase in the capacity for research, processing, storage and information transmission (so-called machine learning, cloud computing, big data analytics, etc.). In particular, the combination between acquiring an enormous mass of detailed information generated and distributed by multiple tools and sources, and their high capacity of analysis[8], allows to acquire precise and punctual knowledge about preferences. social, individual consumption patterns, and risk profiles of each market player.

2) Demand factors, including:

– the rapid change in the expectations and needs of consumers (often induced and encouraged by the innovative goods and services offered by new suppliers), with consequent difficulties for “traditional” actors, burdened, as aforementioned, not only by a very onerous organizational-production structure and a complex legislative and regulatory system, but also by a very traditional and deep-rooted cultural approach to the credit business, to adapt quickly and profitably to the continuously changing market conditions;

– some peculiar and highly distinctive socio-demographic characteristics. The new generations (so-called millennials, digital natives, Gen. Z or Gen Y), characterized by a high level of familiarity with IT tools and new media, not only represent the new and quantitatively more consistent market demand for services with a high technological content, but also boast additional and massive prospects for future growth;

– a generalized distrust (even if factually unjustified) in pre-existing and traditional market players, resulting both from an inevitable process of “secularization” of the bank’s role and the effects of the 2007 US financial crises and the European sovereign debt crisis of 2012, and a simultaneous increase in trust in new players.

            In light of the above (inevitably brief) analysis of the drivers of the radically new technical-production paradigm introduced in the financial-credit market by the Tech Companies of the digital economy, and above all of the absolutely central and increasingly predominant role played by such non-banking market player (especially by virtue of the ample credit enjoyed by them among the younger and “technological” groups of the world population), it appears evident that the changes and transformations we are witnessing within the banking sector at the present time are probably the prologue, and not the epilogue, of complex and articulated transformation processes that will affect the entire chain of credit intermediation in the coming decades.

2.3. In the banking sector, the abundant product and process innovations of fintech companies blend actual financial services and information technologies, involving all sectors of credit intermediation, from granting credit (crowdfunding and peer- to-peer lending) to instant payment services, from virtual currencies (cryptocurrency) to consulting services for investments governed by artificial intelligence (so-called robo-advisor), in addition to decentralized transaction validation technologies (blockchain and distributed ledger technology), biometric identification and service support (cloud computing and Big Data).

            More precisely, if in general terms the activities carried out by fintech companies in the financial-credit sector can be distinguished as highly innovative (such as blockchain, cryptocurrency and regtech, the latter meaning the use of technological tools to support the procedures to comply with rules and regulations) or traditional (as in the case of lending and payment activities), over the years we have come to a classification divided into two macro-groups:

1) actual financial intermediation activity attributable to the set of fintech companies proper, within which one can further distinguish:

            a)  obtaining financial resources by way of capital (equity-based financing), within which the “pure” equity crowdfunding activities are identified, designed to allow retail investors to access directly and without “traditional” intermediaries private equity investments of various sizes (typically in start-up and early stage[9] companies), as well as club deal platforms, which raise liquid funds from investors identified on the basis of criteria established independently by the platform itself (such as consolidated work experience in a specific sector, a wealth of adequate consistency, belonging to a network of business angels, etc.);

            b) obtaining monetary resources by debt financing. In this context, fintech companies act as a link between the companies requesting loans and potential financiers through the use of appropriate IT platforms (marketplaces), while operating more rarely in the first person. In this macro-area, the following can be further distinguished: i) lending crowdfunding (or social lending) and peer-to-peer lending (P2P lending), characterized by the direct and disintermediated interaction of many subjects who channel financial resources through an IT platform to applicants for funds, possibly providing for automatic selection mechanisms based on scoring; ii) short-term loans made by discounting invoices (so-called invoice lending), with the to-be-paid of already paid formula, or credit securities, based on an operating mechanism basically mirroring the one analyzed above ; iii) club deal solutions, by which we mean debt fundraising activities carried out by fintech companies that focus exclusively, or in any case predominantly, on institutional or ad hoc investors;[10]

