RE-INTERMEDIATION IS THE KEY TO SURVIVAL

The Financial Re-intermediation in Europe is Fintech’s Future

Europe is confronted with aging Population from one side and the Promises of a Social Safety by the Net from the other side. There is no easy solution we must start to pay back or debt.

Chiefly, should we move towards a disintermediated financing model that would wipe out regulated financial intermediaries? Or on the contrary, wouldn’t it be the time to Re-intermediate our Financial and Industrial Services in Europe, by emerging a new type of Fintech made in France, a new Branch having for model the Re-intermediation and separated from the financial disintermediation?

The Re-intermediation is the key to survival?

The COVID-19 pandemic has affected the lives of billions of people in the world, and led to successive widespread lockdowns in many countries, and destroyed economic growth. Furthermore, its full effects are only now becoming apparent across the social and financial spectrum. But one major aspect has been revealed through this crise, the important role played by capital markets in intermediating capital to rebuild shattered economies and in mitigating the socio-economic impact of the pandemic.

Like the 4th re-industrialization, the re-intermediation of the financial industry is underway. Indeed, it is a true cultural revolution that is taking place in Europe and especially in France. It is absolutely necessary for administration, banks, financial institutions and businesses alike. The aim is to avoid the dangers of moving to a disintermediated model of financing for businesses in the eurozone, which is subject to three major constraints: the ageing of its population, natural disasters and health risks, and the imminent arrival of GAFAs and their digital solutions, which pose a threat to financial security, as they are not regulated in the same way as the European Union.

Therefore, industry 4.0 with the help of financial institutions must be Europe’s main response to the rise of GAFAM, and other disintermediation vectors in the Euro area. It is this systemic crisis, due to the coronavirus pandemic that is restoring banks and financial institutions to their role as the backbone of the economy. That is why industry 4.0 and financial intermediaries must act together to become a powerful level and make our industry more competitive, in a context of globalization in order to attract investors, to develop our own technologies and cloud.

For France and Europe, it is a question of regaining their national production and above all of maintaining control over products and materials whose strategic character requires European sovereignty. Today, the solution is not deglobalization, but a greener, more regulated, more transparent globalization with companies that respect environmental, social and governance (ESG) criteria. What will mark the difference in the future, will be the capacity that sustainably has created value without depleting its ecosystem and those including in financial markets. In short, the financial industry in France and Europe will have to rely on greener and more sustainable intermediation.

This research note shows that the dynamics of reintermediation raises interesting issues in strategy and management, concerning value creation and value appropriation in global value chains and changes in financial technologies. The remainder of this paper is organized as follows. In the first section, we review the main questions of the 4th Industrial Revolution and her link with financial reintermediation that has started in Europe namely in France, who could become the next Economic model of the Eurozone. The second section present the impact of the disintermediation for the industrial and financial sector in Europe and specially the French case, who has been the leader of the disintermediation. The last part of our research concludes on the solution of the Middleman. Accordingly, to Re-intermediate the European economy involving the necessary skill-revolution, one of the main solutions could be the association of the middleman and Financial Technology. Therefore, by making emerging a new type of Fintech coming from France, a new Branch having for model the Re-intermediation and being separated from the financial disintermediation. Europe will have to bring back her micro-economy that she has principally delegated to China, who has become more than the World factory: she has become a manufactured economy. What we are proposing to support the phenomenon of Reintermediation is a new financial tech called Re-intech that will be separated from the fintech and that will contribute to French and European strategic independence. Intermediation – like disintermediation - is a strategic concern within the banking and finance sphere. It is an empirical phenomenon that impacts the modes of transactions between firms along a value chain, power relations, value creation, value appropriation, the definition of the frontiers of the firms, modes of cooperation and competition. Following this, to make emerge new intermediary with new capabilities in order to create new chains of value, we have to “reintermediate” our financial system through three main pillars: the middleman, a new financial tech separated from the fintech and ESG.

1- Industry 4.0 and the Re-intermediation

The 4th Industrial Revolution that is underway suggests a possible reindustrialization and, as it were, a reintermediation of the French entrepreneurial fabric. In fact, when we talk about industry, we are not just talking about manufacturing, but in a broader sense, it also includes so-called services to industry, particularly the financial industry. However, if there is a dynamic in France that is readjusting, the country must face two major constraints: the weight of the administration and the need for “skills revolution”.

With its tax system, our country has been able, on its own, to transform its corporate taxes into subsidies for relocations with little success. In France, industry is taxed more than other sectors, even though it is exposed to greater global competition. Production taxes weigh more heavily on it: the manufacturing sector accounts for 15.4% of value added but contributes more than 23% to the payment of production taxes. The difference in taxation levels with Germany is 10.7 points, more than half of which is due to these same production taxes.

