Fintech, schmintech

16.03.2017
Fintech is taking off in Switzerland – albeit slowly. But why? Perhaps one reason is the structure of the Swiss financial sector, which limits the potential of certain technologies. What works abroad will not necessarily work here – especially in fintech.

Christian Walter | swiss made software

The Swiss fintech scene is glancing enviously at London, New York, and Singapore. While these locations benefit from high investment and cooperative regulators, Switzerland is trailing behind in the shadows. This is despite the financial sector being of greater importance in Switzerland than it is anywhere else in the world, excluding the United Kingdom. Its contribution to Switzerland’s GDP was 10.4 percent in 2014. As a comparison, it was 7.2 percent in the United States, and 12 percent (2015) in the United Kingdom, and four percent in Germany.

Thus, there should be a lot of interest in the current fintech boom/hype in Switzerland, the land of banks. And it is indeed a boom: while figures for 2015 have yet to be finalized, according to Accenture, investments in fintech start-ups tripled from four to twelve billion in 2014. The latest figures for Asia indicate a continuation of this trend, at least in this region. Accenture reports that investments grew from 880 million to 3.5 billion dollars in the first nine months of 2015 alone.

Global investments

It is still unclear whether Europe is falling behind. In 2014 some 1.5 billion dollars were invested – the majority of this in the United Kingdom (623 million), Scandinavia (345 million), the Netherlands (306 million) and Germany (82 million). Switzerland is unfortunately not on the same level. Despite this, a local fintech scene has been growing in Switzerland over recent years, and it made visible progress in 2015. This is particularly evident through the actions of the much-criticized regulator, FINMA. The door to online identification will be opened in 2016. This would ultimately enable individuals to open accounts online. Another item on the agenda is the ‘light’ banking license, which would have lower requirements than those currently stipulated by Swiss banking legislation. However, this new license category must be subject to two conditions. First, the institute must be working with smaller volumes. Second, the institute must not be permitted to perform any maturity transformations. This means that long-term loans cannot be granted on the basis of short-term deposits. Finally, there should be a form of ‘regulatory sandbox’, i.e. a space in which new business models can be tested without the need for a license.

The fintech industry’s wish list has therefore yet to be fulfilled, but important steps have been taken to create the required framework for Switzerland to be competitive on an international level. These developments are partly the result of a relatively new and ongoing dialogue, which is benefitting from the industry’s improved organization. With Swiss FinteCH, Swiss Fintech Start-ups, the Swiss Crowdfunding Association or the Swiss Startup Association, there are now multiple relatively new organizations that represent the industry’s interests.

The progress made can also be observed elsewhere: According to research by the Swiss FinteCH, 85 fintech start-ups were founded in Switzerland in the last four years alone. Switzerland also now boasts a large number of incubators and accelerators.

Structural issues

Thus, the Swiss fintech industry seems to be on the right track, even if it is clear a lot remains to be done. At the same time, one must also be careful not to compare apples with oranges. After all, Switzerland’s apparent lagging behind also has structural reasons, which are not likely to change.

Let us examine the make-up of the Swiss financial sector: 46 percent of gross value added comes from the banks, 40 percent from insurance companies, and 14 percent from other areas. In turn, the banks can be subdivided into private banking (21 percent), retail banking (19 percent), asset management (3 percent), and investment banking (3 percent). By international standards, the Swiss financial sector is well diversified, at least according to BAK Basel Economics.

Investment needs to be made in the areas of fintech that have the greatest potential. And since a large proportion of fintech investment continues to be made in the United States, the country can be used as an informative benchmark.

According to Accenture, the bulk of fintech investments in the United States were made in lending (54 percent) and payments (25 percent). Therefore, 80 percent of investments, or approximately 7.9 billion, ends up in areas largely associated with retail banking. Many of the start-ups that have settled here are focused on the mass market. This is something that is hard for Switzerland to duplicate, as the market is too small to profit from economies of scale. Those with challenging concepts will want to test these with the largest client base possible. In spite of the internet and globalization, the realization is sinking in that even today, it is virtually impossible to develop a market without a local presence. It is no coincidence that there are virtually no internationally successful Swiss IT companies with a b2c focus. The Facebooks and Alibabas of this world need a large market in order to expand.

Who is feeling the pressure?

Investment in wealth management, on the other hand, is rather limited at four percent. It seems that few ideas here are able to stimulate the imagination of investors. This may have something to do with the fact private banking is not a mass market. Currently it seems mostly to be banks investing in this area. According to the results of a study by industry platform Asian Private Banker, almost half of the Asian banks surveyed invest between 50 and 60 million dollars every year – the majority of which is being spent on integration rather than development. Manoj Bhojwani, head of IT in Wealth Management at Credit Suisse Asia-Pacific, puts the figure at close to 60 percent. The much-discussed robo advisers, like Wealth Front or Betterment, are also more of a mass market interest, and will take an altogether different form if adapted to the needs of private banking compared to when directed at the general public.

All that remains is insurance, but investment in the United States’ insurance sector is infinitesimally small at around one percent. According to Venture Scanner, things are only starting to move in this sector – over 50 percent of the 535 startups tracked were founded in the past four years. This should come as no surprise – the insurance industry tends to respond rather more slowly than banks and is currently under less pressure. Tech Crunch speculates that the real development in this area is yet to come.

And so we see that Switzerland, the famed land of banks, is neither one thing nor the other. Many elements of the fintech boom cannot work in the small Swiss market, are driven by the dominant mass technology, or have not yet managed to succeed on an international level. But this is no excuse for the sense of quiet coziness that dominated here until just recently. If Switzerland is not careful, it could easily lose the valuable status it has fought so long and so hard to achieve.