Finance4Good

The past thirty years have seen a rapid expansion in the scale and scope of the financial sector across the world. Investors such as pension funds, sovereign wealth funds, insurance firms have expanded to unprecedented scales and have become active not only as investors but also as political actors across the globe. Similarly traditional financial sector firms such as asset managers have outgrown products and services sectors with a wide margin. This increase in scale has been accompanied by a rapid rise in the power and legal rights of investors in corporations through expedited representation of investors in corporate boards and in the setting of the agenda of companies’ annual general meetings. Furthermore, through processes of securitization, most aspects of human societies ranging from natural disasters to household debt, national heritage sites, land and essential goods such as basic food commodities are now tradable as financial products and are as a result affected by financial markets.

This explosion of scale and scope of investments has led to a host of pressures on asset owners and asset management firms demanding from them to respond to global crises such as climate change, water scarcity, corruption, and access to basic human rights.  A rapidly expanding number of investors have heeded these calls and have joined a global movement frequently referred to “socially responsible investments” aimed at increasing attention to environmental and social concerns in investments. Some have done so by associating their financial capital with broader social & environmental responsibility. Some others have highlighted the linkage between environmental and social crises and their long term financial returns as primary motives for attending to environmental and social concerns.

One year after the COP21, the risk of devaluation of assets for projects contributing to climate change has for example increased significantly. Despite this progress, in the debates and activities in this area, the voice of millions of concerned individuals including pension & insurance beneficiaries, but also financial customers, still needs to be heard. More and more of them want to orient their investments more directly toward certain goals –not just above average returns-- and have trustworthy reports of how their assets managers use their savings and deposits. And more broadly, more and more global citizens, and particularly those who don’t have the possibility to invest, need to benefit from finance. Actually we all need a finance that serves the well being of all humans, fosters growth without undermining the mid- and long- term perspectives of our societies. 

Moreover, while institutional investors have seen such fast expanding power and influence, a large part of the human societies still lack access to basic financial services such as transfer of money and debt. Such financial services, when provided in a responsible and fair way and avoiding over indebtedness, have proven to be essential to enabling economic development through access to markets and investments. Entrepreneurs from developing countries have triggered the rise of several financial organizations, which aim to deliver financial services to those who needs them direly. Micro-credit companies were among the firsts to bring access to debt to the poorest communities. Crowd funding platforms are growing to become another crucial source of financing for development in several emerging economies. Peer to peer, decentralized financial services firms relate community members and facilitate basic money transfers among them. Finally, impact investing is another fast expanding source of investments with focus on matters of public good while promising competitive financial returns.

The above phenomena highlight the special times we live in with regards to finance- society interactions creating significant potential for mobilizing financial capital for public and private good. Such potential is being partly realized through increased accountability of large investors to public concerns and part through entrepreneurial activities at the margins of traditional financial markets aimed it empowering excluded communities. On both fronts, we are only at the early stages of development.  

At HEC Paris, through the Society & Organizations Center and other actions, we have been studying the above processes scrutinizing their potential for bringing about accountability to financial centers and/or financial empowerment of excluded populations. The Finance4Good event is another illustration of how together, academics, students, practitioners and alumni, we contribute to account for these transformations and even more we can be actors of change for a better society.

On these issues, Laurence Moret, the Press Relations and Institutional Partnership Director in Crédit Coopératif, invited Jean-Louis Bancel, Chairman at Crédit Coopératif, François Champarnaud, Head of the Financial Division of the French Stakeholder Agency and David Korslund, Senior Advisor at Global Alliance for Banking on Values at Finance4Good Conference to debate on if and how banks can contribute to the real economy.

The difference between sustainable banks and systemic banks

A question that plagues the minds of many is the real difference between sustainable and systemic banks. Mr. Korslund provided some insight into this: the main difference is that sustainable banks operate on the principle of sustainability centered on supporting clients that deliver People, Planet and Prosperity. They are client-centered with a focus on real economy, while systemic banks focus mainly on the financial markets and the factors affecting the bank’s bottom line. Sustainable banks are fairly transparent on how they report and how their governance works. Another significant difference between these two styles of banking is their respective lending approach.

