Intervista ad Alessandro Foti, Fineco

First of all, we need to come to an understanding. What do we mean by fintech? Because it's a very widely used word. So, I'll try to give a definition. Fintech companies do what you would normally expect banks to do, but that banks don't do because they are inefficient in terms of their IT platforms and operations. Basically, that's what they do. If we look at what the various fintechs do, they carry out activities that are absolutely normal. In fact, one might ask: why doesn't the bank do it directly? When you see, for example, factoring activities for small businesses, why shouldn't the bank do them? Very simply because banks are structurally characterized by a very low level of efficiency in controlling the operations infrastructure. So, basically, if we look at banks, they often have architectures that are still children of the 1970s. It's a bit like if instead of speaking Italian, we spoke Latin or Ancient Greek, which are extinct languages. We could understand each other, but the reason they are extinct is because they are no longer up to date. This 1970s architecture is from a period when the concept of data management and real-time simply didn't exist.

And so we simply had the privilege of starting. We are a young bank because we were born at the end of 1999. So we were able to build state-of-the-art infrastructures, without all this legacy. Additionally, I add another very important aspect: the entire company has always had a culture very centered on operations. Because the banking system has always considered operations as a second or third level activity, a kind of commodity. But actually, that's where you make the difference. For example, our entire senior management team is very experienced in IT operations, starting with myself. I have a degree in economics, but my first job was at IBM, where I was forced to do a full immersion. So we speak the same language. When we sit at the table with the technicians, with the IT side, we speak the same language. Whereas if we look at the traditional system experience, this was always considered a residual activity, so often massively outsourced, with heavy use of external system integrators. This led to a progressive loss of internal culture and knowledge, so the system lost control of these activities.

Now, we are clearly in a context where the big news is that data management has become crucial for any type of activity. Banks are in a somewhat particular situation because on one hand, they possess the greatest granularity and depth of data among operators. Worldwide, we talk about social media and everything, but the data available to the banking system is significantly greater. The problem is that banks, unfortunately due to their operational inefficiency, cannot effectively manage this data. Imagine, as I mentioned earlier about the architecture: if I have a core application written in COBOL from the 1970s, then I have a whole series of software layers, for example, managing data uniqueness, data warehousing becomes almost impossible. So the second aspect is that in the meantime, there has been a profound process of digitalization of society. What happened in the last, say, 18 months, the last 12 months, is the great novelty that the system is struggling to understand: if before the push towards digital was somewhat driven by the system, now it is a movement I define as bottom-up driven. Now it is a very powerful demand that comes directly from end consumers. The banking system finds itself squeezed in this moment. For example, I always use the example of the grandmother who got used to using FaceTime to see her grandchildren three or four times a day. She discovered that technology is much simpler than she could have imagined, and she won't give it up. She doesn't say, 'Okay, when we return to normal, I can meet the grandchildren physically.' Why should she give up seeing them three or four times a day instead of once every fifteen days or once a month?

And so, for us, it wasn't really a choice. It came naturally because of our culture. We have always defined ourselves as a company of workers, specialized workers, but still workers. Our task is to give customers the best possible services in the most efficient way. So the concept of using technology and operational efficiency has always been at the center. And above all, we were able to do it free from any kind of legacy. Because it's clear that when one asks, 'Why don't banks evolve?' it's not that they don't realize the problem. The problem has become so big that no one feels like tackling it. Because the processes and how companies work have adapted to the technological infrastructure. So, even if tomorrow morning someone manages to change the entire technological infrastructure, then you have to change people's mindsets. And that is usually the hardest thing. So on one hand, an incredible opportunity is being created for companies like ours. At the same time, the banking system finds itself in a complicated situation. It's a bit like the Arab countries that know they have oil underground, but they weren't able to extract it, and were forced to use the technologies of Western companies. We can call them the fintechs of oil, physically. So that's a bit of the situation. I understand that behind it, there aren't strategic decisions. For us, it was quite consequential for the type of company we are and the culture we have.

But I would say that this is a very important point for me. Because regulation is always behind evolution. So you always have to be very careful in having a transparent dialogue with regulators. It's a bit of a balancing point that you have to find. At the same time, I have to say that regulators are making a huge evolutionary step. For example, now that we are moving more and more into a digitalized context, we see that there are fewer bank robberies, but the aspect of cybersecurity is becoming increasingly important. The more one has direct control of the infrastructure, the less risk one runs. Because if we look at all the serious incidents that happened recently, they occurred due to the complexity of infrastructures. However, what you raised is certainly a point of attention. Especially when you start to become a large organization. As long as you are a small company, your systemic responsibility weight is lower, but when you start to become a big company, this is a big point of attention. It is right to innovate, but you cannot take excessive leaps forward. The secret lies in being able to have a very transparent dialogue with the regulator. The regulator is not obtuse; it simply needs to understand. So you have to try to move. But I have to say that we have always found an attentive response, and especially there is an exponential acceleration in the level of awareness of the regulator. The regulator is the first to be aware that if the system does not evolve in a certain direction, then the problems could be extremely complex. I think now of the whole debate that is exploding on cryptocurrencies. That is a topic that is still being talked about relatively little, but I believe it will have explosive impacts on the entire system.

