SocGen

The coronavirus pandemic has sped up European banks’ digital strategies, with huge investments going towards organic and acquisitional growth in technology and innovation. Burhan Khadbai reports.

Europe’s banks have been behind the curve when it comes to digital transformation. This lack of digital savviness has allowed fintechs to disrupt niche areas of the market and attract customers away from the large incumbent banks.

“Pre-pandemic, most large banks were significantly behind a lot of fintechs and newer entrants in the banking and financial services space,” says Manu Saxena, a partner at McKinsey who advises banks and technology providers with a focus on transactions and growth strategy. “They had legacy architecture and frankly outdated processes. A lot of banks’ innovation and technology streams were also siloed and separate from the business.”

However, during the Covid-19 pandemic, the banks doubled down on their efforts to accelerate their digital transformation. Banks in Europe are not just investing huge sums in technology to boost their digital presence organically, but they are also increasingly looking at partnering with and acquiring fintechs to plug the gaps in their digital strategies.

Digital growth

One of the recent acquisitions of a fintech firm by a European bank this year was UBS’s $1.4bn takeover of Wealthfront, a US-based automated wealth management firm aimed at millennial and Gen Z affluent investors. According to the bank, this will help the bank to “accelerate its growth ambitions in the US, broaden the firm’s reach among affluent investors and expand its distribution and capabilities”.

But banks in Europe are not just at looking at fintechs to expand their geographical reach. Société Générale’s (SocGen) recent ALD-LeasePlan tie-up, for example, has been viewed as a way for the French bank to boost its digital offering. ALD Automotive is the operational leasing and fleet management business line of SocGen Group.

“With the ALD-Leaseplan operation, the rationale is to first strengthen a profitable business because returns on investments in this area are quite high,” says Claire Dumas, group chief financial officer at SocGen. “Secondly, this is an area with a strong growth potential, driven by the mega-trend around the mobility revolution. So, this transaction will allow us to capture this trend and additional profitability. Thirdly, this transaction also diversifies SocGen’s business model.”

Ms Dumas adds that the ALD-LeasePlan deal will also “increase the investment capability towards the digital transformation of the combined entity under a united set up and framework”. As such, the ALD-Leaseplan deal will not only create a leading global player in the auto-leasing market but it will also accelerate the sector’s digital transformation.

A mixed approach

“We have made digital development a central part of the bank’s strategy and have taken a mixed approach,” says Ms Dumas. “We have internal digital projects, but at the same time we also look at value-creating models, such as acquisitions or partnerships.”

We have made digital development a central part of [SocGen's] strategy and have taken a mixed approach

Claire Dumas

In 2020, SocGen acquired Reezocar, a French online platform for the sale of used cars, and Shine, a neobank dedicated to professionals in the small and medium-sized enterprise segment. A year before that, it acquired Treezor, a French bank-as-a-service platform.

“We always look at opportunities in the fintech field, but we look at [them] in a selective manner,” says Ms Dumas. “We want to make sure these acquisitions fit into our overall strategy.”

Another digital-focused transaction that fits into this strategy is the merger of ING’s online customer base in France with SocGen’s digital bank, Boursorama. SocGen and ING have signed a memorandum of understanding on the deal and intend to reach a final agreement on the tie-up soon.

“This ING deal is very good as it gives ING clients the ability to join Boursorama in a very easy way,” says Ms Dumas. “It is not a takeover of a client portfolio. We are looking at external growth opportunities in a selective way and with the appropriate structure.”

Boursorama has organic growth plans, she adds. “We have announced a target of four million clients by 2023 and we are one year ahead of this plan. Boursorama has a unique model and the capabilities to grow very quickly. [It] is a leader in the French market — it’s one of the only banks combining full online processes and a complete range of product offer.”

Cloud enablement

Intesa Sanpaolo recently announced plans to launch its own digital bank as part of a €5bn investment into technology and growth under the Italian bank’s new four-year business strategy.

“Our digital strategy started a few years ago under the previous business plan, which was a strategy of cloud first and mobile first,” says Massimo Proverbio, Intesa Sanpaolo’s chief IT, digital and innovation officer. “For example, we developed what is considered one of the best mobile banking apps in Europe. Secondly, we moved towards the cloud, creating cloud capabilities tailored to our needs through a partnership with Google-Telecom Italia and ensuring that all new development projects are cloud compatible.”

Under the current business plan, Intesa Sanpaolo is planning to set up a digital bank, called Isybank. “[It] will be the best fintech that you can find in the market with four million clients who have more digital needs,” says Mr Proverbio. “We will then extend the same technology platform to address personal clients with complex needs at lower costs. IT is, and will be even more of, a key core competence for us: we want to be a best place to work for people that have and want to develop technology skills.”

Isybank will target customers in Italy aged under 40 and will also expand abroad. Intesa Sanpaolo has selected Thought Machine’s Vault core banking cloud-native platform to power Isybank and has made a £40m investment into the UK-headquartered fintech firm. Thought Machine is also backed by JPMorgan, Lloyds, Standard Chartered and ING.

“Under the strategy we are open to working with other fintech partners, as we are doing already with Thought Machine,” says Mr Proverbio.

Beneficial arrangements

While relationships are becoming increasingly common between incumbent banks and fintechs, they are taking different forms, from outright acquisition to collaboration. Irrespective of the arrangement, benefits are seen on both sides, with banks able to take advantage of an existing product or service without the onus falling onto the bank to develop it in-house, while fintechs can scale up quickly by leveraging the large bank’s expertise and distribution channels.

