As promising start-ups multiply, the Federal Council is finally turning its attention to fintech, especially its regulation. An encouraging first step - but a long way still to go, say entrepreneurs.
First, came the awakening; now, the expansion. Swiss fintech, which really emerged in 2015, counts some 200 start-ups active in participatory financing, mobile payment and robo-advisors. Geneva and Zurich offer the best framework conditions, close behind Singapore and ahead of London, according to the IFZ Institute in Zug. Fund-raising, increasing year after year, rose to 160 million francs in 2016, while dedicated programs and associations are multiplying to boost the financial technology sector.
Singapore, Zurich and Geneva: top three FinTech Hubs
Global ranking according to framework conditions offered by each city (based on 68 factors)
“Around the world, financial centers are growing and investing heavily in start-ups,” says Christina Kehl, head of Swiss Finance Startups, an association that defends the interests of Swiss fintech. “Our financial center is one of the key pillars of our economy and we want to continue this success story. That is why fintech and the financial industry can no longer be separated. It is necessary to make our financial center evolve into a strong fintech hub.”
million francs were invested in fintech start-ups in 2016, according to Swisscom’s e-foresight, of which 100 million were in Helvetia’s acquistion of MoneyPark.
“Best framework conditions”
Let us start with entrepreneurial reality, often different from the findings of studies that put Switzerland on the innovation pedestal. In finance as in other fields, start-ups are confronted with such obstacles as the lack of investment once past the “early age” phase and the tax burden, among other things. At the beginning of March, FinanceFox, a promising young insurance company that recently raised $28 million, moved its headquarters to Berlin, because of “better framework conditions than in Zurich.”
start-ups in financial technology are active in Switzerland, according to the association Swiss Finance + Technology. That’s a bit more than the figure given by Swisscom’s think tank, e-foresight.
fintech companies in Switzerland - 28 more than in August 2016.
The banks... but not only
Collaborate or fight? If, at first, they were unsure about fintech companies, traditional banks have now adopted a policy of cooperation. “The situation has changed a lot this past year,” says François Briod, co-founder of Monito, a platform comparing fund-transfer services to determine the least expensive. “Traditional players are increasingly taking the initiative to contact start-ups. But one still needs to know, for example, from which department of a bank a project originates and, if it is not, in the end, just a marketing operation.”
start-ups, among the 192 identified by Swisscom, are active in “investment and asset management”, 44 in “crowdfunding” and 26 in “payments”.
If cooperation from the major banks is growing - UBS and Credit Suisse have invested nearly four million Swiss francs to launch the Kickstart accelerator in Zurich and have formed a large alliance in the blockchain; BNP Paribas (Switzerland) will support the Fusion platform in Geneva; and Julius Bär and Six Group are among the founders of the Zurich F10 accelerator - fintech is also increasingly interested in non-bank players such as Helvetia and PwC. The start-up Advanon recently raised 13.5 million Swiss francs from a consortium that includes Swisscom.
million francs were raised in 2016 by Swiss fintech companies, according to Startupticker.ch and SECA. Total amount raised last year by Swiss start-ups: 909 million francs.
A pro-active Finma
Finma is “ready for fintech”, as it announced in a statement last September, and recent regulatory initiatives of the Federal Department of Finance and the contracting authority are encouraging, say the entrepreneurs interviewed. Some fintech companies are already benefiting.
For example, in March 2016, Finma authorized video and online identification. “In comparison with Switzerland, US/UK platforms can acquire a customer base much more easily,” explains Jean-Marc Sabet, founder of B-Sharpe, an operator of on-line currency transfers. “In Switzerland, to identify themselves, new clients had to present their ID directly or make the identification to the appropriate institutions, often leading to lost time and additional costs. Because of these authentication constraints, users weren’t completing the process of opening an account.” Now, the process is a lot faster: the customer can register and identify at the same time, even using a mobile device. For B-Sharpe, the customer conversion rate is now “significantly higher”.
Another major turning point is the creation of a less onerous banking license for fintech companies. Requirements: not more than 100 million francs of public deposits and a minimum capital of 5% of these deposits, at least 300,000 francs. It’s a good step forward, according to one entrepreneur interviewed, although, for now, it doesn’t benefit “the majority of start-upers involved, as much as it does the spin-offs of banks, companies already well endowed, or even those involved in cryptocurrrency.”
Fast response to change
These first concrete measures have been welcomed positively in the fintech ecosystem. The key challenge for competitiveness is to facilitate innovation, while building a regulatory framework that corresponds to the rapid evolution of new digital models. “The authorities are on the right track,” says Sal Matteis, director of the Fusion accelerator in Geneva. “However, it remains more difficult for a start-up to obtain regulatory clearance here than in London or Singapore, but that’s not necessarily a bad thing. Indeed, we must ensure adequate control to ensure the viability of start-ups that have access to the Swiss market. One negative point: fintech startups often wait months before obtaining a response from Finma and self-regulatory organizations. And, often, they get no feedback on why they were rejected.”
6 fintechs to watch
Ranking in top 100 swiss start-ups in 2016
3. Knip (ZH)
Mobile app comparing insurance policies.
7. Bexio (SG)
Cloud-based management solution for SMEs.
25. Advanon (ZH)
Investment solutions for SMEs.
47. Contovista (ZH)
Management solutions for personal finance.
70. I Believe in you (BE)
Crowdfunding for sports projects.
80. CashSentinel (VD)
Buy a car by mobile phone.
In addition, Switzerland now has many players, often too dispersed. “Building a strong network between government, business, the innovative ecosystem and universities, from Geneva to Zurich, including Crypto Valley in Zug, is essential to competing with the international hubs,” says Sal Matteis, who worked ten years in London as an entrepreneur and investor, then in the fintech ecosystem of Amsterdam, before coming to Geneva. “We must make sure that everyone plays his role and that everything is well coordinated.”
FinTech sector attracts capital
GLOBAL TRENDS IN FUNDRAISING AND NUMBER OF AGREEMENTS SIGNED
In EUROPE, 100% DIGITAL Banks That Have Raised The Most Funds In 2016
Berlin and Singapore grow, London remains a question. Worldwide overview
Brexit polarizes the opinions of entrepreneurs. For the most optimistic, the London fintech hub is still one of the most powerful. For these optimists, potential future difficulties will push British entrepreneurs to be ever more effective and innovative. For the most negative, however, the UK leaving the European Union marks a real turning point. “In the medium term, Britain will be more an extension than a central business base,” says one entrepreneur active in the sector based in Geneva and London for several years. “Besides Brexit, the London scene relies heavily on the marketing aspect of the start-up and less on technological know-how. That has disappointed a lot of people there.”
Long home to the most coveted start-ups, New York has seen companies such as TransferWise, Venmo or Bond Street Marketplace becoming important challengers to the traditional finance sector.
Berlin is attracting increased interest from investors. In 2016, venture capital in Germany increased by 38% over the previous year to $521 million, while it dropped by 34% in Britain, from 1,180 billion to 783 million.
Singapore’s ecosystem relies heavily on government initiatives. The authorities have committed about US$160 million over five years to growing the industry. By multiplying private-public partnerships, the city-state has made the blockchain one of its priority projects.
Keep an eye on Asia. In 2016, the fintech of China and Hong Kong drove investment in the entire Asia-Pacific region to $11.2 billion ... passing North America’s $9.2 billion, according to CB Insights.