But I have to be honest, the whole discussion about PSD2 has been given an emphasis that, in my opinion, has been taken from the wrong angle. In the sense that we always forget that the client, in the end, has a tactical, opportunistic approach. If I go to him and say, 'Give me access to your bank account transactions,' the first response is, 'Why should I do that? What do you give me in return?' So if you are able to give the client some form of convenience, it's possible that he might be interested, otherwise not. So we see it as a system that will actually tend to increase the divide between banks that have a very strong relationship with their clients and those that don't. If what matters is who is leading the relationship with the client. If I have a very satisfying relationship with my client and I go to him and say, 'To further improve the services I give you, give me access to any other accounts you have with other banks so I can aggregate them,' it's possible that the client will say yes. If instead I have a loose relationship with little interaction, the client won't even respond. So this is how we see it. I think there are potentially great prospects in the world of open banking. Open banking means the possibility for banks to collaborate with each other, connecting their systems. It's not that banks are necessarily all competitors; you can also collaborate. So I think that by proceeding this way, there will be more and more cases of this kind. But it's also clear that what is fundamental is the efficiency of the platforms. If I have complicated platforms, I have difficulty dialoguing with another bank. So these are, a bit, how we see the evolution on this front.

Well, first of all, a fundamental aspect. When we look at the fintech world, it seems that talking about fintech and on the other hand, old-fashioned concepts of profitability are somewhat in contrast. Because if we look at what are considered the most popular fintechs, the concept of doing business seems to be: we are old-fashioned guys, so business must grow a lot, but in the end it must make profits. Because if you don't make profits in the end, it's just growth. So observing this world, it seems like we are going back to the early 2000s, the famous New Economy, new paradigm, where what mattered was the number of contacts, the number of clients. But then you see companies of this kind that you don't really understand if they will ever make a profit, but especially the more they increase the number of clients, the more their operating margins worsen. So that is a first point to observe. And then identify those companies that we can define as fintech because they have a very important use of technology as a driver of their business, but at the same time see how these companies are capable of having an economically sustainable trajectory. Because otherwise, we risk finding ourselves in a situation. This is an aspect that is still a bit neglected. I like to continuously look at all these companies. The thing that surprises me is that these companies, the more they increase the number of clients, not that they increase losses, but they worsen the indicators, the indicators themselves. If the more I increase clients and the more I lose per client, there is something that doesn't work. It means the trajectory is wrong.

But you know, I think we need to be very careful not to mix apples and oranges. When we talk about putting banks and payment system operators on the same level, I see it a bit differently. I think there is a lot of confusion about this. For example, when you talk about an operator like PayPal, it provides a component. We see PayPal as one of the many platforms that allow clients to carry out their payment system effectively. We see it exactly as we see credit card circuits or other things. So we think the role of the bank is to interact with this ecosystem. When I was still in the UniCredit group, I remember there were debates on this front, and in my opinion, one of the errors was precisely this: taking as a reference point operators of this type, forgetting that the bank actually does a much broader job. In the end, I have to manage the relationship with the client and be the enabler. So all these components are components with which I must interact. So I think we need to be a bit careful on this front, because otherwise we risk making a unique mix that is not very understandable.

But it depends on the infrastructure. For example, I have to say I am quite struck by how analysts look very superficially at technological infrastructures. If we look at many of these fintechs, we realize that they are much less fintech than they claim to be. Because they do nothing but put together pieces of technology provided by external operators. So it's clear that with such a framework, scalability becomes much more complicated. The more I use components from others, the more my costs will grow linearly. It's different in the case of what I consider the true fintech, which not only uses technology but manages it directly. For example, in our case, we tend to manage and develop all the most important platforms ourselves. That means, as I said before, we manage the source codes, the developers are ours. In this case, scalability can be practically gigantic. Just to give an idea, when we have to develop a new mobile app for banking, we have an internal industrial cost of around €50,000. When we were in the previous group, I remember that because we had to use external components, a new app could cost as much as two or three million euros, with a lack of flexibility and time to market. So the answer is: the more you are truly in control of your own technology, the more scalability tends to be greater. Otherwise, for example, I often read that it has become a fashion: every time you open the newspaper, everyone says, 'Ah, we are digital, we are fintech.' Then you go see and discover that perhaps their core platforms are managed in outsourcing by service centers like Cedacri. Those are very respectable companies, but it's clear that if I have the ambition to be a highly scalable technology company, it's impossible to do so if I use outsourced services from a service center. Because these parties themselves are profit-seeking entities, so my costs will tend to rise in a not linear but fairly consistent way.

