What does the growth of fintech mean for Switzerland's banking market?

Posting date: 29 July 2020

According to the IFZ Fintech Study 2020, Swiss fintechs are “beginning to outpace the [traditional] financial companies” and are growing at an annual rate of 7%. As the fintech companies make a name for themselves – particularly in investment management and banking infrastructure – this has raised the question of whether they pose a threat to the long-standing banking institutes.

 

While it may be true that traditional business models need to be revamped to fit in with the digital world there are many complex financial services that banks offer which fintech companies don’t. Here lies the solution to maximising the growth of fintech while protecting Switzerland’s banks - both markets can prosper when they focus on their unique services.

HOW LONG CAN A TRADITIONAL MODEL WORK IN THE DIGITAL WORLD?

Switzerland’s banking market attracts a huge amount of international investment, and in 2018 they were said to have $6.5 trillion in assets, which amounts to 25% of all global cross-border finances.

 

But with fintech companies flooding the market there’s been a wakeup call for traditional banks to apply technology-driven models. This has been answered by Swissquote Bank who have adopted a blockchain infrastructure and integrated robo-advisory. As more banks begin to adapt their functions it will leave those relying on their traditional business model and reputation struggling to keep pace with the digital world.

BANKING INFRASTRUCTURE

There are many services that the fintech market seamlessly offers - trading in cryptocurrencies, crowd funding and banking infrastructure – that established banks do not compete on. Narrowing in on banking infrastructure, it was found that in 2019 74% of Swiss fintech employees were working in this fintech niche. Banking infrastructure will continue to dominate the Swiss fintech market as financial services move over to the digital sphere – a change accelerate by Covid-19 – and institutions realise their responsibility to seek out systems that protect sensitive data and shield from potential attacks.

THE HOME OF THE CRYPTO VALLEY

Just as the US has the Silicon Valley in San Francisco, Switzerland has its own hub of fintech activity between Zug and Zurich. Known as the Crypto Valley, this region houses over 800 companies and 4,000 employees - with skills in cryptocurrency and blockchain - who handle the mining, storing, trading and investing of currencies such as Bitcoin. Bitcoin hit the market in 2009 and brought with it fear that digital assets would replace the traditional banking system but as it became clear that the volatile currencies would never be used to pay salaries or to take out mortgages, banks recognised they weren’t a direct threat to their services.

THE START-UP SCENE

With its world-renowned banking market, it’s no surprise that fintech has been crowned an up and coming star in Switzerland. Despite having a small population, the nation ranks fifth in the world based on their fintech business infrastructure and ecosystem quality, competing with the powerhouses that are the US and the UK. More fintech start-ups are springing up each day in Switzerland and though banks have traditionally been wary of investing in new businesses with little capital and unproven business models, they are beginning to get behind the smaller companies as they recognise their disruptive business models are the future.

WORKING TOGETHER AND SIDE BY SIDE

While Swiss fintech companies operate in the same realm as the banking market, they provide a distinctly different service and therefore there is an opportunity for the two to work together and benefit from one another. The two markets can collaborate on banking infrastructure and by doing so protect maximise data security and gain more of their trust. Meanwhile, they must continue providing services that the other market doesn’t offer, meaning that banks should direct their resources towards providing complex financial services and fintech companies focus on supplying currencies that are safe from hyperinflation.

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