Traditional banks resist the challenge of Fintech. Leanus analysis
4% of Italian companies absorb more than half of the bank debt; traditional banks preside over the market of medium and large enterprises and intervene selectively on small and micro enterprises. Fintechs are struggling to establish themselves in the credit market for Italian companies. The causes
The last few years have been characterized by the entry on the market of new realities which, at least according to the initial declarations, were supposed to overturn the procedures for accessing credit in the corporate segment; the new players, taking advantage of the technologies and certain of being able to do better than the traditional system, would thus have undermined the traditional banks which are too slow to adapt to change and destined to be overtaken in a short time by fintechs.
Rapid onboarding processes, use of artificial intelligence and machine learning, predictive algorithms, are just some of the ingredients that should have attracted entrepreneurs to abandon the traditional branch in favor of new operators.
To date, the results and the epilogue of some of these realities show that the traditional system is not only not threatened by the entry of new players but it almost seems not to have really noticed it. The causes are many and certainly include the economic situation, interest rate trends, regulatory complexity, and much more.
An element that seems to explain better than others the reasons for the failed transformation of the credit access process and which has perhaps been overlooked by the new operators is represented by the peculiar characteristics of the Italian business system and by the extreme complexity that characterizes the credit processes. Even fintechs are subject to the complexities that characterize the traditional system; to disburse credit adjustments to regulations, investments in infrastructures, distinctive skills, knowledge of the market, commercial network and various other elements are necessary which can only be partially optimized through the use of technology.
For Milano Finanza, Leanus analyzed the complete financial statements of 153.000 Italian companies divided by revenue category and those of 3.938 consolidated financial statements. In particular, in the period 2020-2021 Leanus found that the total amounts due to banks recorded in the balance sheet increased overall by around 16 billion euros, going from 453 to 469 billion. Although this is a net increase, it is interesting to note that companies between 500K and 2M€ were allocated slightly less than 2Bn against the 12 billion allocated to companies with revenues greater than 50 million Euros. The balance of the 2-10 million segment is even negative.
Considering that businesses with revenues exceeding 50 million euros represent 4% of the total, it is clear that just under 7000 Italian businesses have absorbed almost all of the debt disbursed by the banking system; for the remaining 112.000 analyzed the increase was negative or equal to just over 25.000 euros per company.
If we consider that the large corporate segment is heavily controlled by large banking groups which are certainly capable of providing full coverage of the complex needs of this segment (foreign transactions, risk hedging, complex investments, etc.), the new players would only have to dedicate itself to the segment of small and micro-enterprises potentially and numerically large enough to be able to justify its presence on the market.
However, the large number of the target and the effective cumbersomeness of the traditional system have made some elements less evident which probably led to the bankruptcy, at least to date, of most of the new Italian operators. The main causes
Difficulty reaching critical mass. fintechs have to compete with traditional banks that have an established customer base and a large branch network. This makes it difficult for fintechs to reach the critical mass of customers needed to be profitable. B2B online channels related to advanced services without adequate traditional commercial support are insufficient.
Funding problems. fintechs need adequate financing to develop their businesses and compete with traditional banks by reducing the price to the end customer. Furthermore, their activities require significant investments in technology, marketing and regulatory compliance (fintechs must comply with the same standards as traditional banks) which make it difficult to achieve break-even and payback.
Difficulty in offering differentiated products. fintechs often focus on specific financial services (invoice advance, guaranteed financing); even small and micro-enterprises require diversified services capable of covering overall financial needs.
Technology-biased credit assessment model. The evaluation process of a small or micro-enterprise has a degree of complexity similar to that of larger companies. The regulatory framework also provides for the ability to analyze trend data, process projections, collect qualitative information, evaluate and decide. Technology can help but the human factor remains the distinctive element
Low knowledge of the area. The assessment of creditworthiness, and the small territorial banks are an example, is based on the construction of a medium-term relationship, on the historical knowledge of the counterparties and of the players involved; the absence of a widespread presence throughout the country exposes them to much higher counterparty risks than those of traditional local banks
Adverse selection. Businesses worthy of financial assistance have a wide range of opportunities offered by the countless financial and insurance operators and are generally monitored and assisted at 360 degrees by them. The active search for new finance through alternative channels often hides business profiles that have already been rejected by the traditional system and are therefore much more risky.
In summary, the data would seem to confirm that although there is ample room to improve credit processes by progressively introducing new service methods and methods, it will still be the banks and traditional operators who will oversee the credit disbursement activity in a sustainable manner by focusing on a service model and medium-long term customer relationship. For fintechs, there is still a great opportunity to help banking operators improve their processes, in most cases still based on methodologies that have been outdated for years.