However, collaboration seems to be the dominant trend today. “If you look at merger and acquisition (M&A) activity in this sector, there has not been a significant number of deals involving banks acquiring fintechs,” says Peter Hewlett, fintech leader at PwC UK. “What we see more with banks is putting in place partnerships with fintechs.”

His colleague Jeremy Sweetnam, deals partner, fintech technology, agrees. “Banks are more self-aware of the dangers from aggressive M&A than they would have been a few years ago when fintechs came into the market,” he says. “The partnership route and the smaller investment route is probably the right one for now. But is it possible that a bank may acquire a digital challenger bank and brand it as their millennial bank? Yes, it is.”

Like SocGen and Intesa Sanpaolo, Santander is also keen on acquisitions and partnerships with fintechs to accelerate its digital growth. “We have made some bolt-on acquisitions to accelerate our strategy and we continue to look for opportunities where they make strategic and financial sense,” says José Antonio Álvarez, CEO of Santander Group.

He continues: “We also invest in fintechs through our venture capital arm, Mouro Capital. In total, Mouro has allocated more than €300m by taking small stakes in fintech companies which we believe are doing good things and, in some cases, can accelerate our digital transformation.”

Santander has been making a significant investment to improve the productivity of its digital capabilities through the use of the new technology that is available, particularly in Europe, which is the priority, according to Mr Álvarez. “We are also focused on building out PagoNxt, our single global payments platform. The aim of PagoNxt is to create a payments platform for our own banks, but also serve third parties,” he adds.

Transactions through digital channels is now approaching 80%, reports Mr Álvarez, whereas it was 50–55% in 2019. “This reflects the transition and improvement going on with the digital systems of banks,” he says.

Collaboration model

BNP Paribas has a four-pillar model for collaboration with fintechs. The first pillar is to open up access to banking services to support start-ups with their development. “The way we work with fintechs is by testing their services and if their services are a good fit and complement our business model, we will look to either invest in the fintech and partner with it or acquire it outright,” says Sophie Heller, chief operating officer of commercial personal banking and services at BNP Paribas. “When we work with fintechs, we want to keep them separate in that we want to maintain their entrepreneurship culture while adding value in leveraging our own products and services and robust set-up.”

Second is the bank co-creating new solutions alongside fintechs. For example, in 2021 BNP Paribas launched Instanea, an instant payment solution, which was created in collaboration with Token, an open-banking payments platform. Third is acceleration, which involves supporting the development of fintechs through incubators and labs. Fourth, the bank is also investing in start-ups, either directly through full acquisitions or equity interests, or indirectly through third-party funds.

“We see a lot of partnerships between banks and fintechs,” says Mr Saxena. “Some banks are taking a significant stake in fintechs, while others are opting for a more organic route by setting up separate functions and infrastructure to spur innovation.”

He believes that, if done well, the organic path can be quite good because the standalone function can reap the benefits of being part of a large organisation while at the same time eliminating the old school processes. He adds: “However, what we found in our research was that banks who go down the programmatic acquisitions route tend to outperform those who go for a pure organic option over the longer term.”

The death of branches?

As European banks accelerate their digital transformation, there is a question mark around the future of retail bank branches. Under its new 2022/25 business strategy, for example, Intesa Sanpaolo plans to cut 1500 branches in Italy as it shifts customers to its new digital bank.

However, Mr Proverbio believes there is still a future for retail branches. “Physical branches will still exist because there are clients who like to sit in front of people,” he says. “There are moments when people need personal trust and advice.”

Like its peers, Santander has also been slashing the number of its branches, although Mr Álvarez also believes in the future of branches. “In Europe, our number of physical branches is about half of what it was four or five years ago,” says Mr Álvarez. “Do we want to keep physical branches? Yes. While we believe in creating a good digital proposition, we also want to offer physical advice to customers.”

Mr Saxena does not expect an elimination of branches. “Branches will continue to exist in some shape or form, but I do expect them to be scaled back,” he says.

Some argue that the issue of legacy branches and IT systems has been a deterrent in preventing cross-border bank mergers in Europe over the past few years, despite being strongly mooted. “It doesn’t make economic sense to acquire legacy branches of banks,” says Sam Theodore, a senior consultant at Scope.

But this is just one of many issues, according to Mr Álvarez. “There have been talks on cross-border European mergers for several years,” he says. “With mergers, there are issues around overlapping IT systems and networks. But IT is only one aspect and is not the main issue. There are other significant issues with bank mergers, such as anti-money laundering [compliance] and legal issues.”

European banks have made significant progress towards their digital transformation during the pandemic, but this transition still needs much work. As Mr Hewlett warns: “Any of the Tier 1 banks are going to find that transition more complex than they had envisaged. If you look at the Tier 1 banking landscape, many of their computer systems go back to the 1970s.”

There are advantages to banks investing in technology and building out their own systems and products. But partnerships with fintechs and acquisitions seems to offer a more lucrative and faster route to market.

“It’s all about the evolution towards the digital world and the need for banks to adapt to the digital ecosystem,” says Mr Theodore. “Of course, at the end of the day, all banks offer online and digital variants of their traditional products, but they need to change themselves to be part of the new digital ecosystem, which not all banks are doing well. It makes sense if you’re building a digital business to bring one in rather than doing it all yourself in-house.”

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