            c) investment activities and services, among which the following: i) trading activities of financial instruments through specific IT platforms, meaning not only the traditional intermediation activity but also the supply of aggregated and revised information or copy-trading activities;[11] ii) financial management activities, which include firstly, centralized treasury management services (unified management of the income and expenses of all current accounts and credit cards of a specific subject) as well as the so called “Electronic piggy bank”, which provides for a predetermined amount of money for each expenditure, to be used later for financial investments; iii) financial advisory services on third party or own brand products in automated mode (so-called robo-advisor[12]), involving a significant cost reduction compared to the traditional offer, an expansion of the products and services offered and a high degree of personalization;

            d) payment services relating to legal or virtual currencies (so-called cryptocurrencies, which, as is known, cannot be used as payment on regulated markets and are therefore devoid of the protection provided for by the legislation for the retail consumer) , within which the following can be included: i) money transfer services, in relation to which the innovation brought by fintech concerns the production process and not the product, so as to allow the customer to transfer money more quickly and at lower costs through the provision of multi-currency accounts or money transfer circuits which can be combined with methods of purchasing goods and services in instalments, or even transferring money via telephone numbers; ii) actual payment solutions, in which fintech companies offer application tools to make payments at affiliated resellers, or to create mobile wallet services, prepaid cards, etc.

            e) insurtech services, meaning the use of technological innovations within the traditional insurance system with the aim of increasing efficiency by reducing the costs of the service as well as simplifying the customer’s choice among multiple products;[13]

2) instrumental / functional activities for actual financial intermediation, conducted by companies belonging to the technology sector. In this context, the following are distinguished:

            a) data management, big data and analytics companies, which provide data management and analysis, rating and / or scoring services[14]. The amount of information portrayed by various IT platforms, as aforementioned, allows users / suppliers to know the exact behaviour of customers and therefore to maximize the customer experience when supplying the product / service, but even more importantly to have complete knowledge of the creditworthiness of potential borrowers (this translates into a clear competitive advantage in the above-mentioned loan granting activity);

            b) companies specializing in the development of blockchain and distributed ledger technology (shared databases constantly updated by a plurality of subjects) to support multiple activities;

            c) cybersecurity and personal data protection companies;

            d) regtech companies, which provide technological applications to measure, almost in real time, the impact of regulations on the activities of client companies and their exposure to risk.

            Fintech therefore connects every segment of the financial-credit market and the plethora of services connected to it, modifying its structure in a fully cross-sectoral sense with external actors which are completely detached from traditional financial services, such as technological start-ups and the IT and social media giants, in order to eventually request a necessarily strategic “counter-offensive” devoted to survival by the already present companies, to form the backbone of a real macro-sector whose boundaries are ever more indefinite and blurred.

            The new market players, unlike traditional banks, display a series of disintermediation activities within the credit sector, playing the role of direct intermediaries between supply and demand through multipurpose IT platforms and exposing themselves much less to credit risk,[15] as well as benefiting from a different revenue structure: while traditional players focus on the intermediation margin, fintech operators are based on a commission-type revenue regime, offering customized services to customers at significantly lower costs than to incumbent companies.

            The challenges of fintech innovations therefore open up to divergent scenarios according to both the degree of their adoption by traditional banking entities and the degree of penetration of non-financial entities characterized by a core business of a technological nature, which aim to be “New” financial intermediaries with high capacity to erode market shares as well as to change the competition. In this perspective, Fintech represents both a stimulus to innovation and a disruptive element for the entire chain of traditional financial-credit intermediation.

2.4. New players for a new credit market

            The phenomenon of Fintech companies operating in the credit-financial sector appears to be particularly varied and made up of a multitude of actors, mostly of non-financial extraction or who don’t have finance in their core business (or in any case not initially). And exactly this particular category of actors, lacking an “institutional pedigree” and represented by large technology and web companies, that generate the growing difficulties encountered by traditional market players, banks in the first place, in adapting to the constantly changing conditions of the competitive context.

