modefinance's audition at the Finance Commission of the Italian Parliament

You can watch the audition here: Mattia Ciprian, Finance Commission.

As the only Fintech rating agency, modefinance provides its customers with the most reliable and efficient credit rating, through the application and the analysis of our algorithms. Turning to all companies operating in "alternative landing”, and companies that allow SMEs to finance their business (short/long term) without going through the banking circuit, led us to the banking disintermediation, a precise direction that the banks have taken through "alternative lending": in Italy, from 2012 to 2016, the traditional credit declined by 108 billions (even for regulatory reasons, i.e. Basel 2 and 3).

The two water wells

Personally, we do not think that Fintech is a banks’ enemy or competitor; rather we think it should be a companies’ ally. Bringing to you a fascinating comparison by Leonardo Frigiolini – banks and Fintech are two water wells, side by side and not communicating, and companies can get into both: this is therefore a double offer, not a "battle" between traditional banking institutions and Fintech.

But there is a problem: the rope to draw in the water bank has shortened, and Fintechs’ too weak and is likely to break –.

Frauds

There’s another issue that Fintech has to face: an increasing number of fraud attempts. More and more non-bankable companies are trying to be approved for loans by early Fintech corporates: it often happens that the necessary controls are underestimated or even unsuccessful. The problem here is not the ability to analyze the data, but the data itself: not just some financial “makeup” to remove imperfections, which we are always able to detect, but false information provided.

This convinced us, in the past few months, to develop a potential scams predictive algorithm, identifying common attitudes patterns among cheating societies; not enough yet, but the right way for solutions.

How to face them

These frauds obviously create a strong system crunch, where both investors and SMEs loose.Yet the solution, or part of it, would be very easy: let verified entities and rating agencies, reliable and regulated, work on non-public data to conduct more in-depth investigation.

For example: the Italian Central Credit Register, managed by Bankitalia. It contains all the customer indebtedness records, the list of bad guys. But there are so many databases that could help identify who has past incorrect behaviors.

Facing the solutions Fintech is setting up around Europe (i.e. in London there are various initiatives aimed to increase transparency in the bank/business relationship), we have been invited to Open Up Challenge, where the "better use of technology and data to transform the process of access to credit, cash flow management and a better overall vision of the enterprise“ is one of its primary goals.

This means, more than 250,000 British SMEs anonymous financial transactions are provided to selected Fintech companies, by the beans themselves, with the sole purpose of testing new solutions to improve transparency and market efficiency.

Is there any risk of breaking the law? Not if this is done right.

Access needs to be open only to those who prove to be trustworthy (i.e. ESMA certification), as well as establishing sandboxes, as defined by the European Commission "are mainly supervisory tools for companies and supervisors to explore how regulation should be interpreted and applied in light of a firm's new solution, through running live tests.”

Let's make it clear: sandboxes are playgrounds where the children (Fintechs) and their parents (regulators, in Italy it might well be CONSOB and Bankitalia) can play free with the users' data, with the purpose of understanding whether the current rules limit and block development and market efficiency. If so, Fintechs work on shared solutions, weighing strengths and weaknesses, changing rules and lining them with modern needs.

Fintech sector is at risk if Fintech companies won’t be provided with the widest possible solutions to secure both users and investors, while accurately estimating the risks they both face.

Today the difficulty to define Fintech, even for those who work within, limits the environment and the possibilities to provide any solution. We therefore need a Fintech representative, able to explain need and opportunities to private and public sector, to dialogue with institutions and to mediate between the parties.