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The future of banking, the bank of the future

Milan, 24/06/2019, National Conference

Wedged as they are between factors that limit profitability and competition from Fintech companies, banks are being forced to innovate. In a European scenario penalized by low interest rates, Italian credit institutions are also suffering the impact of the country’s low economic growth and of trends affecting the government bonds, of which they are the principal holders. Added to all this is a European legislative framework that has continued to evolve over recent years and that has prioritized the reduction of risk associated with non-performing loans. The rapid balance sheet cleansing implemented by finance entities with private resources has further penalized the national banking sector, more than other systems that have managed to act in time with public resources and that introduce additional risk factors in other balance sheet items, starting with derivatives, on which European regulators’ sights are not adequately set.

The result is a still fragmented credit sector in which the market does not reward those entities engaged in consolidation, and is much more focused on cutting costs than on investments. Instead, investments, especially those in technology, should be among the priorities of Italian banks. The growing Fintech market, with its rapid and disruptive process and product innovations – not least Facebook’s recent launch of the new currency, Libra – is disorienting traditional credit operators, who are being forced to compete with much more agile and less costly enterprises that are, above all, not obliged to abide by the same heavy regulation.

What emerges then is, on the one hand, the need to demand common rules, thereby placing banks and Fintech on an equal footing; on the other, to find a way to innovate in business within the limits set by the current legislative and economic situation. The success of some banking consortiums that later morphed into competitive corporations free of bank shareholding, shows that cooperation among institutes can lead to forms of successful innovation in certain sectors, beginning with payment systems. Another plausible approach would involve an alliance between banking and small/mid-sized Fintech actors with the aim of creating the kind of critical mass needed to compete with digital sector multinationals.

This is a challenge in which banks have some major cards to play. While Fintech eliminates intermediaries, the banking sector boasts a substantial wealth of that trust highly appreciated by users and businesses along the value chain. While the new digital operators appear to have won the Retail sector battle, the Corporate and Private segments can still be protected thanks to quality of service and human contact. Moreover, in a world in which digital capabilities are bringing exponential growth to both services and criminal activity, only by keeping the focus on service, trust and quality can banks play a role in the future of the finance sector – an effort that regulators and policy makers must not seek to obstruct but rather facilitate.