            In particular, the greatest challenge to “traditional” banks and to the consolidated businesses they have been overseeing for some time, is brought by the so-called player over the top, i.e. by the global giants of the digital economy, who implement concentric and / or collateral diversification strategies with respect to the original core businesses based on the extensive exploitation of economies of scale and scope (primarily , the use of the vast amount of data on customers available to them), as well as taking advantage of a legislative and regulatory framework that is still rather “flexible” when considered with reference to these new non-banking players, allowing them to act as an economic and innovative alternative compared to the present players with regard to both the consolidated customers and the unbanked customer groups (in particular, as already mentioned, the new generations).

            With regard to the Western economy, the phenomenon under consideration is perfectly summarized by the acronym G.A.F.A., which refers to the American four Big Tech Companies and global pioneers of the digital economy (Google, Apple, Facebook and Amazon, recently joined by Twitter and Instagram). These companies, initially classified as tech companies, as aforementioned have gradually started offering products and services to their “canonical” business model, through newly established or ad hoc subsidiaries[16], in a multitude of commodity sectors often very “distant” from the original sector, including the banking-credit area which is currently the chosen area for innovative information technologies and has high added value.[17]

            The eastern markets, on the other hand, identify in the acronym BAT (Baidu, originally founded as a web search engine, Alibaba, currently the largest e-commerce platform in the world, and Tencent, leader in the Asian messaging market) the largest tech companies that offer products and services in almost all financial services areas (payments, insurtech, crowdfunding, traditional banking services, cryptocurrencies, etc.).[18]

            It is interesting to highlight how the tech phenomenon, both in its original albeit generic meaning of “companies with a high technological content specialized in offering highly innovative services and products compared to other market players”, and in its credit-financial version well summarized by the acronym fintech, despite having unequivocally originated in Western economic systems (in particular, and for the most part, in North America), achieved the highest penetration in the economies and societies of Eastern countries (in particular in China, to which the aforementioned BAT belong, but also in India, Singapore and Russia), while the countries of the European Union are still far away both in terms of number of users of the new technologies (by which we mean both individuals and companies) and for the total amount of monetary resources invested therein.[19]

3. Future prospects for national banking intermediation

            As mentioned above, the digitization and computerization process is not only permeating the entire national credit-financial industry but also undermining, by encouraging the disintermediation of transactions, the substantial monopoly regime held by “traditional” banks (so called incumbent) in providing customers with a varied panel of products and services.

            In fact, for decades Italian banks have been able to exploit to their advantage being the main access point to the world of finance (just think of the offer of a simple product like the bank account, which has allowed them to serve a wide audience of customers), as a result of the aforementioned technological process, the financial services sector is progressively permeating new non-banking players, and, in particular, BigTechs (i.e. the giants of electronics, online commerce and the Internet, including Google , Apple, Facebook, Amazon, Alibaba, Microsoft, etc.), the latter, taking advantage of the general delay with which the banking system is approaching new technologies, are increasingly interested in the first-person management of FinTech services in synergy with its historical core businesses, without the constraints, even of a regulatory nature, which instead weigh on traditional banks (so-called open banking), for this purpose relying on The enormous availability of liquid resources as well as using the information collected from transactions carried out on its platforms by a large loyal clientele.[20]

            Already starting from the mid-nineties of the last century the activity of banks in the various sectors of the national credit system began to be eroded by markets and by non-financial intermediaries, specifically by a plethora of online banks that competed above all on collecting savings to which were then added the financial promotion networks and private banking structures (which structurally absorb fewer amounts of fixed assets than traditional banks), this process of flanking / replacement by FinTech companies has gained momentum with the business of payment services23 (liberalized in 2018 within the EU with the Payment Service Directives 2) and then embracing the area of ​​investment and credit, with the aim of breaking down packages of financial products and services (up to a few years ago they can only be purchased by exclusively banking intermediaries) through l ’Use of innovative data analysis technologies (such as artificial intelligence and machine learning24), designed to process, with appropriate algorithms, the personal information that individuals and companies, sometimes unknowingly, disseminate on the web (so-called Big Data), and finally investing all sectors of banking and financial intermediation: payment services (instant payment), financing services (crowd-funding and peer-to-peer lending), consulting services (robo-advisor) and virtual currencies (cryptocurrencies), in addition of course to the technologies supporting services (cloud computing and big data) that allow to reduce the costs of transmission, processing and storage of information.