Yes, exactly. This is another point I remembered, very important. Compared to others we interviewed, who almost always rely on external sources, we have a business model that helps us. We made a choice to lend money only to clients we know very well, so we can have significant data acquisition. But it's correct: if I know the client to whom I lend money well, I only lose the money if I want to lose it, because the information I have tells me everything. It's clear that if instead I use external databases to analyze my client, everything becomes much more complicated, especially in a country like Italy, where the level of centralization of the public administration and data is very low. It's a country where the registries of individual cities don't communicate with each other. This creates a structural weakness in the system of external databases. So direct management of client data becomes fundamental to have credit quality and a cost of risk that is decisively under control.

Well, first of all, we have an origin that I think was the winning choice: starting from the assumption that technology, data management, and everything was fundamental. So the company was from the beginning a kind of melting pot of cultures. At a certain point, we had to make a choice: was it easier to take people with developed technological skills and explain to them how a bank works, or to take bankers and make them familiar with technology? We concluded that the first was easier, and that's what we did. So we are full of people with a very quantitative, mathematical approach. And this has been a great help because all decisions, everything we do, is based on a very careful analysis of numbers. Often, having interacted significantly with the traditional banking system, I have seen that this is not done. For example, any initiative is evaluated very carefully based on the internal rate of return, feasibility, conflicts. Often in the traditional banking system, you see the concept of 'nice to have' without evaluating all the consequences. But it's a bit like a dog chasing its tail, because to have this approach, I must also have an adequate infrastructure. For example, a huge problem in the traditional banking system is the inadequacy of what is called the Management Information System (MIS), which allows me to do granular analysis of numbers and data. If I don't have it, even if I have good intentions, I cannot do the analyses I need. So we always come back to the origin: if I have a technological infrastructure that is not adequate, then all my ambitions are somewhat frustrated. Many errors in the system are because decisions are not taken rationally based on numbers. Numbers tell you everything. You don't need to be a genius to manage a bank; you look at the numbers and make decisions based on them.

Ale, for a very simple reason. We have never been fans of pure robo-advisory. Pure robo-advisory can work well if we assume a perfectly linear world, that markets move linearly, that expected returns are in line with models. But we know that's not the case. We had the example last March when losses were many standard deviations from the expected scale. And thinking that the client in front of that model just says, 'Okay, what do I do?' So the relationship becomes fundamental. Moreover, it means assuming that people's lives are linear, which is not. We know that each of our lives can be overturned at any moment: one gets married, divorces, has a child, changes job, changes city. This requires continuous revisiting and planning. So the human relationship component becomes fundamental. On one hand, technology allows you to manage everything super efficiently, but all with the human relationship. The path we are taking is progressively removing from the consultant's table all activities that the bank does, leaving the consultant what we call the last mile, which is also the most important: the relationship with the client. So this is a fundamental element. The use of technology allows the consultant to remove all disturbing components, like administrative activity, but also portfolio construction. Because a robust portfolio construction with algorithmic data over the long term outperforms portfolios built by hand by consultants. No doubt. But also client management: if I can profile the client directly through technology, understand their needs, I can put in the consultant's hands pre-packaged solutions, making their work much easier. This is also a great barrier to entry for the biggest players, who might have high technological potential but probably, by focusing only on digital, wouldn't achieve what you are saying. No, absolutely. In my opinion, the system is making two errors. First, there is little conviction of how much technology can actually help. The models continue to be models where the objective is not productivity increase but simply increasing the engine size. For example, they keep recruiting but don't care if their consultant manages 100, 200, or 300 clients. That's the first point. The second is that we have always been quite vocal about the fact that the system is making a huge mistake. Italians are finally realizing that savings must be managed better. There is a gigantic amount of money moving: we estimate that immediately available savings are at least between 2 and 2.5 trillion euros. Unfortunately, most operators are engaged in a rear-guard battle to defend margins and market practices that are completely inconsistent. We have always been very vocal about performance fees, for example, where Italy is a black sheep at the system level globally. There are still practices like incoherent benchmarks, short time horizons without high-water marks. This is a sign of great myopia. We are talking about huge figures. The risk is that if the Italian saver is finally understanding where to go, then gets disillusioned by these short-sighted behaviors, it could be a huge lost opportunity for the country's system. I think about these two trillion euros. Even a 1% recovery of efficiency, through better management and more adequate costs, would have a wealth effect of about 20 billion euros per year. With compound capitalization over 10 years, we reach an amount that exceeds the Recovery Fund. These are the things we are talking about.

