Competition and Concentration between Banks, Neobanks, and Payment Institutions

Competition and concentration are phenomena that simultaneously regard traditional banks, “neobanks,” and payment institutions. The first are proper financial intermediaries; the third are service companies that at least for now, do not intermediate anything; while the second are relatively hybrid entities, although it is difficult to generalize because they are very varied.

The evolution of the context in which these three categories of operators act starts from the idea of being able to produce new financial services of various types, especially payment services, in a simple, low-cost, efficient, and transparent way, generally for 365 days a year and 24 hours a day. Their activity, at least in the beginning, was aimed above all at trying to somehow acquire the customers who used the same type of services, or similar ones, but produced by traditional banks. The competition was evident, and traditional banks lost market share in the services in question. The development of neobanks and payment institutions was rapid, and in many countries they have reached sizeable dimensions both in terms of number of customers and amounts of money managed. This was also favored by the fact that banks weren’t much convinced of the danger, and at least initially did not believe the growth would occur; they thus acted almost only defensively, and were poorly organized and not decisive at all.

For some time now (things have been moving very quickly) the situation has changed, and in light of the events, traditional banks have decided to change their attitude, starting to set up structures that to a certain extent compete with neobanks and payment institutions. They have acquired various types of fintechs, organized new services, used their investment capacity to the maximum, expanded their distribution network adding new channels to traditional ones, and focused on enhancing their relationships with customers, which are certainly still much more numerous than those of the new players.

The newcomers are in turn reacting, but they cannot hide their difficulties, which are essentially of a financial nature. Despite the considerable growth of their activities, most neobanks and payment institutions continue to lose money. Many of their services are in fact not profitable. The problem can be solved in two ways. The first regards the expansion of the range of services provided by adding different, more profitable products, which can thus compensate for the losses on the services currently provided. The second regards the acceleration of the development of current activities, whose return is strictly related to their dimensions. The phenomenon of economies of scale is very important in this sector.

Both of the possible solutions can also, and perhaps above all, be sought through merger or absorption operations: in the first case by involving intermediaries who already produce or distribute complementary products and services; and in the second with acquisitions of companies in the same business segment, that would allow for increasing size while also reducing investments, especially in technology, and achieving economies of scale.

Based on the situation in numerous countries - including Italy, although the problem is actually less present at this time - concentration has now become a widespread and very important process. It is almost a paradox that at the same time, concentration is very relevant in the world of traditional banks, that have even more difficult problems to solve than neobanks and payment institutions do, which they certainly will not resolve only with concentration. Consider what could happen in our country if this process were to involve all of Banca Intesa San Paolo, that aims to acquire the majority of the capital of UBI, and Carige, MPS, and Banca Popolare di Bari, that will end up somewhere we don’t know yet, and also the world of “cooperative credit banks” (BCC) and small “popular banks,” especially in Italy’s South.

It is thus fairly natural that business combinations that lead to greater concentration in the three sectors indicated above are increasing considerably, just as it is very natural that such concentration also regards the single sectors. With regard to payment institutions, it is widely thought in Europe that within a few years there will be no more than three or four, a process which seems likely at the global level as well, although it is still not clear what will happen when the information technology and e-commerce giants join this market more decisively than they have so far.

The scenario is thus both clear and confused at the same time. It is clear because the lines of its evolution are not in discussion. It is obscure because we still know little about the characteristics the single lines will have. In any event, the dynamism that the three types of companies have shown so far, especially in recent times, is destined to intensify and accelerate. Those who do not participate in the race risk being excluded from the market, to the benefit of those who will emerge victorious.

Roberto Ruozi is Emeritus Professor at the Bocconi University