            A similarly increasing ability of the user of modern technological tools will then contribute to making the “traditional” banking interlocutor virtually superfluous, just as the transactional function (i.e. cash management) will play a progressively minor role in the overall credit economy. In fact, new fintech companies, unlike traditional banks, carry out a series of disintermediation activities of the entire sector, liaising supply and demand through specific IT platforms and therefore exposing themselves in a much lesser way to traditional credit risk.

            Moreover, if the growing presence of non-bank players in the credit market, and specifically of Big Tech companies (i.e. the giants of electronics, online commerce and the Internet) operating through multi-channel and multi-customer digital platforms, represents a clear threat to the survival of traditional banks25, on the other hand it is evident that the new information management and Big-Data technologies can simultaneously offer significant opportunities, provided they support the high investments in technological infrastructures and in highly specialized human capital required to enjoy them (or by outsourcing part of their core business to FinTech companies, as in Anglo-Saxon countries), at the same time enhancing the resources that have always been the heritage of traditional banks, such as, in particular, the rapport with customers and the trust they have always enjoyed as a result of being strictly regulated and supervised.

            The bank branches will therefore have to drastically change “skin” in the name of technology as well as user-experience, with the consequent reorganization and rationalization of the distribution networks26, and jointly the role of the banking staff will change (thereby amplifying a trend already underway in Italy),27 who must be specialized in consulting with regard to highly complex financial transactions and products. In fact, those who need to carry out “basic” branch operations will be able to turn to modern ATMs and home banking and mobile banking (resulting in a reduction in the influx of customers in the branch and associated effects on the cost structure due to the progressively redundant staff), while the remainder will have to be able to take advantage of high value-added consultancy from branch staff.

            Renewal processes of such proportions necessarily require significant investments in technological resources (in particular in the field of information technology and big data management) and professional resources in order to reorganize the entire banking business, in order to obtain cost synergies and scale economies, for digital transformation and supplying innovative products and services to customers (such as fintech products) as well as to access new and more sophisticated operational and control processes, whose high amount, however, appears hardly compatible with the current average size of Italian banks (as well as completely “out of reach” for the Cooperative Credit Banks, due to their “traditional” limited size, simplified operations, reduced level of capitalization as well as high territorial dispersion).28

            Therefore, it is considered inevitable to start (this has already been true for years) a process of consolidation of the sector through extraordinary operations of concentration and aggregation, which if on the one hand will make human and financial resources available to devote to the innovation of operational processes and the diversification of business models, thereby favoring not only organizational and commercial rationalization in terms of expanding product-factories and achieving higher levels of operational efficiency29, but also a partial recovery of income from interest income through the increase in credit volumes, on the other hand, will lead to a progressive and further reduction in the number of credit institutions.30

            In fact, we are witnessing, and will continue to witness, in the national credit sector, processes of concentration and business aggregation substantially similar to those which we have witnessed, and still are witnessed, in numerous other economic-productive sectors (the first ever was the aerospace industry starting from the nineteen-eighties, then followed by the semiconductor, automotive, transport, airlines, food, large-scale distribution industries, etc.) as well as, obviously, in the banking sector of practically all the countries of the European Union , and equally similar are the reasons that determined them (net, ca va sans dire, of the merchandise and, above all, “legal” peculiarities of each sector).