Systemic banks lend no more than 40 percent of their total assets, so the question remains where do the other 60 percent go? On the other hand, sustainable banks lend up to 85 percent and are reasonably transparent on the sectors they finance. It has also been found that the long term return on assets is higher and less volatile for sustainable banks. In conclusion, as a bank you can do financially well by doing societal good.

Why did systemic banks turn their backs on the real economy?

To better understand the reason why systemic banks abandoned the financing of the real economy, moderator and HEC Paris lecturer Laurence Moret turned to François Champarnaud. He has witnessed the evolution of finance in the world these past years through the management of the annual report “Money and Morals”. “Systemic banks did invest in the real economy, but not enough.” Mr. Champarnaud explained, “The banks reasoning over investing in the real economy shifted after the 2008 financial crisis.

Before 2008, banks neglected potentials risks of various financial securities. But after the crisis, there was too much demand for long term financing of economic projects. So they lowered their demand for credits. Globally, energy-producing countries have increased their savings because they did not have strong enough banking systems to finance the economy, they are not stable enough.” In Mr. Champarnaud’s opinion, banks did not live up to their role. However, he insisted, in such situations, sovereign funds, or other actors such as the government, should be able to take over this role, to invest in projects that are not profitable in the short term.

What does a strategy of a bank dedicated to real economy look like?

Crédit Coopératif was started by a workers’ association in 1893. The workers felt their financial needs were unmet because no one was willing to finance their projects. Thus Crédit Coopératif was born. As a bank, the members asked themselves: “Where are we coming from, where do we want to go and how can we meet the needs of the people?” The driving force of Crédit Coopératif is their values. They believe good values help good business. It is not about staying neutral but about building forward.

The purpose of a bank is to provide money and finance to those who need it. For Crédit Coopératif, it is important to get feedback from stakeholders, especially their customers. Consumers have been fed up with traditional banks ever since the financial crisis of 2009 and they are making their voices heard. They want to know where their money sleeps at night. Their manifesto is both transparency and letting customers decide which part of the real economy they want to invest in, placing the decision-making power in individuals.

In the case of Crédit Coopératif, the power of money derives from individual investors. According to its chairman Jean-Louis Bancel, banks do not need huge amounts of capital. In the real economy, many sectors are capital intensive but others, like banks, are not. Economic capital is needed, perhaps in the form of long term loans. With banks holding onto a lot of cash, it strangles real industries like agriculture. Are huge amounts of capital really required for banks and is it in the interest of the market that they hold on to it? 

Are sustainable banks the antidote?

At this juncture, the world needs an antidote to the current destructiveness of systematic financial institutions. Mr. Korslund believes sustainable banks, with their focus on the real economy, are a key part of the answer. According to this senior adviser in banking, there were a lot of financial product innovations in the Eighties and Nineties but only one was truly beneficial to the financial world: the ATM. Many others have turned out to be “weapons of financial destruction”. Large banks have broken business models and they don’t know how to fix it.

Systematic banks should ask themselves: “What is our role in the economy?” Sustainable banks have already found their answer and that is why they appear to be going forward. Is there a way of creating societal value through banking? Traditional banks ask themselves two questions: “How do we make money and how can we exploit human needs to do so?” Sustainable banks flip the questions around: “What do people need and how can we deliver on a financially sustainable basis?” The order of the questions is the main point and the key answer to finance for good. There needs to be a more prioritized focus on the real economy.

Assessing banks

Global Alliance has developed a Scorecard, an instrument to assess the sustainability of banks. It is a structured way to assess both their core characteristics, their quantitative results and the qualitative elements of their business model. GABV hopes this will help to change the strategies of current banking institutions. More information can be found on their website GABV.org.

Small is beautiful? How can sustainable banks grow and create impact?

In relation with the positive impact of sustainable banks, some may think that Crédit Coopératif and GABV members correspond to the notion of “small is beautiful”, and compare favorably to the “too big to fail” banking sector. Can these kind of banks grow further and influence the financing of the real economy? In response to the concept of “small is beautiful”, Mr. Bancel pointed out that it all depends on the perspective. “What is big and what is small? The size of balance sheet? The number of people working in infrastructure?”

To Mr. Bancel, what is more important is whether the bank can contribute positively. “We have to find ways to cope with two hands. On one hand, on the local level, we should help people change their lives and be an actor of the society; on the other hand, globally speaking, we should think of how we can be useful as a global citizen and preserve diversity of players to be resilient in crisis.”

