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Financial technology


Swiss fintech faces uphill struggle for toehold




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Blockchain enthusiasts insist that new technologies are safer than traditional financial services, such as Swift (Diessenhofen data centre pictured).  (Keystone)

Blockchain enthusiasts insist that new technologies are safer than traditional financial services, such as Swift (Diessenhofen data centre pictured). 

(Keystone)

Despite a large, established financial centre and top marks in global innovation scoreboards, the Swiss lag behind in a creative sector that promises to bring jobs and wealth creation.

The Swiss fintech scene pales in comparison with the likes of New York, London and Berlin. Even the likes of Luxembourg and the Netherlands are threatening to overtake Switzerland as a European fintech centre, while China, India and Singapore are causing waves in Asia.

One crucial industry figure shows just how much work Switzerland has to catch up with the big players. Swiss fintech start-ups attract just a fraction of the venture capital as other locations (see graph).

According to research group Statistica, the volume of money generated by digital finance transactions should easily surpass $2 trillion this year, and grow to $5 trillion in 2020. Switzerland accounts for just under $16.9 billion (see graph).

This is better, at least, than Singapore and Hong Kong. But considering that Zurich is the world’s seventh most important financial centre – and Geneva 13th – according to the Global Financial Centers Index, this does not make for impressive reading.

There are several reasons why Switzerland currently remains a global fintech minnow.

The wrong type of innovation

The IMD Global Innovation Index is just one survey that places Switzerland at the top, or near to the top, of its rankings. Switzerland always attracts high scores for the number of patents its companies file, but much of this space is taken up by established firms like Nestlé or Roche. 

As Ernst & Young points out in its Swiss Fintech 2016 report - co-authored by the Swiss Finance & Technology Association (Swiss FinteCH) - occupies the middle ground when it comes to measuring activity by early stage start-ups.

A recent trawl of European fintech start-ups by Zurich-based consultancy nexussquared found few Swiss applicants for its nexuslab accelerator programme. In fact, only one of the eight finalists from the project was Swiss.

“There is a lot of innovation in Switzerland, but it is very risk adverse,” said nexuslab co-founder Daniel Grassinger. “Swiss innovators tend to over-engineer their ideas, keeping them under wraps as they theoretically work on every detail to make them best in class. Then someone else comes up with the same idea and puts it into action.”

Talent restrictions

“The fintech hubs in Berlin and London are full of eastern European developers who are attracted to the flair and vibrant living conditions of these cities,” according to Fabian Vogesteller, a lead developer at the Ethereum foundation. “This is where London may start to suffer following Brexit.”

Switzerland is slowly working its way towards a new corporate tax regime, having been forced to abandon its current “anti-competitive” system by the EU. But it is unlikely that foreign firms will know exactly what the new corporate tax landscape will look like for another three years.

Regulations slow to adapt

The Swiss Financial Market Supervisory Authority (Finma) has started to react to the new reality of digital financial services. It has introduced lighter supervisory practices for some fintech services, allowed consumers to sign up to some such services digitally and introduced a regulatory “sandbox” for start-ups to test their innovations in the marketplace.

But Finma still lags behind countries like Britain, according to John Hucker, president of Swiss FinteCH. “The British financial regulator has done a great job at pioneering new measures for fintech,” he said. “It has developed a flavor of interactivity with start-ups, collaborating with them to adapt regulation. Switzerland, by contrast, traditionally adopts a more liberal, hand-off approach – we don’t see such interactivity here.”

Finma director, Mark Branson, said his hands are tied by outdated legislation. “Regulation that is based on 1936 banking law is related to the analogue world, which by definition discriminates against digital providers,” he said. “The financial revolution is evolving so rapidly that we can’t get bogged down striving for a 100% perfect legislative solution. We are advocating swift action that we can fine tune later.”

Dots not joined

Britain and other countries have adopted fintech strategies, with top government officials throwing their weight behind such coordinated schemes. In April, the Swiss government published its Digital Switzerland strategy paper that promises to coordinate policy and the output of several departments to look at legislation, data protection, communication infrastructure and the economic benefits of digitalisation.

This white paper has now entered the consultation phase as the wheels of Swiss administration grind slowly into gear.

In the meantime, several fintech associations and tailored start-up incubators have popped up, with more to come. “Wouldn’t it be great if they all collaborated together towards a common goal,” ventured one delegate at a recent fintech event in Zurich.

Some fintech players have also complained that cantonal and federal economic development agencies were slow to grasp the importance of fintech and have only recently started to jump on the bandwagon.

Game not over

“The train has not yet left, there is still a lot to play for,” says nexussquared co-founder Daniel Gasteiger. He believes that Switzerland has potential to become a leading player in blockchain technology.

The fintech industry could also take heart from Switzerland’s thriving biotech and medtech sectors, which also started from humble beginnings at the turn of the Millennium. With the fledgling biotech industry struggling to make headway against legislation and regulation, Domenico Alexakis started up Swiss Biotech in 2003. The association has grown from 145 members in 2006 to 279 last year, supporting 15,000 jobs and generating CHF5 billion in revenues.

“It can be difficult getting such an idea off the ground as the big guns tend to look down on the small start-ups,” Alexakis explained. “The key was presenting the economic advantages of a strong biotech sector. As soon as people understood the potential economic impact, they started to get on board and support it.”

Swiss fintech

There are several reasons to be cheerful about Switzerland’s fledgling fintech scene. According to Swisscom, there are currently 185 start-ups offering a wide variety of services, from robo-advising (such as InvestGlass), insurance (Knip), software (Temenos) and payment services (Twint/Paymit).

Switzerland’s strong data protection laws, corporate tax regime and political neutrality have attracted such overseas companies as Ethereum, Xapo and Blackphone.

UBS and Credit Suisse banks, insurer SwissRe, state telecoms company Swisscom and the Swiss stock exchange SIX are among the established financial and infrastructure companies to get heavily involved in the fintech scene. Several start-up accelerators have sprung up in the last couple of years, including one from consultancy nexussquared that has the ambition to turn Switzerland into a global fintech hub.

Fintech

The rapidly expanding financial technology industry now encompasses a wide range of digital financial services. A host of new software platforms and apps now offer people a range of new options from retail banking to remittances, insurance and wealth management.

A developing decentralised system called blockchain can store and distribute crypto-currencies (such as bitcoin) and digital contracts (such as land deeds) without the need for banks or formal clearing systems. This promises to reduce fees, improve security and bypass the volatility of central bank controlled fiat currencies.

Huge technology firms like Google, Amazon and Alibaba are also joining the feeding frenzy. And consumers are just as likely to be ordinary households as Wall Street traders and billionaires.

Fintech – overrated dotcom style bubble or the future of finance? Have your say in the comments section below.

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