            Ultimately, what is the future of “traditional” banks? If, in the current scenario, the institutions whose business models more oriented towards credit supply, and more generally focused on traditional banking activities with low added value, are also the ones that have the most limited income performances as well as a constant erosion of brokerage revenues,31 and if the possibility of an increase in revenues related to retail credit appears to be very limited considering that in Italy this market is now mature and subject to strong competitive pressures (also coming, as aforementioned, from the new non-banking players), this results in the need to revise the business models with a view to reducing complexity, achieving a radical diversification of revenues as well as a drastic cost reduction.

            The objective is therefore to redirect the banking activity towards a less risky fee-based operation, with higher margins and high added value (revenues from other service activities, commissions and trading, and more generally from every kind of fee)32 and which generates stable revenues without absorbing risk capital, to be pursued by adopting new simple & digital technologies33 as well as increasing and enhancing: i) cross selling on highly diversified products (not only financial products, therefore, but also social security , insurance and wealth management, which for some years now have been included among the core components of banking activity and no longer among ancillary factors, to the point of having generated the neologism bancassurance)34; ii) offering services on the market of bonds and shares of small and medium-sized enterprises (including granting guarantees on the financial market); iii) asset management services (investment banking and private banking) and transaction banking (cash management, trade finance and securities services).

            Therefore it is a consultancy model, borrowed from fintech companies, based on the portfolio and on product logic integration (or rather, of the factory-product) and of the collateral services, with a customer logic, i.e. focused on valorization of the relationship with the customer and of the high value-added banking services offered to them, within the framework of a fiduciary partnership banking relationship that draws margins from commission income and which, unlike income from interest and brokerage margin, accrue only “open bank” and do not (normally) generate losses or absorb risk capital. To this end, the challenge posed by FinTech consists in responding to the specific needs of individual customers through articulated solutions that exploit efficient and tailor-made technological platforms, so as to guarantee a simple and intuitive user-experience by combining the advantages of technological innovation, intended to improve the efficiency of processes, focusing on the direct and personal relationship with the customer.

            In summary, the trend towards commoditization in the financial system through the transition, from a digital perspective, from transactions to services, indicates that the challenge of future banks is to transform themselves into “tech companies with banking licenses” centered on a digital culture to guide the business to a new relationship with the customer, focused on services with greater added value that goes beyond the traditional banking offer, within an increasingly dynamic and competitive system as a result of open-innovation and the intelligent use of Big- Date.

[1] According to the European Banking Authority (EBA), in September 2018 the total value of Non-Performing Loans held by Italian banks amounted to approximately 297 billion euros (37% of the total NPLs present in the Eurozone banking system), and Italy was the fourth country in the Union for the ratio between NPLs and total credits (11.8%, compared to 22% in 2015). According to data from the Bank of Italy, between 2008 and 2015 the stock of non-performing loans had almost quadrupled (from 87 to 341 billion euros), and only began to decline in 2016. Between 2012 and 2017, the national banking system also accumulated write-downs from NPLs for approximately 64 billion euros.

[2] Rossi S., Idee per il futuro del sistema finanziario italiano, XXXI Convegno “Adolfo Beria di Argentine. La banca nel nuovo ordinamento europeo: luci e ombre”, Courmayeur, 23 september 2017.

[3] Schena C., Tanda A., Arlotta C., Potenza G., Lo sviluppo del Fintech. Opportunità e rischi per l’industria finanziaria nell’era digitale, Consob – Quaderni Fintech, n. 1, 2018.

[4] Financial Stability Board, Fintech credit Market structure: business models and financial stability implications, 22 May 2017; Banca d’Italia, Fintech in Italia. Indagine conoscitiva sull’adozione delle innovazioni tecnologiche applicate ai servizi finanziari, December, 2017.

[5] Financial Stability Board, 2017; International Organization of Securities Commission (IOSCO), 2017.