Capacity of banks to channel ressources into the real economy

Banks are sometimes hesitant to finance long-term projects due to the following reasons: cost of capital and cost of high level of regulatory capital they should maintain. A way to achieve financing for long term projects is through Mutual Banks or cooperative banks, as they recreate the link between the shareholder and the customer. Mr. Champarnaud emphasized the belief that banks must take the ‘know your customer’ approach. It is essential for them to know the risk they are taking, to whom they are lending and to which sector. It is not advisable to be a global bank, one that lends to any sector. The bank should have a direct link to the territories, the sectors and the customers it lends to.

Do digital technologies help banks get closer to the real economy?

Lastly, in the age of digital transformation, the importance of technology on the future development of banking system is intriguing. Will digital technology help banks get closer to real economy? Both Mr. Korslund and Mr. Champarnaud are reserved in regards to the extent to which digital technology can bring significant progress. In their opinion, human interaction in the assessment of the credit process is indispensable. “What is your project? Who are you? What is your personality? We need human point of views.” Mr. Champarnaud explained. Mr. Bancel, on the other hand, had a more optimistic view. “I believe in the importance of technology, it helps the work move forward, faster and in a more complex way.” 

Written by Valerie Wang, Nikita Chu & Shagun Telwar, HEC Paris Students.

In the past, financial aid used to mainly flow through the government, resulting in an unequal distribution of resources and corruption. The alternative, financialized approach to development financing emphasizes the utilization of private investment vehicles. This implies the flow of money from both local and international investment firms and individuals directly to enterprises within developing nations. This enables the transfer of knowledge and capacity building in receiving enterprises and their sustainable access to financial resources.

Mehrpouya highlighted the need to debate the significant potentials but also risks and challenges associated with the rapid rise of diverse forms of private financing models in the world of development. All the panelists agreed that there is untapped potential in this emerging sector.

At present, the primary source of financing for development comes from Private Equity, followed by Impact Investments, which are growing at a rate of $12 billion dollars per year (currently a $50 billion dollar sector). Private Equity firms focus on the financial return, while Impact Investing seeks to target specific social and environmental results in addition to financial profit. Erick Rajaonary, CEO of Guanomad, was the only panelist from the investee side of the equation, working in sustainable agriculture to create organic fertilizers from bat droppings in Madagascar. Founded in 2006, Guanomad now exports its six product lines all over the globe, with a third of exports going to the United States.

Today, 40% of the firm is owned by a South African Private Equity firm, but Rajaonary reiterated the importance of development and investment driven by local resources and capacities. Through the infusion of outside investment and technical assistance, Guanomad has become a viable investment opportunity for its capital providers, while at the same time driving social, economic, and environmental change in Madagascar. The enterprise has remained focused on continuously developing its product lines and its international markets while also addressing the larger concerns of Malagasy society such as food security, organic farming, rural development and environmental protection. Rajaonary also plays an active role in community development through education, professional training, healthcare and social empowerment of people.

On the other end of the spectrum, Jean Michel Severino’s’s Investisseurs & Partenaires (I&P) creates opportunities precisely for enterprises like Guanomad. The impact investment firm, dedicated to development in Sub-Saharan Africa, works in 15 African nations, and has invested in about 60 small and medium enterprises. One particularly successful investment was a cement tile factory owned by a female entrepreneur in Mali. I&P initially invested $50,000 into the firm, and following six years of guidance, the firm had a 30% turnover and 100 employees. I&P sold the company for $150,000, netting an impressive $100,000 profit on the initial investment.

The fact that the company was owned by a woman in a mainly Muslim nation makes this even more impressive. It is creating these types of opportunities that will drive change across the developing world. As asserted by Jean Michel, it is critical to move beyond traditional investment models because there are viable ways through which corporations can use money to serve development and make soft profits at the same time.

The aforementioned examples are encouraging for development financing, but social impact investments do not always generate adequate returns to convince traditional investors such as private equity firms. In these cases, crowd-investing firms such as the Lelapa Fund, co-founded by panelist Elizabeth Howard, can play an important role. The Lelapa Fund connects entrepreneurs in Kenya to short term and long term investors across the globe. Its target investors are venture capitalists and individuals looking to invest in development.

