Increasing customer expectations, macro-economic trends, technological innovation, and regulatory requirements are all contributing to the need for financial institutions to remodel. With digitization marching on, this is urgent if they are to retain and grow their market share. The Italian financial services industry is no exception.
Italy has a rich history in banking with some 600 banks, approximately 300 of which are co-operative. Consolidation will be inevitable for those that don’t transform. At the same time, there are some 250 financial technology companies (fintechs) operating in the country. These mainly focus on payment, crowdfunding, digital lending and credit risk management. Furthermore, established international players, such as N26 and Revolut, have also entered the market.
Italians have generally, up until now, preferred to tie their allegiance to brick-and-mortar banks, in part because Italians like to use cash. The European Central Bank estimates that around 86% of transactions in Italy are still in cash. But the landscape is changing fast. According to Eurostat, 47% of Generation Y now bank online (this is still low compared to the Nordics, which stands at 85-87%).
Italian banking customers are looking for more choice in products, services and channels. They are increasingly choosing financial institution providers who offer online services. We have seen a rise in the positioning of mobile banking platforms such as Hype, for example, which now serves 1.2 million customers. Incumbent financial institutions must make more effort to keep up with the market challengers.
Innovate to survive
Technological innovation is changing the market structure of financial services. Application programming interfaces (API) over the Internet, smart device apps, and big data analytics are all contributing - ll of them powered by cloud.
Take Banca Mediolanum, for example. With 1.2 million customers, it is now using cloud-based big data analytics tool Google BigQuery. By analyzing massive and complex data sets, Banca Mediolanum believes it can better understand and engage with customers. The bank maintains this strategy will bring in over 10,000 new customers a month.
Italian banks are very aware that they need to transform. According to a recent Italian Banking Association Survey, almost 90% of Italian banks are increasing their investment in digital transformation. Intesa Sanpaolo, for example, is investing approximately €2.8 billion into digital transformation. It is looking to increase its digital banking business from 10% in 2017 to more than 70% in 2021.
Banking on hybrid cloud
Accelerated digitization for both consumers and business customers is driving Italian banks to move to the cloud, according to Anitec-Assinform, the National Association of Italian Information & Communication Technology companies.
Banks will, however, need to invest in their cloud infrastructure from the beginning. If they don’t, they may run into downtime and latency issues, which will impact their brand image.
A hybrid approach to cloud can lower IT costs, improve efficiencies, accelerate innovation and boost new business models. These make it attractive for banks. Anitec-Assinform estimates that the adoption of hybrid cloud architecture in Italy grew 26% in 2018 and is on an upward curve.
Hybrid cloud comprises multiple computing, storage and services environments. This includes on-premises, private cloud and public cloud services with full orchestration between platforms. Its innate flexibility allows financial institutions to deploy and scale new applications and services quickly and at low cost. Its combination of public cloud flexibility and private cloud security is an ideal solution for a highly regulated marketplace with rising levels of compliance.
In addition to agility, hybrid cloud can provide banks with valuable data-insight to innovate new products, as an example. Banks have always had large amounts of data in their legacy systems, but they haven’t been able to mine it successfully. Hybrid cloud allows them to merge public and private cloud with internal data infrastructures to yield data insight securely.
Hybrid cloud suddenly becomes a competitive enabler. While avoiding vendor lock-in, it lets banks and financial institutions adapt to continuously changing economies without having to re-platform to change vendors.
According to IDC, 50% of banks will have moved at least 20% of critical business to as-a-service cloud platforms by 2024. Their aim being greater efficiency gains and cost savings.
Cloud is central to keeping banks agile
The Payment Services Directive (PSD2), a European directive designed to boost competition in the financial services sector, is also driving banks to hybrid cloud. This is primarily to ensure agility and speed in getting new products to market.
Italy has been operating PSD2 since 2019. PSD2 provides the foundation for open banking. Security is a key concern here. Hybrid cloud models reduce the potential for data breaches by enabling banks to select and optimize workloads. The public cloud can be leveraged for less data-sensitive applications, while critical services can be processed in the private cloud.
Digital disruption is here to stay
Financial institutions’ CIOs know that old business models will not be sustainable in a digital economy. Those that focus on digital optimization will be the ones to flourish.
One-third of financial services’ CIOs identified digital as their top business priority for 2019, up by more than 8% from last year, according to Gartner. This trend will continue in 2020.
Banks ahead of the transformation curve are looking to partner with fintechs to provide compelling next-generation products and services. Hybrid cloud provides the flexible and scalable infrastructure necessary to support such creativity.
A clear strategy is critical to cloud success
A clear hybrid cloud strategy is essential for success, however not every application works best in the cloud. Some data may be better stored on-premises.
Compatibility issues across infrastructure need to be considered. Because hybrid cloud demands control across private and public domains, control and security are paramount, as of course are legal and technical compliance.
For financial institutions that view such complexity with trepidation, this is where the business value of a partner comes in. Orange Business Services, for example, offers an a la carte approach whereby enterprises can pick and choose the services they require to ensure they are getting the maximum benefits. These include strategy planning, assessments and a full set of industrialized services.
By relying on Orange expertise for hybrid cloud projects, banks and financial institutions can stay focused on what is most important: business performance.
Francesca Puggioni is the Managing Director of Orange Business Services for Southern Europe. With an extensive international business background, she is a champion of cultural diversity in the workplace to inspire creativity and drive innovation and favors a dynamic and innovative management model. She is a great supporter of socially responsible initiatives, especially where technology can have a positive impact on society as a tool for social, economic and environmental development.