But citing the case of Revolut, it's one of those cases we mentioned earlier. It's a company that has grown a lot, continues to grow a lot, but has an economic trajectory that is clearly unsustainable. Losses continue to accumulate, and it has always moved in a gray area. When I talked about systemic responsibility, we have many things we would like to do to be more agile and flexible, but we cannot because there are rules to respect. For example, the perennial problem of anti-money laundering is one of the biggest issues. The fight against crime passes through anti-money laundering. If you try to become a bank in a certain country, they tell you that to be a bank, these are the rules. If you say, 'That doesn't work for me because I want to be more flexible,' then you have to understand what game you want to play. It's evident that the banking system worldwide is not homogeneous; some countries are more rigorous, some less. Certain processes, like onboarding clients, in most European countries are not admissible for these reasons. So my comment is that Revolut is very good at offering a single service with incredible conviction, but that's all. They continue to lose a lot of money. And when you decide to make the dimensional leap and become an adult, entering the major league of banks, you face the rules that must be followed. There is a big controversy about the big digital giants entering financial services, but they are doing it in an ambiguous way, laterally, avoiding the regulatory constraints that banks typically have. This is a gray area. You cannot think of doing a job while avoiding the systemic responsibilities of that job. If you are a bank, whether you like it or not, the problem of supervising anti-money laundering is an obligation that banks have, and I say thank goodness, because otherwise we would live in a world where criminality would have total free space. Deep web, a world of deep web. So this is my comment when I see these types of realities. They will have to decide what to do when they grow up, if they want a structurally sustainable business model, and if they want to actually play the role of a bank. It's too easy to say 'I'm a bank' but not actually be one. At a certain point, you have to decide. Certainly, I move to one of the last topics because time is moving on.

But we don't use benchmarks. We are by definition, being a company with full control of technology, very flexible. We behave as what we call 'smart followers'. We observe, we are always observing everything and everyone. When we identify something interesting, we have a very pragmatic approach: we implement it when we believe it has a level of robustness and effective interest on a large scale from the clientele. So we are never the ones who introduce novelties. I remember the boom of NFC, near field communication, and everyone was into it. But they didn't realize that the POS terminals were not updated. So I had a contactless card, but then I went to the store and no one knew how to make it work. So it was useless. It was useless to make leaps forward. Many examples of this kind can be cited. So we continuously look around in a very secular way, because good ideas can come from many places. When we see something interesting and robust, thanks to our control of technology, we are very fast and super efficient in implementing. So, is there a name you can give as a reference in the market? Well, there are so many things we are looking at that making specific names becomes a bit... For example, to cite a name that we just talked about, Revolut. They are very good at the onboarding process. So we redesigned our client onboarding process by looking at what these companies do, clearly stopping one step before what they do because we have to respect rules. But many things we were inspired by them, for example. I have no problem admitting it, especially when we went to England, where the onboarding process is fundamental to convince clients. We were inspired by these realities, but we adapted what we do to the fact that we are a systemic reality. So we cannot do exactly everything they do. But this is an example that comes to mind. Since time is running out, the concept is: great attention, looking around. Sometimes you also see traditional banks doing interesting things, for example, in the use of certain tools. So anyone can give you ideas. You have to be extremely secular and very humble in approach. What becomes fundamental is having an infrastructure that you control perfectly from a technological point of view, and this allows you to be incredibly fast and reactive, so it allows you to watch.

No, I look. On one hand, there is the growth rate, but immediately I go to see the trajectory of the operating margin created per client. I don't look at whether they are losing money; they are losing money. But I look at the trajectory. If the trajectory shows that they are progressively increasing the operating margin per client, meaning they grow a lot and the margin per client is headed in the right direction, then I say this is an interesting company. If instead I see that the company grows a lot and the other indicator continues to deteriorate, it's clear that what they are doing is not sustainable. How many years of franchise would you give a fintech to read it on this topic according to common sense? Well, in my opinion, a company that after 5 years on the market has not managed to reverse this trajectory, it becomes a time horizon that should raise some big questions. If after 5 years a company still has a trajectory of operating margin per client that continues to worsen, I would say that if I were an investor, I would sincerely start asking myself some questions.