This direct investment model puts the investor's money straight into the hands of Kenyan startups. It might seem risky but it is the most effective method, reducing cost of capital for entrepreneurs. Lelapa Fund screened 550 Kenyan startups in the past year, basing its decisions on both positive and negative social impact. It connected a similar amount of investors to opportunities. However, because Kenya lacks formal government infrastructure to support this type of investment and entrepreneurship, Lelapa Fund has been closely working with Kenyan Financial Markets Regulators since 2014. Jointly, they are implementing a system which allows wealthier Kenyans to invest into this space. 

As exemplified by the Lelapa Fund, the role of the public sector and regulators cannot be underestimated in supporting private investment in development. The expansion of a vibrant private sector is in the interest of the central government, given the economic benefits for the nation as a whole. The success of a private venture often spills over into the well-being of a nation. However, as Jean Michel Severino underlined, the problem is that, “if you study poor nations, they have too few corporations to achieve a significant economic impact, and the few corporations that do exist are often poor and not very profitable.” Thus, although corporations are beneficial for national development, poor nations do not have the ability to support such structures. According to Lelapa Fund co-founder Elizabeth Howard, part of the solution to this lies in the creation of “a whole ecosystem…to be built up for people to access these systems.”

André Laude, former Chief Investment Officer of the International Finance Corporation (IFC), tapped into his experience of working for a World Bank member organization to offer significant insight into the public sector perspective. At the IFC, Laude operated with the primary goal of creating sustainable long-term jobs that produce beneficial results for the community at large. Laude stated that development financing institutions and banks must continue to demonstrate that finance can serve public good and still produce profit.

The key seems to be to incentivize private investors to make the leap and invest in market opportunities in developing nations. Once this is done, developing nations will find more support for small scale local projects not often supported by central governments, and large scale investors are likely to become more involved. A key in bringing about this transformation will be mobilizing new forms of financing to drive alternative responsible and sustainable investment models. 

Finance to serve development is a growing industry, offering plenty of opportunities both for traditional and impact investors and for communities and societies on the receiving end. The manner in which finance is utilized often attracts debate, but one thing remains clear: Finance, if mobilized responsibly, can help change the world for the better. The results-driven nature of financial markets, if combined with attentiveness to social impact, has immense potential to deliver tangible and effective social outcomes.. So are you ready to be a part of this change?

Written by Daniel Park & Sukanya Narain, HEC Paris students.

The session brought together HEC Paris professor and mediator of the conference, Jean-Edouard Colliard, Salvatore Gnoni, who runs the Investor Protection and Intermediaries Team in the European Securities and Markets Authority (ESMA), Enrico Perotti, professor of international finance at the University of Amsterdam and Vikrant Vig, professor of finance at the LSE. These four specialists tackled questions such as expectations one can have from regulation and the degree of complexity needed to be efficient.

How can finance regulation be efficient?

Salvatore Gnoni considered the question from his own point of view, the one of a regulator interested in the investors’ protection. Acknowledging both the vital part securities market plays for growth in our market economies and the need for regulation that arises from market failures, he went on to describe how the MiFID II directive passed in the wake of the 2008 crisis recalibrated the relationship between regulation and the financial markets. Its scope was broadened to include structured deposits, stricter rules were created on advice as well as inducement, supervisors gained the power to intervene on products and the issue of governance and implementation were stressed.

Weighing up the notion that regulation has become too complex, Professor Gnoni changed the perspective to address the problem of how to regulate well within a complex environment. He mentioned the growing complexity of products and markets, the impact of new technology on financial markets and the complexity of the negotiation process for the adoption of new legislation, all factors which may lead to the need to create complex regulation. The solution resides first in better regulation principles, principles which are reflected in ESMA’s processes. For the speaker, it is as vital to enforce existing regulations as it is to pass new ones.

In this respect, HEC Professor Gnoni underlined the importance of supervisory convergence which indeed has become one of the priority strategic objectives of ESMA. He went on to mention the tools used by ESMA to deliver on supervisory convergence, including peer-reviews, soft law, mediation, breach of the Union law procedures and, more recently, workshops and thematic sessions. This shift of focus from rulemaking to convergence for the supervisors concluded his intervention.

