Q: How have recent regulatory initiatives affected UniCredit’s business model?
A: Changes in regulation have been pervasive. They touch every area of our bank, every item in the financial report, every person, every customer. We’ve seen an average of two significant regulatory changes each week over the past five years. So together with the external environment and changes in customer habits, regulation has been a major transformational factor.
On the macro-prudential side, banks are being clearly asked to deleverage and gather more liquidity and we have been pursuing this in many ways. The most significant was our capital increase of €7.5bn in 2012. The other major area of change has been rules designed to protect consumers and investors, but since this had been a clear trend for some time we were already quite well prepared in this regard.
We are now looking forward to the next important steps towards a banking union in Europe with the creation of the single supervisory mechanism.
Q: Have differences in national regulations made it harder to manage the group?
A: Increasing regulatory and supervisory fragmentation across Europe has become an issue. Some people are now talking about European regulatory balkanisation. Before the crisis we saw clear convergence in supervisory behaviours across Europe, but the crisis has now led to major differences in certain regulatory attitudes. This creates significant problems in managing the group as one single entity.
For example, we moved from having one global treasury to having more fragmented treasuries. It is no secret that transferring liquidity from Germany to other countries has become problematic. But the sheer volume of sometimes conflicting new regulations has also generated entropy. Conflicting regulations across jurisdictions or also between macro prudential and conduct rules, end up increasing costs not just for banks, but ultimately also for European customers.
Q: Which has had a more profound impact, regulation or changing customer habits?
A: It’s very hard to rank them. Let me put it this way – regulation and changes in the external macro-economic environment had a sudden impact after the Lehman crisis. The shift in customer habits has been more gradual. Things started changing back in the 1990s, but there is now again a clear and strong acceleration.
The number of customers that no longer come into the branch has increased in the past two years. And smartphones and tablets have become more important to the point where they are clearly overtaking the computer as the main online channel used by customers to interact with banks.
So we are in a highly transformed environment. This is the ‘new normal’ in banking.
Q: Is regulation also pushing banks to achieve higher levels of automation?
A: Actually, the main pressure is from customers. But the combination of three factors – the worsened macro-economic environment (low interest rates affecting commercial banking revenues and stagnant volumes), plus new regulation, plus new technology – has conjured up a situation demanding a profound discontinuity in banks’ business models. The pressure of regulators against cross-subsidies requires banks to either re-price or make more efficient certain segments or products that have historically been loss leaders.
These factors have also created overcapacity. Banks have too many resources in terms of people, branches and other real estate assets that are too costly compared with the revenue generated. This will require, among other things, a drastic simplification in the product range and much greater administrative automation.
Branches will have to focus less on low value-added administrative tasks and more on delicate, trust-rich interactions such as consulting and customer acquisition. This is a fundamental change banks need to make. I don’t expect banks to reduce branches by 50%. What I do expect in the future is completely different branches, more ‘cash-light’, more ‘cash-less’, more 24-hour ATM branches with fewer people, more contact centres, more remote advisory, even more teleworking but without losing sight of trust-based relationships as the key link between bank and customer. That is the bank of the future.
Q: Has the pace of change towards digital and multichannel banking quickened? If so, why?
A: Yes, today customers want to interact with their bank through multiple channels simultaneously and this requires major investments. In the old style multi-channel banking, a customer using a PC to start a mortgage application had to pick up the phone to ask for help. More recently, the same customer might be able to click on a button so that someone shows up on the screen and is able to see exactly what the customer is working on at that point in time and help him to move forward. Integrating the channels like this is one of the biggest challenges. It is one thing to have multiple channels, but it is entirely another level to move seamlessly between them.
