Wealth management analyst at Verdict Financial, Nicole Douglas, points out how the traditional haven of wealth management, Switzerland, is the frontrunner to watch when it comes to the growth of innovative fintech players
Switzerland is renowned for being the most traditional private banking haven, but innovative start-ups have reason to rejoice about the prospect of a fintech license in the country.
Aimed at enticing start-up companies to enter the market, the fintech license, approval for which was received by Switzerland’s Federal Department of Finance in November 2016, will increase competition in the Swiss wealth management space.
On a macroeconomic level, low taxes and a relatively stable economy make Switzerland an attractive market to do business in. But for start-up fintech companies, current regulations can pose heavy barriers to entry. However, subject to final approval, the license will grant exemption from some of the regulations Swiss banks currently face.
For instance, the minimum capital requirement of CHF10m needed by Swiss banks would be reduced to CHF300,000 under the fintech license, making it possible for start-ups to compete more easily. Since eligible companies must have limited acceptance of client assets (less than CHF100m in deposits) and no lending activity they would not be covered by Switzerland’s deposit protection scheme, which lends these companies to less stringent requirements.
Additionally, a sandbox has also been proposed that would allow fintech start-ups to trial their offering so long as the total deposits they take do not exceed CHF1m. For approved companies, a license would be granted by the Swiss Financial Market Supervisory Authority, the country’s financial regulation arm.
For wealth management start-ups in the fintech space, this is beneficial. Lowering the minimum capital requirement eases pressure on wealth management start-ups to make decisions such as whether to offer shares, which could impede future financing rounds. The proposed sandbox will also provide the opportunity to test business models and receive guided advice on how to best bring the company to market.
This move will, no doubt, help drive competition. Although start-ups will not pose a threat to incumbents initially, they will differentiate among themselves in order to remain competitive, aiming to compete with established players in the future.
Differentiation will most likely take the form of addressing items that deter individuals from investing through a wealth manager. Our 2016 Global Wealth Managers Survey shows that nearly a third of HNW investors in Switzerland choose to invest directly in order to avoid management fees. Start-ups that recognise the need for more affordable wealth management solutions and provide an attractive pricing model will pique the interest of individuals who prefer to invest with a wealth manger but are dissatisfied with high management fees.
By easing regulation, Switzerland is signaling to start-ups across Europe that it is looking to grow its fintech sector and potentially compete with Germany and the UK as a fintech hub. The proposed license also comes at a time when market volatility, negative interest rates, and a strong Swiss franc are affecting returns from investments, further encouraging clients’ price-sensitivity and demand for alternatives. With new entrants competing for market share, traditional wealth managers will be forced to revisit their fees structure and product offerings, and this is all to the benefit of customers.