Dutch-based professor Enrico Perotti followed up by questioning the future of monetary and prudential policies in a context of zero growth. According to him, being provided with a realistic perspective on where we are going could help define the regulation we are looking for. Public debate has been dominated by concern over lack of growth as the world’s richest economies have barely limped forward since 2008. But the essential question should be the rate of growth we should expect. Historical growth rates are linked to technological disruption and its impact on productivity.

Since no recent technological boost has occurred, that production has been reallocated to the emerging world, work participation has dropped and high level of debts has further limited spending boosts. Consequently, the downturn in growth should not be a surprise to the Western world. This lack of growth only compensates past excesses permitted by a credit boost, in the absence of any increase in productivity.

Thus Professor Perotti disagrees with those who believe the same levels of growth will return once the uncertainty that is currently discouraging households from spending will give way to confidence. For him, we are at the end of a debt super cycle and must accept that the past growth was unsustainable and inflated. Clearly, growth in spending was confused with an increase in productivity. Low demand is healthy, or at least realistic, and zero growth per capita has to be the base scenario for regulators.

LSE professor Vikrant Vig went on to discuss the degree of complexity needed for regulation to be most efficient. It has been argued that regulations mirroring the complexity of financial markets have led to an increase of scope for regulatory arbitrage. They have created barriers to entry and a problem of governance. Big banks have the resources to lobby the regulator and find loopholes that permit them to generate rents.

Strikingly, Basel II and III increased the “too big to fail” issue, since the model-based approach of risk assessment gave way to the optimization of the models by the big players. It has to be noted that the regulators also gained from excessive regulation as it reinforced their power. Yet the adequate level of complexity still needs to be found, a difficult task when those involved disagree on a way to measure complexity. However, should we first agree that simpler rules are more efficient and that less is more? After all, speed limits are the same for everyone, and have proved to be efficient.

We are living in crucial times. As the environmental impact of human activities has grown exponentially since the industrial revolution, so has the need to reach a political consensus regarding the urgency of action. This appears to have been achieved.One of the key issues regarding the development of a decarbonized economy, or at least a low carbon economy, is electricity generation. Financing the transition from conventional energy sources clearly requires great commitment. In the EU alone it will be necessary to invest 270 billion euros more per year (roughly 1.5% of the EU's GDP) over the next 40 decades in order to bring down carbon emissions by 80% of the level reached in 1990. While we can agree on the goal, the means to achieving it seem source of conflict. Who should finance this transition? What energy sources will have to be promoted? Under what conditions? Is it financially feasible to promote such a change in an era of low commodities prices?

Such questions were debated at "Financing a Low Carbon Economy" session of Finance4Good conference moderated by Jean-Michel Gauthier, Affiliate Professor at HEC Paris and Executive Director of the Energy & Finance Chair. His remarks set the tone: “The situation in the energy market looks bleak if you look at the glut, excess of oil, gas, electricity. And very low energy prices do not encourage alternative investments.”

Government Role

So far, markets have not been capable of fully assessing the price of climate change. Short term profit seeking has proven to be a barrier for further involvement in the transition to a new economy. However, governments are starting to take action in favor of a low-carbon economy through regulation. Last year, France became the first country to introduce mandatory climate change through Article 173 of the “energy transition for green growth” Law. Major world powers, such as China, are also taking a stand in favor of a “green economy” with it brings out its first domestic green bonds. In a matter of months, these have become its largest green bond market. 

Policymakers have exerted a key role in reducing the cost disadvantage that most clean energy technologies face in comparison with fossil fuels. SolarNet director Patrick Hubert gave the example of solar energy production which currently costs less than other energy resources. “The development of renewable capacity production in Europe,” Hubert stated, “has only been possible through subsidies and government schemes, and not on the basis of a market mechanism or even against the backdrop of a mere supply and demand situation.” 

Financial Markets

Changes towards a low-carbon economy can also be seen in the private sector. Investors are starting to realize that climate change is a factor that has to be included in the risk calculation of a portfolio. As mentioned by Frédéric Samama, new arguments are emerging stating that investing in polluting companies may even go against fiduciary duty, as it will represent a lower return on investment for shareholders in the long-term.