Concerning the “skills revolution”, indeed reindustrialization requires greater automation of industrial sites and thus a change in skills. On the other hand, industry is relevant if it is carried out on all the territories, but France’s industrial policy is not yet an industrial strategy strictly speaking. Moreover, if the French and German industrial balance sheets are compared in terms of competitiveness and investment, there are major differences. In the 1990s, Germany was able to set up a real industrial strategy, in particular by promoting and maintaining intermediation, thanks to its remarkable network of owners of small and medium-sized enterprises - which have not been destroyed by the weight of inheritance tax, giving its Länder a solid entrepreneurial and financial base.

Even if it is in Germany (2011) that was born the concept of industry of the future, Germany is not strictly speaking an economic model, but a mercantilist model because of its surplus. Moreover, it has not invested enough in the economic future of Europe, its ageing industry continues to produce products of the 20th century. On the other hand, it has relied far too much on China, its largest trading partner, which, for its part, has to face one of the world’s largest health crises with Covid-19. Recently, a panel of experts commissioned by the World Health Organization has criticized specifically China for its slow response in curbing the spread of the coronavirus in January 2020. Additionally, if the financial health of Chinese companies has improved in recent months compared to companies in the rest of the world, their debt has risen sharply, especially in the SOE (state owned enterprises – SOE) sector. Adding to that, there is an increase in delivery times in China which oblige companies in the world to increase their security stock in 2020. To resume, China’s growth comes partly from the rebuilding of safe stocks of companies around the world.

Concerning the EU-China investment deal, for European businesses, the agreement is of high importance as it would allow them to increase investments in the lucrative and steadily growing Chinese market without facing protectionist restrictions. In addition, if the concessions Europe has made seem very fragile, no one thought of linking the Commission’s haste for the EU-China investment deal to the European debt situation.

One of the major challenges of Germany is demographic, indeed according notably to several US and Swiss studies ageing population threatens economic growth, it has a negative impact on GDP. This phenomenon could be

explained in particular by the decline in labor productivity. With one of the most ageing population of Europe, Germany must import a foreign workforce sufficient to be able to maintain its industry and its economic cape. In this respect, France is the second most attractive European country for foreign investors, so it could become Europe’s next economic model with its powerful industrial fabric and unique “savoir faire”. It also erases the question of the Brexit and the opportunities for the “Place financière de Paris”. Specially for financial services, the crown jewel of the U.K. economy generating a trade surplus of more than £40 billion in 2019, according to the Office for National Statistics.The decision to quit the single market meant an end to passporting — a rule that allows banks to serve EU consumers from a base anywhere within the bloc.

The number of financial companies that have moved to France with Brexit remains contained, but it could still increase in the coming months. "Nearly 2,500 jobs" and "at least €170 billion in assets" have already been relocated to France at the end of 2020 as part of Brexit. And in its recent study Choose Paris Region explain that: “Paris will soon be the only global financial center in Europe, with a very broad spectrum of financial services that revolve around banks, insurers and asset managers”. Currently, the European Commission is ramping up plans to take on the U.S. dollar’s global influence by boosting use of the euro through financial markets, trade and foreign policy. Europe as ambition for the euro, in fact boosting the euro could help lure financial dealing away from the City of London and shield European companies from U.S. sanctions.

Consequently, regulatory sensitivities, and therefore the temperature of trade talks, will increase as both the EU and the U.K. seek to repair economies suffering the damage of the pandemic. Financial services and investment will play a central role in any recovery, where the importance of the Reintermediation. In fact, if France is the next financial capital of Europe, she will take a leading position in the European Union and will play in the Europe of 27 the role played by the United Kingdom in the Europe of 28.

2. The Financial Disintermediation in Europe and the French case

The pressures of various international agencies, such as the International Monetary Found the final result is a complex and increasingly feudalized social-welfare economy in which manager rather than owners share power in a complicated dynamic system whose chief features are still unknown even to serious students.

Are we prepared in Europe to accept the consequences of the shift to a disintermediated financing model that would wipe out regulated financial intermediaries?

The disintermediation of the financial sector in the euro area that has been put in place since the 2008 crisis has not proved to be a success for France. Indeed, by becoming the leader of disintermediation in the eurozone, in particular by promoting the elimination of regulated financial intermediaries, on the one hand, France has weakened the financial balance of the small and medium-sized enterprises on which the large industrial groups depend in terms of service to industry; and on the other hand, it has accelerated the process of relocation of services to industry, particularly to emerging countries. Moreover, France has been, little followed by the other countries of the European Union which have been able to minimize the impact of a massive disintermediation.

Should Europe therefore move towards an American-style financing system with much more market and less bank credit? If, we observe that enterprises in the euro area funds more on the financial markets and less through bank credit, it seems clear that this development is mainly due to the new regulations imposed on European banks - which are the main cause of the observed disintermediation of euro area corporate finance.

