02 Specialty Finance Challenger Banks in Italy: reshaping the lending landscape? April 2019 www.pwc.com/it Foreword Following major market and regulatory turmoil in the Customers are looking for additional choices in terms last decade, structural changes of the banking of products-services, channels and providers; new and financial system start to be actual and visible: digital technology and open banking platforms enable technology, customer behaviour and regulation are modularization and integration of systems, within and driving a “paradigm shift”. across companies. Key dynamics are well-known on an individual basis, New players are driving innovation and providing but a comprehensive picture of the on-going major customers with more choice: specialized banks and transformation process emerges if indicators are financial companies but also emerging players, with considered all together: digital business model. • The number of individual banks have decreased Competitors from other industries are joining; by 24% over the five years period 2012-2017 unexpected alliances and partnerships will innovate the (from #706 to #538); industry landscape and foreign players are entering into • #8 well-known Institutions (with a total of c. €120bn the market, leveraging on EU passporting; the role of Big of asset and c. #1,900 branches) have gone under Tech could be disruptive. resolution or restructuring process in the latest 12-18 months and merged with high street Banking Profitable market niches, underserved by traditional Groups; banks, exist. Specialization can be a key competitive • Banking branches have decreased by 17% from factor to capture the opportunity. 2012 (from #32,881 to #27,374); • Banking customers, that are active on digital Specialty finance is one of the most profitable channels, are ~#19m; segments in the banking and financial landscape, • Following the new “Intermediario Unico” regulatory with intense competitive dynamics and innovation, new framework, the number of financial companies have players and business models, M&A activity and Investors. reduced from #530 (companies ex art. 106 and 107) to around #150. “Challenger banks” has been recently used, with a broader definition, to identify the group of new banking The dynamics related to the recent regulatory reforms players that pursue differentiating strategies with respect (credito cooperativo, popolari, fondazioni bancarie) to high-street banks in terms of product/customer and profitability issues of the traditional- branches specialization and/or technological innovation. based commercial banking model will push for further consolidation in the banking sector, in particular for In this paper, we will focus on Specialty Finance small regional banks. Challenger Banks as banking players with a strong potential for superior performance, as they Nevertheless, building scale is no longer the only operate in the high yield and/or low risk segments of answer: technology is shaping the new market specialty finance, with distribution models based on landscape and business model innovation can alternative channels, digital technology and flexible generate alternative value creation options. operating models. 2 Specialty Finance Challenger Banks in Italy: reshaping the lending landscape? This working paper has its origins in the extensive PwC Deals projects experiences of our teams in this area. It has the ambition to become an ongoing PwC Deals FS is a specialized unit within PwC network, observatory, able to capture the key market and which helps Financial Services organizations to execute competitive dynamics, collecting hints and points successful deals and create value through mergers, of view of the different players in the Industry. acquisitions, disposals and restructuring. We work with clients to develop the right strategy before the deal, identify issues and points of negotiation and value and implement change to deliver synergies and improvements after the deal. Emanuele Egidio PwC | Associate Partner | DDV FS Leader Strategy& [email protected] Strategy& (formerly Booz & Co.) is the oldest management consulting firm in the world. In 2014, Gianluigi Benetti Booz & Company and PwC joined forces and Strategy& | Associate Partner formed a global consulting powerhouse providing [email protected] end-to-end consultancy services under the brand of Strategy&. Globally, Strategy& counts more than 4,500 professionals across 57 offices Francesco Cataldi Strategy& Italy since 2016 developed his positioning Strategy& | Director in strategy consulting for Financial Services with [email protected] a dedicated team of professionals and vertical capabilities on key topics and main industry sectors: retail and corporate banking, insurance, asset Dmytro Bezverkhyy management and specialty finance. Our integrated team PwC | Senior Manager | FS draws from corporate & business strategy, large-scale [email protected] transformation, new business models and innovation, strategic deal services to help clients with speed and certainty and unlock value from their business. 3 Challenger banking model in specialty finance Pag. 7 1 • Which features define a «specialty finance challenger bank»? • Business segments in the specialty finance markets and key differentiating factors. SME Special Situations challenger banks Pag. 19 2 • SME lending is «the real challenge» for banks. • New strategies and a new business model to capture the market potential. • Why a banking licence could make the difference for NPE specialists? Specialised models in consumer lending Pag. 25 3 • Consumer credit is currently one of the most attractive areas in the banking business. • Specialization as a key competitive factor. • The case of CQ (salary-backed loans): the path from a “near-prime” to a “flagship” consumer credit product. Digital Banking: new paradigm or enabling factor? Pag. 33 4 • Fully digital banks with unmatchable advantage in customer experience; …but how far is profitability? • Digital agility as a competitive advantage for new players. • Could the partnership with Fintech be the answer for Incumbents? M&A and capital market activity in specialty finance Pag. 43 5 • Recent M&A in specialty finance, driven by banking disposals. • Investors launching challenger models leveraging regional banks consolidation in specific segments. • SPACs and IPOs. Which opportunities …and challenges… for challenger banks? Pag. 47 6 • Thoughts on unexplored market opportunities, new business models and strategic combinations. Appendix Pag. 51 … not only banks – the evolution of financial intermediaries (106). 4 Specialty Finance Challenger Banks in Italy: reshaping the lending landscape? Key messages Technology, customer The need for scale, to … but building scale is no behaviour and regulation enable both cost efficiency longer the only answer: are driving a “paradigm and digital transformation, technology is shaping the shift” in the banking will push for further new market landscape and industry consolidation … business model innovation can generate alternative value creation options Profitable market Specialty finance is one Specialty Finance niches, underserved by of the most profitable Challenger Banks have traditional banks exist. segments in the banking a strong potential for Specialization can be a and financial landscape superior performance and key competitive factor to competitive advantage. capture the opportunity Based on our analysis, in 2018 specialty finance specialists and challenger banks overwhelmed the traditional banks on the base of all key performance indicators Leveraging the distinctive … organic growth could elements of this model be too slow: it’s time for an could represent an acceleration in business opportunity for both combinations and incumbents and new strategic partnership entrants ... 5 1 6 Specialty Finance Challenger Banks in Italy: reshaping the lending landscape? Challenger banking 1 model in specialty finance 7 Definition and business models Introduction Often, the most innovative ventures start as financial companies or payments institutions and leverage In order to provide a framework that could help wholesale funding strategies (securitization or non- analysing the different strategies we suggest the recourse disposal); banking transformation is a must-do following segmentation approach. when direct/ retail funding becomes a competitive factor. Specialty finance challenger banks Specialty finance players According to our definition: Specialty banks have propositions typically anchored around specialist lending for customers underserved by others in the market, such as certain types of small and medium-sized enterprises and the consumer market (for a specific definition of specialty finance segments, refer to the following chapter). They generally have very Specialty Finance Challenger Banks limited physical presence, placing more emphasis on represent a specific group of banking call centres, third‑party distribution channels, some players that operate in the high yield regional offices and, increasingly,digital channels. They often work with intermediaries to source new business. and/or low risk segments of specialty They still see potential for growth in their target markets, finance with alternative channels, digital but are agile and confident in their ability to adapt when technology and flexible operation models the time comes to broaden their areas of focus. Digital‑only banks Digital-only banks recognise