That is why key actors such as AMUNDI, are currently offering decarbonized indexes, an approach that uses both divesting and engagement techniques. While obtaining similar returns to an average index, decarbonized indexes exclude the worst performers (30%) of every industry in terms of carbon footprint and pollution, creating a virtuous circle of encouragement for a continuous improvement in environmental practices. 

Large banks such as Société Générale have also experienced changes in their investment structure in the last three years. Currently, energy financing is almost exclusively reserved for renewable energy projects. Nevertheless, Allan Baker also acknowledges that the sector is facing liquidity limitation issues: the amount of money invested in energy financing is insufficient for a full energy transition. There is still a need to attract larger investments from institutional investors. 

In the microfinance sector crowdfunding is allowing the financing of smaller green projects, individual investors are able to invest in micro green bonds. As stated by Mathieu Dancre, these type of investors are not only looking for good levels of return on investment, but also transparency and trust. Although green crowdfunding has proved to be an efficient mechanism for the development of renewable energy projects, the competitiveness between renewable and nonrenewable energy sources is still so high that it makes it difficult for green projects to succeed. 

We can acknowledge that transitioning into a low carbon economy is a goal that will require the cooperation and coordination of all key actors: governments, establishing the right incentives; investors, taking into account the impact of their transactions; asset managers, formulating innovative ways to achieve profitability and accountability; and consumers who will have to invest in goods compatible with this new economy. Are we up for this challenge?

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The panel was made up of Allan Baker, Managing Director, Global Head Power Advisory & Project Finance, Société Générale; Mr. Mathieu Dancre, Founder and President, Green Channel; Mr. Patrick Hubert, co-founder and Executive director of SolarNet; and Mr. Frédéric Samama, Deputy Global Head of Institutional & Sovereign Clients and founder of SWF RI, Amundi. All four specialists looked at the challenges posed by the  financing of a low carbon economy.

What made the financial revolution possible?

Speaking of the game–changing financial revolution, professor Ghez mentioned three doors that opened to this possibility. Door A was the 2007–2008 financial crisis, which prompted people to start demanding more transparency and gaining back control from their banks. Door B was the appearance of Fintech business models which mobilizes resources far more quickly. Door C was found behind the political revolutions we have witnessed across the globe, from North Africa to the Middle East via Ukraine. These political upheavals have brought with them a sense of individual empowerment occurred with the technology innovation mentioned above at hand. This momentum has encouraged individuals to demand better and more frequent supervision over how their money in the saving accounts is being used by banks. 

Both Pierre-Nicolas Patouillard and Pierre de Feraudy agreed on the vital role played by  citizen empowerment in these revolutions. Mr. De Feraudy added that access to information made all the difference. Nowadays, for example, people can go on the internet to search for the financial products banks are suggesting. This meant finance was no longer a reserve for the elite. On top of the three doors professor Ghez described, Mr. Patouillard pointed out two other doors that made the revolution possible.

Door D were regulations that sought balance between introducing competitiveness by lowering taxes for the banking system and increasing purchasing power of people by reducing costs of customers. While Door E was the increase in the number of international actors who were not necessarily considered as competitors initially but were starting to branch out into the banking business, actors such as the GAFA (Google/Amazon/Facebook/Apple). The emergence of these international players made it even more difficult for international banks to remain in the international arena.

What are the new business models challenging?

When asked about what they are trying to challenge or change in the banking industry, Mr. de Feraudy and Ms. Sadoun spoke about their respective sense of mission and vision. “In my business, we finance what the banks don’t finance. Our mission is to bring money to finance the real economy, which are SMEs (Small and medium–sized enterprises). We try to find a different way of financing to entrepreneurs,” Mr. de Feraudy explained, “not only the money, but also access to this money.” In Lendopolis, for example, there are 2 main things that are done differently.

First of all, for new enterprise customers, the time between their first conversation with Lendopolis and getting the fund in their bank account is 30 days, compared to a probable 6 months with traditional banks. Second, Lendopolis does not invest with the client’s money, they merely provide investing opportunities to clients. To Ms. Sadoun, transparency is at the heart of 1001pact.com. “The traditional financial system made people believe that finance is complicated and you should trust bankers with your money because they know how to invest it. But we believe that finance is quite simple, it’s about investing in companies and understanding its business, market, social impact, and CSR performance.”

