The benefits of a wider adoption of blockchain technologies in the banking industry are substantial, and that it is only a matter of time before the FinTech revolution encompasses the world economy.
Based on a recent report by KPMG, it seems that the private banking industry in Switzerland will have to embrace this revolution in the immediate future, or face destruction. The number of private banks in Switzerland has fallen from 179 in 2005, to 112 in 2017. Christian Hintermann of KPMG Switzerland further expects this number to halve.
This thinning in numbers can be attributed to rising costs as a result of greater regulation, a shrinking of margins as wealth creation shifts towards emerging economies and financial markets continue to grow at a sluggish pace, and falling numbers of clients due to the increase in regulatory crackdowns on tax evasion.
Put simply, the security and protection offered by Swiss banks which made them so appealing are being eroded, and the institutions are struggling to cope. Swiss banks have no choice but to develop new business models, and partnering with innovative FinTech firms may give them a new lease of life, whilst failure to adapt could bury them for good.
FinTech and Regulation
Switzerland has experienced an increase in regulation as a result of the Basel III capital reserve requirements, coupled with more stringent ‘Swiss Finnish’ anti-money laundering and anti-tax evasion initiatives, and heightened consumer protection rules. Not only is this increased regulation exerting a greater strain on the finances of private banks, it is also costing them much more time: Prafull Sharma, KPMG’s head of digital transformation and outsourcing, has said:
“Client relationship managers are spending more time on back and mid-office duties and less time with clients.”
The good news for Swiss banks is that there are a number of start-ups in Switzerland (such as NetGuardians and SwissMetrics) who offer a solution. These FinTech start-ups have developed regulation technology (‘RegTech’) algorithms which effectively process Big Data and “automate risk management processes, facilitate regulatory reporting, prevent fraud, enable companies to stay abreast of regulatory changes around the world and support strategic planning.” Partnering with one of these start-ups would significantly reduce the time and effort banks have to invest in compliance.
FinTech and Emerging Markets
Robo-advisory is another popular, disruptive technology. Robo-advisors offer financial advice and/or wealth management online, with little to no human intervention. Their advice is based on algorithms, which are executed by software to automatically find the best allocation to manage and optimize clients’ assets. Robo-advisory upstarts provide investment management services to a wider audience and at a lower cost compared to traditional human advice. They also offer their clients a greater say in the management of their assets and provide faster access to information.
Swiss robo-advisory banks (such as Descartes Finance and True Wealth) have partnered with more traditional private banks because whilst robo-advisors have their benefits, they lack the personal touch, experience, and flair of private bankers. This technology presents an opportunity for Swiss banks to enter emerging economies, with KPMG’s Matthias Bossardt saying that, “Asian clients are definitely into the latest gadgets and technology for their banking relationship. Embracing fintech could open up new markets for many smaller private banks.”
Blockchain and Cryptocurrencies
In general, Swiss banks tend to totally avoid cryptocurrencies and even the ones that have experimented with them, have done so cautiously. The two banks which stand out the most are Smart Valor and Melonport, who have based their services on blockchain technology. In this context, blockchain enables individuals to store and transfer their assets peer-to-peer using digital cryptocurrencies. These currencies are not printed or controlled by the central bank, and thus any transactions take place outside of the traditional financial system.
The founder of Smart Valor, Olga Feldmeier, says she founded the company to offer individuals the chance to safeguard their assets against inflation, such as the hyperinflation in her native Ukraine in the 90s caused by the Government printing an excessive amount of money. Whilst many private Swiss banks continue to view cryptocurrencies as a huge speculative bubble waiting to burst, or as an excellent facilitator of criminal activities, banks like Smart Valor and Melonport hope that their success will catch the eye of other banks and force them to modernize their operations.
The Swiss private banking industry is struggling and is expected to continue to do so unless the banks change their business models. FinTech has the capability to provide solutions to a lot of their problems: RegTech can substantially simplify compliance, robo-advisory can help banks break into emerging markets, and blockchains can help them regain some of their lost clients, or even gain new ones. The banks have to act fast and adapt: if they continue to stick to their traditional models, they will go out of business and will be replaced by the innovative start-ups who could have saved them.