However, the shift towards capital market financing is a mistake for the euro area because of the low demand for risky assets by savers, and the need for high labor market flexibility with this type of financing. On the other hand, SMEs cannot consider going directly to the market, indeed in 2014, 95% of their financing came from intermediated loans. By financing on financial markets, SMEs will be faced with the fact that they can close for long periods of time, as it was the case for the corporate bond market from 2008 to 2012 and from 2015 to 2016. For the SMEs to be able to do without disintermediated financing, would imply that they must hold large reserves of cash - as in the United States - in order to be able to rapidly reduce their costs and financing needs by adjusting their employment very sharply. But as we have already mentioned, there should be labor market flexibility which is not present in the euro zone. In addition, despite the developments that could be foreseen by a potential reindustrialization in France, many business leaders remain reluctant to face the industry of the future and digitalization. They feel that their business is too small for this type of project and that their clients will not find it interesting. In addition, there is a lack of means for them to be able to access both the technological building bricks essential elements of the industry of the future, and their compliance with regulation.

The additional layer of regulation is also a burden for small and medium-sized enterprises, since they do not have the same funds as large technology companies that can easily comply or introduce new regulations for their users. By comparison, the economic framework for SMEs in Germany is much more advantageous, not only favorable to research and development (R&D) and innovation, but also enabling them to benefit from important services provided, by public services, professional associations and CCIs. Thus, through disintermediation, financial intermediation in Europe will lose one of its central roles which is to transform risk-free savings into risky financing of the economy, given that it finances the State and more companies. This has the effect of making household saving less efficient and no longer financing the productive capital of enterprises.

In addition, with the disintermediation of the euro zone, China has become the world’s factory, it is one of the nerve centers of the world economy and the current health crisis has exposed our extreme dependence on its production. Europe’s share in global value chains has diminished in favor of the Chinese dragon, which even competes with Germany in the sale of intermediate products on the Old Continent.

It is critical to understand that the Covid crisis is a reflection of our deficiencies and lack of preparedness for the challenges posed by a planet in trouble. But the solution is not deglobalization, it is to stop the “low-cost globalization”that is underway, to make globalization greener, more regulated and more transparent. So, the real question for all countries is the resilience of the entire production system. It is a matter of responding to a shock to adapt to it, to renew itself, in short, we must absorb this shock and to do so we must create more diverse ecosystems. France, in response to this unprecedented crisis, is preparing to set up a long-term project on the vulnerability of the French industry’s supply strategy. It is therefore primarily a matter of relocating the production of strategic components. Europe, on the other hand, with its expertise is the very first industrial continent, in fact in comparison the United States lost a lot of their industrial skills during the wave of globalization. As for China, it has many handicaps in terms of added value, competence, legal compliance and health infrastructure. Furthermore, the balance of payments in China has deteriorated sharply and could be in deficit in the near future. Moreover, in terms of ESG, their lack of social investment and governance will certainly penalize them in the short and medium term.

3. Reintroducing the Middleman

To Re-intermediate the European economy involving the necessary skill-revolution, one of the main solutions could be the association of the middleman and Financial Technology: “Certainly, the valuations of individuals as manifested in the market prices determine the course of all production activities. If one wants to oppose to the reality of the market economy the image of a holistic system, one must abstain from any use of prices” (Ludwig von Mises, The Myth of Macroeconomics). But to realize this purpose, Europe will have to bring back her micro-economy that she has principally delegated to China, who has become more than the World factory: she has become a manufactured economy. And more recently, one of their major strengths concern their commercial standards. Indeed, with the withdrawal of the United States from international Trade agreements and the new agreements signed by the European Union with China, it is now the Chinese standards that are applied in the trade agreements with the big European companies. In other words, she is manufacturing the economy of the world from the great powers to the emerging countries and she is going to become an “economy of savoir-faire” because she has already started her “skill revolution”. Obviously, by our massive disintermediation and delocalization we have offer to our competitor our most precious value our skills and our “savoir-faire”.

Middlemen have long played an important role in the sustained functioning and revenue-generating ability of the global finance industry but are still relatively ignored as such by the strategic and managerial literature. Indeed, those who theorized most about this market phenomenon are the micro-economists, and more particularly market microstructure analysts. They have shown, that by operating as a crucial link between the providers of capital and the end-users of capital, these intermediaries have been pivotal in enabling financial and monetary systems to operate effectively.Additionally, these intermediaries have precise functions, such as risk pooling or market making, that are necessary for imperfect markets to work in spite of their imperfections.