Driven by this belief, 1001pact.com analyzes and evaluates companies comprehensively, from financial status to environmental and social impact throughout the value chain, for customers then send this investment deck to them. “This way they can select which company they want to invest in with all the information, they’re actors of their own money.” Ms Sadoun explained. She went on to explain her vision for the future of banks. “I think, for instance, that the bank of tomorrow will be a bank that allows you to know how much carbon emission is produced when you invest one euro. It’s quite a cliché, but when you see the problems on the news, you might not know that the money you invested, you’re contributing to these problems. We want to change the financial system and say ‘with your money, you can contribute to positive effect’.”

Trying to catch up when new entrants: innovating in the traditional financial sector?

Facing the increasing concern of their clients about the management of their money as well as the emergence of the Fintechs, how should traditional actors of the financial sector evolve? One solution: to innovate. But according to Mr. Patouillard, there is no magic recipe for innovation, particularly in the banking system. Yet following the three steps –  learn, observe, act – helps Mr. Patouillard anchor the banking practices in today and tomorrow’s society. First, banks have learnt from the crisis and the new entrants, elements of great value in people’s minds: transparency, real–time response and the value of community for instance. These new features are expected by clients.

Second, they not observed their competitors, but also themselves, and tried to assess which internal activity is still worth keeping in the business and the ones that need to be reshaped. Then, they act. This means to connect with the surrounding ecosystem and initiate a dialogue with these side businesses that challenge the traditional characteristics of the banking system. This process of innovation is leading banks to transform themselves, starting with digital transformation.

However, implementation of innovation can be slow. Quite often, clients do not see the tangible and instant results of these policies in their day–to–day interactions with the banks. Indeed, many constraints prevent banks investing in radical innovation. To begin with, certain cultural reasons related to the conventional aspect of the industry, as well as the weight of the legacy, are slowing down the initiatives. Then, the extremely large number of customers can also hold back innovation: it is crucial to maintain the way the banks’ contract with their clients, and thus it prevents the banks to accelerate in their transformation. All of these evolutions require financial resources and time. A complete overhaul of the business model of traditional banks is not on the agenda, but innovation remains key to maintaining their position in the financial sector, especially in the long run. 

So, will there still be banks?

Ms Sadoun, Mr. de Feraudy and Mr. Patouillard all agreed on one point: in the future, there will still be banks. They remain a necessity to the current functioning of the financial system. In France in particular, the banking system is really consolidated and works quite well in financing activities. This leads to the rethinking of the potential coexistence between these two types of businesses, with traditional banks on one side, and  Fintech on the other.

After all, they do not necessarily have to be seen as competitors since each one of them has different business models and is targeting different segments of the financial market. “Complementary is the key word.” concluded Mr. Patouillard. This complementarity can embody situations of in which activities are co–financed. As Mr. de Feraudy pointed out, almost 50% of the projects funded by his crowdfunding platforms are co–funded by traditional banks.

Mr. Patouillard drew a parallel with the entry of Uber on the personal transport market: “They are not only Uberizing the market; they are increasing the market”. The same goes for the financial sector. Crowdfunding is a financial solution drawing people into funding activities as well as helping project leaders to access funds. Eventually, the coexistence of traditional banks and Fintechs partakes in the financial inclusion: all the partners are needed to help each and every one of the citizens.        

What about tomorrow?

One concern remained on the table after all this: what will be the status of the Fintechs in the future? Ms. Sadoun reminded the audience that startups are really appreciated and supported when they are small, but become a problem when they grow. In the financial sector, this leads to the idea that crowdfunding will end up being part of bank activities. Yet Fintechs, and in particular crowdfunding platforms, need to keep their independence in order to work towards the goal they set at the beginning and to keep offering an alternative to clients. 

Tomorrow’s financial sector will definitely see the coexistence – and the collaboration – of two entities: banks and Fintechs. The latter will constantly challenge traditional banks’ functioning and push them to reinvent their model and to innovate. Eventually, we can expect to reach a greater financial inclusion, of citizens, funds suppliers and seekers of funds.  

From left to right: Nicolas de Feraudy (Business Development Manager at Lendopolis), Pierre-Nicolas Patouillard (Innovation Director International Banking and Financial Services in Société Générale), Eva Sadoun (co-founder of 1001pact.com) and Affiliate Professor Jérémy Ghez.