[6] With regard to FinTech, questions and problems are clearly posed in terms of rules and controls to which new digital operators must be subjected. The risk is in fact that of widening and strengthening the perimeter of the shadow banking system, in which intermediaries of all kinds offer banking and para-banking services without subjecting to the regulations that govern official financial institutions, thus avoiding any type of institutional supervision. In practice, a collateral banking system that allows alternative forms of financing to those created through the intervention of credit institutions. Moreover, in the light of the evident problems of which the aforementioned deregulation is a herald, as well as the numerous and pressing requests made by “traditional” actors, substantial regulatory interventions are expected in the near future aimed at reducing the advantages enjoyed by fintech companies as well as guaranteeing customer trust, therefore in a context of equal treatment between all market players which at the same time favors innovation. Panetta F Indagine conoscitiva sulle tematiche relative all’impatto della tecnologia finanziaria sul settore finanziario, creditizio e assicurativo Hearing at the Finance Commission of the Chamber of Deputies, 29 November 2017; Rossi S., Ideas for the future of the Italian financial system, Courmayeur, 23 September 2017; Pozsar Z., Adrian T., Ashcraft A., Boesky H., Shadow Banking. Federal Reserve Bank of New York, Staff Report No. 458, 2012.

[7] Sibilio N.I., Boero M., Salerno L., Banks and Fintech: strategies and business models, Bancaria, Vol. 2, February, 2019; Dell’Amico G.C., Ambrosio P., Regolamentazione e vigilanza nel settore Fintech, Studio KPMG-Advisory, 2019.

[8] Genovese A., Falce V., La portabilità dei dati in ambito finanziario, Consob – Quaderni Fintech, n. 8, 2021.

[9] This category often includes platforms that simply function as a “showcase” for investment projects and which can be defined as marketplaces. In other words, these fintech companies provide a multimedia platform through which companies that need to raise funds can advertise their initiative and at the same time retail informants can acquire the related information. The revenue sources of the platform come from a commission calculated as a percentage of the funds raised by the company. Sciarrone A., Librandi A., Marketplace lending. Towards new forms of financial intermediation? Consob – Quaderni Fintech, n. 5, 2019.

[10] Schena C., Tanda A., Arlotta C., Potenza G., Lo sviluppo del Fintech. Opportunità e rischi per l’industria finanziaria nell’era digitale, Consob – Quaderni Fintech, n. 1, 2018.

[11] These activities are similar to e-trading platforms (by this we mean the trading interfaces that allow investors to trade securities on the markets on the basis of agreements previously entered into with the service provider), now dated and offered by traditional financial intermediaries, but they differ as they provide the option to investors to automatically copy the investment strategies of other traders, thus combining the financial the social aspect.

[12] Alemanni B., La fiducia nel robo-advice. Evidenze da uno studio sperimentale, Consob – Quaderni Fintech, n. 7, 2020.

[13] Arner D.W., Barberis J., Ross P.B., Fintech, regtech and the reconceptualization of financial regulation, Northwestern Journal of International Law and Business, Vol. 37, Issue 3, 2017; McQuinn A., Guo W., Castro D., Policy principles for fintech, ITIF, 2016.

[14] Palmerini E., Il fintech e l’economia dei dati, Consob – Quaderni Fintech, n. 2, 2018.

[15] Sibilio N.I., Boero M., Salerno L., Banks and Fintech: strategies and business models, Bancaria, Vol. 2, febbraio, 2019.

[16] Among which we mention only a few: Google Pay (proprietary payment system for mobile devices developed in partnership with Visa, Mastercard and major international banks); Apple Pay, Apple Cash and Amazon Pay, with mirroring functions to the former; Amazon Lending (loan service for small and medium-sized businesses that can be used directly through the e-commerce platform and active in Anglo-Saxon countries and Japan).

[17] In any case, it should be noted that the particular and articulated characteristics of the credit-financial sector, which obviously also include the complex legislative and regulatory framework (moreover, as aforementioned, not yet identically defined between new digital and incumbent players), are such as to make the positive outcome of the aforementioned penetration / diversification strategies perpetrated by Big Techs never completely certain (for example, Google Pay Send, conceived in 2011 as a peer-to-peer payment service was discontinued, or the cryptocurrency  Libra / Diem global payment system, developed by Facebook in 2019).

