With some 200 startups, five key areas of expertise and several professional associations, the Swiss FinTech ecosystem is growing in what is a traditionally bank-friendly environment. In this article, we shed some light on what is currently happening in Switzerland.
“There are currently between 150 and 200 FinTech startups in Switzerland. Given the size of the country, this is a pretty high number and it’s certainly a good start,” enthuses John Hucker, with whom L’Atelier met up at the European FinTech Awards 2016, which took place in Amsterdam in April. As President of the Swiss Finance and Technology Association SwissFinTeCH, he explains why FinTech companies are thriving and why the environment is so propitious to their development. “Switzerland is really the country most associated with banking. In cities such as Zurich there are bankers everywhere, you can’t avoid them. And this close link to the idea of being a banker that the Swiss have explains in part why FinTech companies are so important for the country.” Fledgling companies can use the local financial tradition to their own advantage. In fact, according to a report from IGBank S.A., one out of every ten FinTech startups worldwide is Swiss.
However, the risk-taking inherent in entrepreneurship is not really part of Swiss culture. “One reason is the fact that under Swiss law you can’t declare yourself bankrupt, so a business owner carries the burden of failure throughout his/her entire life. As a general rule, if you fail you’ll be stuck with that label forever. So while in the United States people expect you to fail and then learn from your mistakes, in Switzerland you’re not given the same chance to try again,” points out John Hucker. Those who are part of the ecosystem that has been building over the last few years are trying to change this mentality and to surmount the current regulatory barriers.
Obstacles to promoting a pro-FinTech environment
The rather unusual political organisation of the Swiss Confederation is mirrored in the structure of the startup ecosystem. Underlines Hucker: “From the outside, Switzerland looks simple but the federal system is very complicated and each part of the country differs widely from the others. On the one side you have a Catholic French-speaking region and on the other a German-speaking Protestant region. Geneva and Zurich are very different cities, with different issues, different ways of doing things and strong rivalry between them.” The man who organises the Swiss FinTech Meetup events in Zurich and Geneva knows what he is talking about. He explains: “Instead of having two FinTech groups, we decided to set up a single representative organisation embracing a range of sensitive local issues. In a small country like Switzerland, it’s important to act in unison so that our voice will carry greater weight.” Especially when the main obstacle is a national one. Many people view the Swiss Financial Market Supervisory Authority (FINMA), as a “slow-moving institution which does not respond to the issues at hand.” An IG Bank analyst also shares the view that “FINMA regulation is the main challenge” for FinTechs.
In Bern, the Federal Palace houses the Swiss Federal Assembly and the Federal Council. © Emma Zhang
Nevertheless, the FinTech associations are trying to obtain support from the State, but “it’s difficult because the State authorities don’t like taking sides in the economy. The State basically considers that its role is to set up the framework and leave private organisations to sort out any problems. It’s different from the United Kingdom, where we see the government actively supporting FinTech companies,” stresses John Hucker, pointing to another difference between London on the one side and Zurich and Geneva on the other: the Swiss system is all about helping fledgling firms – early stage companies – to get off the ground. So a number of rules will need to be adjusted if the sector is going to really attract investors and startup entrepreneurs. “For example there are fiscal policies designed to help those who wish to set up their own company: companies are taxed on their wealth so if you have a flourishing startup that has managed to raise venture capital funds, the founders will receive a tax bill even before they’ve sold off their inventory.”
So there are some obstacles, but “a lot of work is currently being done to resolve these situations.” The President of SwissFinTeCH is quite optimistic. He feels that “FINMA has been listening hard to the FinTech ecosystem over the last two years, it has talked to our association, to a lot of startups and to the banks, and they’ve tried to find fast solutions to key issues.” BNP Paribas Suisse COO Kim Andrée Potvin agrees: “Everywhere in the world, banking has worked for hundreds of years in a certain way, but for a short time now everything has been changing very fast, so the regulator needs to react, face up to what’s happening and adapt – as we all have to do.”
In late March FINMA announced new measures to help FinTech startups flourish. "Given that the risks are lower and the field of activity more limited, the requirements for obtaining a licence will be less demanding than for a banking licence,” stresses Hucker. A recent FINMA circular, in force since March, provides for video and online identification so that a financial intermediary will be able to set up business relations via digital channels. Says Potvin: “This is a pioneering step, which has for example already been of great help to the Wecan.Fund, a startup that graduated from the Fusion incubator. The Federal Council – i.e. the Swiss government – has embraced the trend and in mid-April tasked the Federal Department of Finance to examine the possibility of exempting FinTech firms from banking legislation and regulatory requirements.
