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.