[18] Still purely by way of example the following fintech companies are highlighted, originated by “budding” from the aforementioned Asian Big Techs: Du Xiaoman Financial (formerly Baidu Financial Services, specialized in wealth management and micro-credit issuance) ; Ant Group (formerly Ant Financial, is owned by Alibaba and among its subsidiaries includes, among others, Alipay, specialized in electronic payments, Huabei, specialized in the supply of financial products to SMEs, the digital bank MYBank, AntFortune, specialized in wealth management, Zhima Credit, focused on credit-scoring); WeChat Pay, owned by Tencent and specializing in electronic payments.

[19] Ernst & Young Global, Global Fintech Adoption Index,2019.

[20] Ciampi F., “Più vicini ai clienti per battere i big del web”, Il Sole 24 Ore, 18 settembre 2019, p. 18. I giganti dell’e-commerce Mercado Libre and Rakuten have been successfully operating in the banking sector for several years, both in Argentina and Japan. Through the Lending service, active since 2011, Amazon has so far given  over $ 4 billion to a select number of small and medium-sized businesses operating in the United States, Japan and the United Kingdom. In Europe, at the end of 2018 Facebook obtained the banking license in Ireland, Amazon in Luxembourg, Google the license for e-money in Lithuania. From a research by the Accenture company carried out globally in 2019, it appears that about a third of the 33,000 people interviewed would be attracted by the idea of transferring their bank account to Facebook, Google or Amazon (with reference to millennials alone, the percentage grows to three out of four people).

21 Draghi M., Banche e mercati: lezioni dalla crisi, Banca d’Italia – Documenti, 2009, pp. 1-23.

22 Oriani M., Zanaboni B., Trattato di Private Banking e Wealth Management, Vol. 2, Hoepli, Milano, 2016, p. 117.

23 This type of service has a positive effect on bank balance sheets due to its low capital absorption, and is an important source of revenues, albeit often with low margins. The objective of the Directive is to create a single and integrated market for payment services by standardizing the rules and breaking down barriers to the entry of new operators, thus helping to strengthen the security of the system as well as guaranteeing its transparency for the benefit of consumers. Spaccavento S., “The sustainability of commercial banking business models and the role of innovation”, Marketing & Finanza, 2, 2015, pp. 4-15.

24 Machine learning derives from the theory that computers can learn to perform specific tasks without being programmed to do so, thanks to the recognition of iterations between data.

25 In any case, if the evolution of the “banking species” is underway and will gradually be defined and inevitably completed over the next few years, it is not clear that this will lead to an automatic rarefaction, or even the extinction, of the National credit “biodiversity”, or in any case not to the extent that most feared of causing an actual harm to Italian companies and families. In fact, we believe that the decrease in the number of “traditional” banking players that we are witnessing and will continue to see in the future (and which, moreover, does not necessarily constitute a negative circumstance, to the extent that it is determined consequently to explicate an endogenous process of “selection of the species” and whose effects also reverberate, ultimately, on the final customer) finds equilibrium, even if not necessarily a precise equalization, with the aforementioned entry into the credit market of a multitude of non-bank actors.

26 An alignment of the penetration of digital banking in Italy with the European average would allow national banks to reduce operating costs by an amount of 5-6 billion per year at the system level, with the related shutting down of of branches and employee cuts. Graziani A., “70 thousand redundancies to align with the EU”, Il Sole 24 Ore, 13 November 2018, p. 18.

27 In light of the most recent data published by the ECB, relating to 2020, Italy still has the highest distribution capillarity, with 50 branches per 100,000 inhabitants against 34 of the European average, but in the period 2008-2019 there was a reduction by 13.8% of the number of branches while the number of employees decreased from over 340,000 to less than 300,000.

