1.1 Introduction
There have been many structural changes that have affected the banking system since the long financial crisis: a very changeable economic context, increasingly pervasive intervention of the supervisory authorities, a serious economic recession whose âcreepingâ effects are still noticeable in many countries, the tumultuous development of technological innovation, the adoption of unconventional monetary policy instruments and the continuation of low, when not negative, interest rates. All this has been reflected in the way banking has been carried on; it is experiencing substantial changes, perhaps as never before in any previous period. One of the most important consequences, at least in Europe, is represented by a persistent period of weak profitability which, for many credit institutions in recent years, has often resulted in even negative rates of profit. Since it is well known that a prolonged absence of profitability generates negative consequences on the soundness of banks and on the stability of the entire credit sector, scholars, practitioners and supervisory authorities have developed a (new) line of investigation regarding the strategic and operational choices of banks and, as a consequence, their organizational structures, that is their business model.
1.2 Bank Business Model: What Has Been Changing in the Fintech Era
The prevailing business model of the European banking sector, naturally widely influenced by the structure of the economic system whose financial needs it is destined to meet, is that of traditional commercial retail banking, that is, a banking system with a strong incidence of lending activity on total assets, and funding made up largely of deposits channeled through a wide-reaching and widespread local branch network. There is certainly no shortage of significant and important examples of investment banks designed to satisfy the most complex financial needs, located in the main financial centers and operating on a global scale; however, the core component of the European credit system is as summarized above.
The crisis in the banking system, which has lasted for a significant period, has led to a rethinking of banksâ business models. The sustainability of banking strategies has become a source of concern for regulators, especially in the euro area, such as to induce them to include a careful examination of the business model adopted by each bank intermediary in the Supervisory Priorities (https://âwww.âbankingsupervisiâon.âeuropa.âeu/âbanking/âpriorities) and in the Supervisory Review and Evaluation Process (SREP) of each individual credit institution (i.e. the regular evaluation exercise performed by the regulatory authorities for the measurement of risks at the individual bank level and the definition of any actions to be taken).
As we will see in the course of this work, there is no one model clearly superior to the others; the various surveys carried out and reported in the literature and in the regulatory field show a great variety of results (ECB Banking Supervision, 2018), even when the business model is changed (Roengpitya et al., 2017; Ayadi et al., 2018). What everyone seems to agree on is the role in the coming years that technology will have on the redefinition of the business model, and on all banking activity in general.
One of the great challenges facing banks in coming years, and which in many contexts is already a significant issue, is financial technology, or fintech. This term is used to refer to very diverse activities and players sharing some specific features: a marked/exclusive use of technology for carrying out various forms of financial activity, intermediariesâ adoption of new business models and the creation, or rather the re-adaptation, of financial instruments and/or services that, by virtue of this technology, guarantee greater security, speed of execution and lower costs, and can be offered to a wider range of users (FSB, 2017). Fintech companies offer competing products and services in many of the key business areas of traditional brick-and-mortar intermediaries (payments, lending, trading, asset management). Fintech has now gone well beyond being just a buzzword or a niche area for young nerds: investments in the first half of 2018 have surpassed those made in the previous year, exceeding 40 billion US dollars (source: FinTech Global); in 2018, the venture capital sector alone financed fintech deals for over 50 billion US dollars (source: IMF, 2018). Furthermore, besides the fintech companies themselves, growing importance is accruing to the so-called BigTech firms: GAFA (acronym for Google, Apple, Facebook and Amazon; or Alibaba, especially for Asiatic areas) have redefined customer experience across all sectors, including financial services, as they leverage new technologies, sizeable volumes of data and actionable insights to both understand and predict customersâ behaviors and needs.
The debate which developed at the beginning of the decade has seen the emergence of two opposing positions with regard to the possible evolution of digital banking: on the one hand, there are those who advocate totally disruptive scenarios for the banking system, even hypothesizing the end of banks (in agreement with the famous statement by Bill Gates, 1994, âBanking is necessary, banks are notâ); on the other hand, there are those who believe that the fintech phenomenon, like so many others, is destined to âdeflateâ in a few years (âfintech is only another bubbleâ), as soon as events with significant negative consequences occur in the sector. Without any exaggeration, it is undoubtedly true that the phenomenon represents a significant change in the way banking is perceived: technology, now so pervasive in everyday life, has profoundly changed both usersâ and producersâ, banksâ and other financial intermediariesâ approach in the financial field too. The huge challenge that banks are facing is therefore to comprehend whether they are still called upon to play a fundamental role in all segments of financial intermediation, or whether, in some way or for certain areas of activity, other operators will progressively replace them, to a greater or lesser degree. Millennials (young people in their teens to mid-30s) are emblematic in this respect: over half do not see any difference between their bank and others, and would be much more interested in a new financial service offered by Google or Apple than one provided by their bank (Chishti and Barberis, 2016).
Dermine (2016) outlines three main areas in which banking activity could be hit, to a greater or lesser degree, by the development of digital technology: the first is the payment system and brokerage of financial instruments (including passively managed mutual investment funds). In this case, the required expertise involves data processing and not banking business in the strict sense: this explains the attractiveness of the segment for large operators accustomed to processing huge amounts of data, at ever-increasing rates and with very low costs. The newcomers in the payment business ( PayPal, Apple, etc.) and the transfer of funds at international level (TransferWise), and their increasing market shares, well exemplify the importance of this threat.
The second area of interest for financial technology consists in those banking products and services that require data analysis and some banking expertise, though not particularly sophisticated: for example, forms of consumer credit or low loan-to-value mortgages, or the management of savings of relatively limited assets. The work done by the credit officer or financial advisor can be handled, in the first case, by electronic (online) platforms, not necessarily operated by commercial banks, that match borrowers with lenders ( peer-to-peer lending, loan-based crowdfunding, marketplace lending), and use algorithms and big data to provide a risk ranking for screen borrowers; in the second case by robot-advisor services, a cheap alternative to âtraditionalâ human wealth advisors. In both cases, in contrast with what happens in a traditional bank, the typical feature of a fintech company is that it makes use of digital technologies an...