Nurturing ecosystem, promising startups
In the same way that Swiss banks have long been famous for their banking secrecy rules, Swiss FinTechs also have their own specific features. John Hucker underlines that “in contrast with London, which is such a large financial centre that it can afford to get interested in a range of financial topics, Switzerland needs to focus on a just few sectors”, i.e. those areas where the country’s players can really make a difference. “There are at least five of these – banking, wealth management, the insurance industry, the blockchain and the finance-related ICTs – big data, Artificial Intelligence, and so on, and financial inclusion. This latter thrust is mainly due to the fact that the headquarters of major international organisations such as the International Committee of the Red Cross, plus one of the four main United Nations offices, are to be found in Switzerland. Moreover, a lot of money allocated to micro-finance or philanthropic causes is managed in Switzerland, so it’s not difficult to think of the associated technologies.”
The startup entrepreneurs from Zurich and Geneva may also benefit from the support of the FinTech accelerators that have recently set up in their cities. Switzerland’s FinTech Acceleration Programme Fusion was launched in Geneva in the autumn of 2015. BNP Paribas (Suisse) is now partnering with it. “We’re very enthusiastic, we have lots of ideas, we’re able to develop solutions internally but our core business is banking, not creating digital solutions in startup mode, so we’ve decided to partner with an incubator which will be able to provide expertise not only through its FinTech companies but also directly from the incubator founders – which will enable us to forge partnerships,” explains Kim-Andrée Potvin. Fusion searched for several months for a bank willing to back its plans. “The major Swiss banks have their own in-house plans and are very discreet about what they’re doing in Fintech. That could explain why they don’t want to get into bed with an incubator. And then there are other banks which are currently just observing and are not yet taking a pro-active decision to go the digital route,” says Potvin.
Zurich, city of banks… and now also FinTech companies
In Zurich, the Swiss Life Lab and the F10 – SIX FinTech Incubator are providing support to other startups. Swiss FinTeCH now also has its own mentoring programme. In parallel, the number of FinTech events has been growing in recent months. One highlight in the calendar will be the Sibos conference in Geneva in September 2016, run by Swift. Switzerland also boasts high-quality training and Kim-Andrée Potvin argues that this is one of the reasons for the propitious FinTech environment. “The Swiss have some very dynamic universities and higher learning establishments such as EPFL in Lausanne, which are already running programmes on these subjects.” Swiss FinTeCH also works with the University of St. Gallen, HSG, a research university, ETH in Zurich and the University of Zurich. This is in fact “what most banks do,” points out John Hucker.
Banks are now also learning to work directly hand in hand with startups. “They invest in disruptive startups because the risks of doing it themselves are too high, and so are the costs,” says Hucker. “Collaboration makes sense. The banks have the advantage of having the customers, the financial resources at their disposal and the regulations in their favour, while the FinTech startups have the capacity to innovate fast.” Getting them to work together seems to be rather difficult, however, in Switzerland as elsewhere. The SwissFinTeCH President explains: “The cultures are very different. Sometimes the bank takes eighteen months to take a decision on whether or not it wants to work with a startup, which perhaps only has enough funds to survive six months. But I’ve seen a lot banks improve in that area, through necessity.” Kim-Andrée Potvin feels that “banking needs to change in Switzerland, as in many countries around the world, but because Switzerland is traditionally a banking country, it will need to undergo even greater change. There is however fertile ground to make this happen.”
There are many good reasons for Swiss people to create their own FinTech startups and even, hopes John Hucker, for FinTech firms from other countries to think about moving to Geneva or Zurich. A number of promising FinTech companies have already emerged from the Swiss ecosystem. Six actually figure in the Top 100 rankings of the European FinTech Awards. Among them are Knip and NetGuardians, which came in the first three of their respective categories – InsurTech and Intelligence and Security. Knip enables users to understand and compare insurance companies’ services and fees, while NetGuardians has a great deal of expertise in providing anti-bank fraud solutions.
These FinTechs are examples of what is happening today in Switzerland. And if it wants to maintain its excellent reputation in the finance field, Switzerland must now make every effort to focus on innovation and take some pioneering steps. As a study from global strategy consulting firm Roland Berger underlines, when it comes to FinTech it is now or never for the banks.