A Modern, Agile, and Efficient Machine

TMI spoke to Raphael Barisaac, UniCredit’s Global Head of Cash Management, and Massimo Ortino, Global Head of Financial Institutions Sales, about how the firm’s new strategy in transactions and payments reflects the dynamics of a changing global market.

UniCredit’s new CEO Andrea Orcel, who took the helm in April 2021, has big plans to tackle the rapidly changing needs of its customers. The bank’s latest strategic spend, announced on 9 December 2021, is targeting annual revenue growth of about 2%, and profit growth of 10% through to 2024. In addition to a huge share buy-back and shareholder distribution programme, a key part of the delivery of his strategy is a €2.8bn investment in digital and data infrastructure, to be rolled out over the next three years. It’s a huge commitment, designed to encompass the new norms of its diverse client base.

The payments space in particular has been undergoing a major overhaul in the past decade, with Big Tech players and fintechs emerging with innovative solutions that at one stage threatened to disintermediate the banks. The competition remains, and banks must stay innovative, but the hype has subsided to a degree. A more balanced view of the future is prevailing, with both parties acknowledging that they need each other, says Ortino. “We’ve learned how to work together, seeing it as an opportunity for enrichment and a means of transforming our industry whilst maintaining the high expectations of our clients across all segments.”

Ortino explains that it was essential for the industry to look at itself in the mirror. It had to recognise its strengths and weaknesses, opportunities and threats, in order to move forward. “We know we are the incumbent, but our biggest asset is not our data, nor the high entry barriers for the competition, but the fact that we have the trust of our clients. It is of the utmost importance, particularly from a corporate perspective.”

UniCredit’s new payments strategy aims to leverage the strong bond with the treasury community to enable it to comfortably team up with fintechs and other new players. “Let’s not try to do it all ourselves – let’s work together to provide value-added ideas, with a commitment to and understanding of client needs,” he says. As a generalisation then, banks have the clients and the trust, and the fintechs have the creativity and agility. Of course, there are exceptions, but collaboration still makes perfect sense.

Looking at traditional payment systems, and the quick and dramatic evolution of customer expectations, reveals the huge impact of technological advancement. It’s why transaction banking platforms are heralding a new era of openness to becoming “more modern, agile, and efficient machines”, explains Ortino. It is one in which he says further partnerships are welcomed as banks move to accelerate client digital transformation and ultimately boost service-related offerings in the transaction banking and payments space.

Infrastructure transformation

One of the areas of banking that has relatively lagged behind technological changes in recent years, says Ortino, is that of the correspondent banking. This remains an essential strategic infrastructure for banks and clients operating internationally. So, to ensure progress, he feels stronger partnerships are required here too to support the ongoing revolution.

It’s possible in the past that the banking industry in general, in trying to protect itself from external competition, has guarded its ecosystem from change a little too zealously, comments Barisaac. He suspects the correspondent banking system, as a funds transfer network ‘for banks, by banks’, has mirrored this protective approach.

Having created an exclusive network and messaging system, the increase of external influence was seen by some institutions as a potential source of earnings disruption, with some deciding to leave the process. 

“As banking professionals, it is our responsibility to bring the correspondent model to the next level, in line with the rest of the industry,” states Barisaac. “We need to figure it out together, step by step, experimenting with new ways and new technologies – leveraging existing infrastructures such as SWIFT.”

In a perfect world, technology, such as the adoption of DLT across real-time transfers, could facilitate the complete elimination of the role of the intermediary. In reality, the world will most likely evolve in clusters that will need to be connected. “While new technology would enable a dramatic improvement in the way we work, the intermediary role will still be necessary to enable interoperability and ensure reach to consumers,” says Ortino.

But change is in the air, he feels. “In the not-too-distant future, banks will have to start running their correspondent network differently, connecting to different types of partners.” He continues: “Some of these partners will bring technology-driven value propositions, but banks have to remember that technology is only ever the enabler, and that service proposition and cost will be the guiding lights in how this network evolves.”

The reason for a service- and cost-based transformation of the network, at least as it concerns corporate clients, is simple, states Barisaac. The often high-value and high-volume payments made by treasuries demand a superior level of service that cannot be met through an app. The banking industry is compelled to protect this aspect for the sake of its corporate clients, but at the same time must try to regain some of the low-cost retail business it has lost to high-tech players in the past few years.

Adoption of new technologies

This means technological advancement is essential, but in the international payments space, political and regulatory decision-making guides some industry developments, notes Barisaac. Of course, all banks operate in their geopolitical environment. “In certain parts of the world, the pace of adoption of new technologies is faster.” It’s why, he explains, banking in some regions – such as parts of Asia – has seen a rapid push towards the digital.

However, to replace any part of the existing global ecosystem, new technology must be proven to be sufficiently robust in context. As an example, while blockchain clearly works in some payment scenarios, it has not been tested to the scale of corporate bulk payments where millions of transactions may be processed per hour and so, in the transaction banking space, a technological gap remains, for now, says Barisaac.

It indicates that there is a difficult balance to strike between strong governance and the trust that it creates, the freedom to innovate, and the risk that this generates.

All this implies that banks such as UniCredit have a role to play in beating a safe but rapid path to technological innovation. It’s why Ortino says banks can no longer afford to be defensive in their approach to disruptors.

Instead, they must accept that while disruption may present a risk to established banking business models, it can also help to enrich the client experience, enlarge the scope of bank services, and ultimately increase the likelihood of individual banks adapting to the rigours of the market. “Most senior managers across the banking world are now prepared to question the way their organisations work, to listen to customers and employees, and to look at what new entrants are doing. They are also ready to experiment.”

Long-term thinking

This links back to UniCredit’s new strategy. The Transaction and Payments wing of the bank is already engaging in discussion with a number of third-party technology firms across its business value proposition, including working capital, trade finance, cash management, and payments.

At a higher level, where the bank connects to different payment rails, Barisaac says part of its ambition is to explore the kind of robust services that its clients want, how it can drive improvements to its current offering, especially across different geographies, and how it can enhance the cost of delivery of straight-through processing.

The clear view coming from the top now at UniCredit is that the bank needs to remain a competitive proposition for its shareholders. This is a technology play – hence the €2.8bn budget for digital and data infrastructure – but Ortino says it is also a matter of “questioning everything we do, simplifying our processes and filling the gaps”. It also entails resisting the lure of cutting-edge tools for their own sake. “Innovation is often regarded as referring only to completely new technology,” explains Barisaac. “On the contrary, the real innovation happens when you can use an asset you already have to better effect.”

In the quest to stay relevant in the longer term, with many banks on a journey towards transformation, Barisaac believes some will be taking a view on certain current activities and deciding at some point to remove themselves. This decision, he explains, will usually be based on profitability, simply because margins are being driven ever-downwards. Banks that have a ready strategy, and the will to collaborate, stand a far better chance of emerging as Ortino’s “more modern, agile, and efficient machines”. For treasurers, now might be a good time to start probing their banking partners’ transformational roadmaps.