But the last decade has shown with increasing urgency that these entities could well become an endangered species. In fact, the process of disintermediation involves removing the middleman that sits between two parties in a transaction. Leading to a strong trend towards disintermediation, with the process well underway across several distinct areas within the banking and finance sphere.

Actually, we can observe three “mega themes” driving the shape of the capital markets of the future. These are the growth of the Asian capital markets, the FinTech/digitization and of course sustainability. One can observe that disintermediation has being carried out across much of the rest of the traditional financial-services space. Accordingly, blockchain technology does not need to be in place to implement a disintermediated financial structure. And this can be demonstrated through much of the success that has been garnered by the fintech industry. Since the development of disintermediated products and services represents an important evolutionary process within an arena that has traditionally resisted progress.

However, if it would seem that while disintermediation represents an exciting advancement in financial services by providing the most direct, efficient way for transactions to occur, it is unlikely to necessitate a complete transition within the industry. Obviously, middleman or intermediaries still have an important role to play in certain cases, and it seems more probable that both disintermediated and intermediated models will co-exist and operate alongside each other, offering market participants a wider range of options from which to choose.

Intermediation – like disintermediation - is a strategic concern within the banking and finance sphere. It is an empirical phenomenon that impacts the modes of transactions between firms along a value chain, power relations, value creation, value appropriation, the definition of the frontiers of the firms, modes of cooperation and competition. Following this, to make emerge new intermediary with new capabilities in order to create new chains of value, we have to “reintermediate” our financial system through three main pillars: the middleman, a new financial tech separated from the fintech and ESG.

What we are proposing to support the phenomenon of Reintermediation is a new financial tech called Re-intech that will be separated from the fintech and that will contribute to French and European strategic independence. The crisis has paved the way for the financial intermediation of tomorrow, the era of the Fintech will never be the same again. Indeed, most economies experienced a shock like never before in April and their ability to bounce back after such a break was put to the test. Moreover, the Covid19 crisis has revealed the fragility of our financial and banking systems, including emerging needs for sovereignty and interconnection. The aim today is to make European financial intermediation networks more resilient. In June 2019, €82 trillion were estimated for the total assets held by financial intermediaries in the euro zone; in addition to the Euro system and the non-bank intermediaries accounted for 60% of total financial sector assets in the euro area. The Financial Re-intermediation in Europe is Fintech’s Future: Re-intermediation is the key to survival.

To maintain our sovereignty, it is essential and strategic to invest in industry 4.0, in particular by offering our financial intermediaries disruptive technological tools made in Europe, necessary to revitalize their business and generate an effective European response to technology giants.

The Re-Intech will bring together all companies using innovative and disruptive business, technological or economic models, aimed at addressing emerging issues in the financial services industry following the Covid19 crisis. In particular by the reintermediation of the European financial industry through the support of small and medium-size enterprises, while contributing to the strategic independence of France and Europe. And by protecting the banking and financial intermediation businesses, which by their “savoir-faire” and patrimony that are part of the French and European heritage: “Too many engineers kill the bank and engineers are neither financial intermediaries nor bankers.”

The Intermed-EU application is presented as the first financial re-intermediation tool, it is a Re-intech, a new branch of financial technologies made in France and future European Techs from Industry 4.0 that will improve financial intermediation activities in Europe. Moreover, it is done to connect Financial Intermediation Networks in Europe networking, to foster cohesion among financial intermediation businesses, to preserve the traditional skills of financial intermediation trades and to develop new talent. To resume, this is a made in France strategic service dedicated to small and medium-size enterprises, whose “raison d'être” is to participate in the recovery of financial intermediaries after the crisis. It takes the form of a secure network aimed at connecting the approved financial intermediaries of the European markets, to promote and rebuild a more resilient financial re-intermediation market in Europe, more environmentally friendly, and more ESG by seeking to have a positive impact on society while being economically viable.

The challenge of this new tool for professionals is to create a new Pan-European standard for financial intermediation that will be able to impose itself in the face of the great ambitions of US and Chinese technology giants in this market. The organization of the new digital service will do this at: Franco-German binational level (partnership with a German SME), Pan-European level (27+1 European countries), International level (our main European partners).

The platform of Intermed-EU will provide companies with an interface to get connect with other regulated financial intermediary, by creating their own profile. The service will be free at national level and paid at pan-European level in the form of a subscription. Concerning, it’s architecture the Intermed-EU network will be based on its database, and a partnership with a German financial company and its collaboration with existing financial and economic institutions. On the other hand, a reporting system will be set up through questionnaires each depending on the materiality of the domain in relation to the company. The platform will also offer various data visualizations, articles to analyze the evolution of reintermediation and we will work in the future on a predictive model. To conclude, another important point will be to develop a partnership with regulated insurance intermediaries, like the financial intermediaries they will play an essential role in reintermediation, through their capacity in building new forms of cross technologies.