A glimpse of Italy and France
By Balwant C Surti, Industry Principal and Head Enterprise Architecture & Solutions Group, Infosys Finacle
Italy. France. The mecca of art, culture and all things stylish. Home to two important banking markets in the Continent. Having been affected by the Financial Crisis of 2007-08 to different degrees – Italy more than France – both countries are now on the slow road to recovery. Like everywhere else, the banking industries in Italy and France are undergoing rapid change, both evolutionary and disruptive, thanks to digitalization. As banks try to grapple with the attendant challenges and opportunities, they are turning to technology, from advanced mobility to analytics, to take them through. This is opening up new opportunities for technology vendors to offer next-generation solutions to Italian and French banks, which are still quite reliant on legacy and proprietary IT solutions.
Economic prospects look up after a long time
Italy is the 9th largest economy in the world. The services sector dominates, accounting for nearly 75% of GDP and 65% of the total workforce. This is followed by manufacturing, which largely specializes in high quality and luxury goods and employs nearly a third of the workforce. Agriculture makes up the rest of the economy and generates nearly 4% of employment.
The global recession had a significant impact on the Italian economy. In 2009, GDP dipped by 5.5%, one of the largest drops in the country’s history. The road to recovery has not been all smooth, with the economy actually contracting for three years until 2014. But all factors seem to be looking up with the Italian services sector registering one of its fastest growth rates in over 5 years at the end of 2015. This, coupled with a faster rate of growth in manufacturing, indicates prospects of a slightly stronger economic performance in 2016. The country’s GDP is expected to grow by 1.4% in 2016 and 2017.
Banking – a time for consolidation and reform
Banking reform is broadly seen as a critical component of any plan to get the national economy on track. With over 650 banks, many see a favorable case for consolidation to overcome excessive fragmentation, enhance governance and boost lending and profitability. A key development in this area has been the initiative to reform voting rules at cooperative lenders known as “Popolari”. The initiative seeks to overhaul the current system, which gives all banking shareholders one vote regardless of the size of their stake, and consolidate the banking sector. Over the next year, the 10 largest cooperative lenders will become joint stock companies thus setting the stage for mergers and acquisitions.
Although the Italian economy is picking up, banks continue to suffer from worsening asset quality. At the end of Dec 2014, impaired loans were nearly 18% of the total, almost triple the ratio in 2007. The biggest causes of non-performing loans (NPL) include the large exposure of banks to corporate, particularly SME, borrowers and a conservative policy on defining and writing off NPLs. Regulators are stepping in to acquire some part of the industry’s bad business loans.
UniCredit, Intesa Sanpaolo, Banca Monte dei Paschi di Siena, UBI and Banco Popolare are some of the big players in the Italian banking scene. The country also has a growing and healthy Fintech culture. The country’s first official Fintech community was launched early last year and at that time counted 78 startups in the banking and financial services space.
Banks have been conservative in their technology policy so far
The Italian banking ecosystem is still largely characterized by solutions that are proprietary and mainframe-based. One reason for this is most banks still prefer to take a rather conservative position on technology given the difficult journey they have had from the crisis to a possible recovery. Another reason for the technological aspirations in Italian banking being relatively moderate is the market itself, which is less complex, in terms of product offerings, statutory mandates etc., than other comparable markets like Spain and the United Kingdom. And finally, most Italian banks are still not fully comfortable with the onsite/offshore model that typically drives most banking transformations. They still prefer to outsource their technology needs to partners with a significant presence in the country, who can speak the local language and have established credentials in the Italian banking industry.
But now, they are taking interest in next-generation technologies
There are three areas of interest that are currently driving technology decisions in the Italian banking industry – going digital, going mobile and reducing operational costs. Even so, the general preference continues to be for replacing banking systems modularly based on Line of Business rather than pursuing large scale core transformation. The market also does not seem to be quite ready for a full foray into the Cloud paradigm with most efforts currently concentrating on physically hosting applications. But concepts like analytics especially in the area of marketing, open APIs, and Linux are rapidly gaining traction among banking leaders in Italy.
Technology vendors must think local to succeed
Temenos, Misys and Finacle are the main technology players in this market. Going forward the technology community will have to work more closely with banking players to mutually identify and define technology requirements and design a technology roadmap that will deliver solutions that are perfectly aligned with local needs and expectations. Banking leaders should crystallize their technology vision for their banks and the vendor community must work with them to achieve the same.
The economy suffers growth pangs
France is the 5th largest economy in the world with the services sector contributing 70% to GDP. The country also has a strong manufacturing sector and is a recognized global leader in automobiles, aerospace, and railways, besides cosmetics and luxury goods. The French economy endured the economic crisis relatively better than some of its peers in the region. But since then, recovery has been rather slow and GDP growth has remained stagnant over the years. The country faces some significant challenges in terms of rising unemployment rates and the state of its public finances. The French economy is forecast to grow at 1.3% in 2016 and 1.6% in 2017 on the back of falling oil prices and continuing monetary stimulus programs. But government tax revenues, consumer purchasing power and unemployment are among the challenges that have to be addressed before the country can get onto a sustainable growth trajectory.
Banking is mature and stable
France is a very mature banking market with around 380 banks and a banking penetration rate of 99%. Most banks in France follow a universal banking model that extends across segments like retail banking, corporate banking, investment banking and capital markets, and asset management. The French banking industry is dominated by five vertically integrated universal banks and their subsidiaries that control over 80% of all assets. These are BNP Paribas, Société Générale, and three banks, namely Crédit Agricole,
Crédit Mutuel-CIC and BPCE, which are structured as cooperatives.
According to a recent report, most large French banks are expected to perform well on a range of metrics primarily on the strength of their diversified business models and robust balance sheets. The fact that most major French banks operate across multiple revenue businesses, like wealth management, insurance etc., is expected to enable them to deliver competitive risk-adjusted returns. In the coming year, French banks are expected to report improvements in capitalization and profitability.
Banks have a legacy of technology
Most of the large banks in France still rely extensively on legacy systems operating on UNIX and mainframe-based solutions that have largely been developed in-house. Just like Italy, the French banking industry tends to prefer technology partners who know the local language and have established local credentials.
But now, they’re going digital
As a mature banking ecosystem, there is naturally a lot of interest in digitalization within the French banking industry. The growing Fintech phenomenon is also expected to pose a real threat to traditional banks with one report indicating that new players will account for 40-60% of the retail banking market over the next decade. A majority of banks already have a concrete digitalization strategy in place with multi-channel customer relationship management, Big Data and Analytics topping investment priorities. Modular transformation and payments also rate high in the overall digital strategy of most banking players. Concepts like Cloud are still to gain any meaningful traction as yet but the focus on Linux continues to expand.
Technology vendors must be there to do that
The major players are Sopra, SAP, Temenos and Avaloq. Being a highly regulated and complex banking market, France offers a lot of opportunity for advanced regulatory and compliance products. There is nascent interest in Business Intelligence solutions. Then there is the additional opportunity of adjacent markets like Algeria and Morocco, both of whose banking industries are significantly influenced by the dynamics of the French market. However, aspiring technology partners must prepare for the biggest challenge of adapting their delivery models to meet expectations of local presence and language capabilities.