28 The already partially collaborating foundations of the mutual banks (during the decade 2008-2018, more than one hundred independent institutions were merged or subjected to administrative liquidation procedures) are severely tested not only by competition from Fintech companies, but also by deploying effects of the financial crisis of 2007 of US origin and the consequent European sovereign debt crisis of 2012 (which attracted the entire national credit sector, but especially the BCC) as well as the new regulatory dictates of a prudential nature in terms of supervision and resolution of banking actors, to the point of making it impossible to postpone a review of their economic-strategic orientation, of the management methods of the core-business and of their governance structure. More specifically, the unfavourable economic scenario, dating back over time, has highlighted the structural weaknesses of the mutual banks with reference to a very “traditional” business model, with low added value and limited content of technological innovation, capable of affecting the lasting and sustainable development of these companies at economically, capital and financially sustainable conditions. We refer, among others, to the limited diversification of revenue and the high dependence of profitability on the interest margin (now subject to continuous erosion for more than a decade), while revenues deriving from commissions for activities with high added value and high margins (such as, for example, bancassurance services, asset management, investment banking and consumer credit), to a collection of financial means almost totally dependent on customer deposits (approximately 80 % of liabilities, compared to 50% of commercial banks), the rigidity of the structure of operating costs as well as the deterioration in the quality of loans, the latter not infrequently accentuated by managerial and allocative choices emblematic of a solid but often “pernicious” link to the territory to which it belongs.

29 The important role that the company size assumes in the Italian banking system is also reflected in recent quantitative analyses on the differences between significant (SI) and less significant (LSI) banks. Research shows an unsatisfactory but still higher median ROE for SI banks than LSIs. The higher profitability of the IS is attributable, first of all, to the lower dependence on credit intermediation, but also to the ability of larger banks to achieve revenues other than the interest margin as well as better control of operating costs and the cost of risk. For SI banks, the ratio between intermediation margin and own funds is equal to 35%, against 21% for LSIs “; for more than a quarter of the LSIs, this source of income does not reach 40% of the intermediation margin, compared to 53% of the SI. Barbagallo C., op. cit. p. 3.

30 In the period 2008-2018 the national credit system was affected by processes of concentration and administrative liquidation which brought the total number of institutions from 806 to less than 600.

31 The causes, of course, are different and closely related: i) the increase in the level of competition and its mutation in typological terms; ii) changes in customers and their needs; iii) an oversized production capacity; iv) the difficulties in providing innovative products and services with a high technological content; v) a particularly high cost of risk due to the past deterioration in credit quality; vi) a recent context of low interest rates (to which the ECB’s Quantitative Easing policies were clearly not unrelated); vii) operating and structural costs with a high incidence, in particular with respect to non-banking competition, also due to delays in the digital evolution (traditional credit activity, moreover, especially if concentrated on small and medium-sized customers, requires numerous physical branches distributed throughout the territory and therefore a high absorption of personnel per revenue unit). ECB, Documents, September, 2018; Barbagallo C., The Italian banking system: situation and prospects, Bank of Italy, 2018. With regard to the interrelationships between business model and income results see: Roengpitya R., Tarashev N., Tsatsaronis K., Villegas A., “Bank Business models: popularity and performance”, Bis Working Papers 682, 2017, pp. 1-42;

32 Ferrari P., Ruozi R., “Le banche italiane e la sfida della redditività”, Banche e Banchieri, 44(2), 2017, pp. 163-186.

33 Digital, as indicated in the text, is increasingly the element of first contact between the parties, and there is no doubt that companies capable of developing more effective and intuitive interfaces and interaction mechanisms than traditional methods have more possibility of dominating the overall distribution chain.

34 De Polis S., Evoluzione dei modelli di partnership tra banche e assicurazioni, Convegno 3 ottobre 2018, Roma.


Jacopo Paoloni is Research fellow at Roma Tre University.

Madjid Tavana is Professor and Distinguished Chair of Business Analytics at La Salle University of Philadelphia.

The entire work has been thought and discussed by both authors; however, paragraph 1 is attributable to Madjid Tavana, while paragraphs 2,3 and 4 are attributable to Jacopo Paoloni



This entry was posted on 28/05/2021 by in law.
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