General Conditions for Swiss Fintech
The conditions still aren’t ideal: A lack of entrepreneurial spirit, tax and stock corporation laws that hinder start-ups and legislative obstacles. The train leading to Switzerland as a fintech hub has not yet left the station.
The “Swiss Fintech Ecosystem Map” issued by Swiss FinteCH lists more than 200 Swiss finance technology companies. “There is so much momentum at the moment, and that’s a positive thing,” says Urs Haeusler, co-founder of the industry association Swiss Finance Startups, and founder of the private equity marketplace DealMarket. Daniel Heinzmann, IT strategist at the Zürcher Kantonalbank and president of “Swiss Fintech Innovations”, is also inspired by the current fintech scene: “It is gratifying to see how it is growing. Just one year ago, there were maybe 135 start-ups.”
And yet: “In an international comparison, we are unlikely to be ranked at the top,” as Rino Borini dampens the unbridled fintech enthusiasm. “It's a pity, because Switzerland remains relevant as a financial centre.” And this is true: According to the Global Finance Center Index, Zurich takes 6th place among worldwide financial centres. Borini directs the media company financialmedia AG, which specialises in financial topics, and organises the largest fintech event in Switzerland, “Finance 2.0”.
Daniel Heinzmann shares a similar opinion: “Compared to hubs like London or Berlin, the Swiss fintech scene still seems rather modest.” For Marc P. Bernegger, the internationally renowned “Serial Web Entrepreneur” and fintech investor, Switzerland is, in proportion to its population, “undoubtedly world number 1 in fintech concentration. But when we leave out the companies that have already been operating for 5 or 10 years, not many are left which are relevant in terms of revenue and profit.”
For Rino Borini, it is the lack of entrepreneurial spirit, among other things, which has prevented Switzerland being considered an internationally significant fintech hub, despite being an outstanding financial centre. Another reason that Borini names is a certain scepticism towards technology: “Technology is often considered a cost factor rather than a future opportunity.”
Marc P. Bernegger describes most Swiss companies as having “too little vision, too little ambition, too little will to take risks”. We're doing too well, in contrast to other countries where your existence depends on having success with your own company. “There’s little incentive to start a business after studying.”
Urs Haeusler sees things a little differently. “We have a lot of successful young start-ups now. It’s not as cool as it was 15 years ago to go work in a bank after getting a degree, earning a lot of money, but being told what to do by someone else all the time. Nowadays, many young people are prepared to take a risk and put all their efforts into building something up even if there's almost no pay.” His conclusion: “In Switzerland, we’re usually not the first and not the fastest. But we do things well and thoroughly.”
All opinions agree on one thing: If Switzerland is to transform itself into a fintech hub, then regulations need to change. Rino Borini formulates it more keenly: “Politics and regulators have been asleep at the wheel. Switzerland is currently bringing up the rear in this regard.” However, the wake-up call has been heard. Company director Mark Branson admits: “Swiss legislation is not fit for fintech.”
The company is therefore proposing a simplified approval process for fintech start-ups that only accept deposits from the general public and do not operate an interest-earning business. A regulation-free space for start-ups, a so-called sandbox, will also be introduced. The devil is in the detail, as Urs Haeusler points out: “We like the idea with the innovator licences and the sandbox. However, Finma has set the limits so low that it is difficult to build up a proof-of-concept to attract investors. We are still negotiating this.”
The train still hasn’t left the station, but time is short. This is something else the experts agree on. “The government in Bern doesn’t need to promise money, but simply put general conditions in place that allow fintech to move ahead,” as Borini accentuates. The efforts are being made, however it still needs to be passed by parliament first – that really needs to happen this year. “We’re all hoping that the National Council and Council of States give this priority.”
However, overhauled regulations will still see Swiss fintechs that wish to expand into the EU being disadvantaged. Passporting applies in the EU – meaning when a fintech company has an approval valid in one country, this automatically applies for all the others. Swiss fintechs can only dream of this. International growth is also important, because the Swiss market is far too small. The “IFZ Fintech Study 2016” authored by Dr Thomas Ankenbrand from Lucerne University of Applied Sciences and Arts also comes to this conclusion. “If long-term fintech jobs are to stay, and be created, in Switzerland, then the fintech companies must position themselves internationally and venture into overseas markets.”
Good general conditions include more than just simplified regulation of financial markets. Other legislative areas could be more encouraging for start-ups. Vitus Ammann, head of marketing at the Zug-based Monetas AG, is critical: “To ensure that you really can take the money promised by investors, the respective financing round must have been finalised in full. So if you are aiming to obtain five million and you already have two million of them, you still have to wait until the full sum has come together.” And employee shares, one of the best incentives to attract and keep talent, can only be issued by a Swiss stock company when it makes a profit – and for a start-up this is, by definition, not the case.
The different tax laws that apply in the various cantons have also earned criticism. Zurich, in particular, makes a negative impression. As Urs Haeusler explains, following a financing round, start-ups in Zurich are assessed at levels which are far too high, having being based on a fictive evaluation geared to future growth. “The capital tax can suddenly be much higher than total income.” Other cantons, such as Basel City, instead use the mean value method to assess the company, as is usually the case for companies not listed on the stock exchange.
There are, in best Swiss manner, meanwhile numerous fintech trade associations. “Swiss Finance Startups” (SFS) is the name of a very active industry organisation with more than 90 members. It considers itself a platform for fintech companies to share experiences, and to create networks between start-ups and decision-makers of the major financial industry players, “so that banks and insurance companies now promoting digitisation do not think they have to move to Silicon Valley, but see that a lot can be done in Switzerland as well,” which is how board member Urs Haeusler puts it. “Swiss Fintech Innovations” wants to get the dialogue between start-ups and banks and insurance companies back on the rails and concentrates its workgroup activities on five specific key topics of interest to the financial services providers while working in close cooperation with the Swiss Fintech Innovation lab at the University of Zurich. The “Swiss Finance and Technology Association” (Swiss FinteCH) presided over by John Hucker positions itself as a “centre of gravity for fintech in Switzerland” and intends to promote the evolution of our country into a world-class fintech hub.
“These fintech efforts are not being coordinated, there's too much petty-mindedness –an egosystem instead of an ecosystem.”
Rino Borini, Co-Founder & CEO financialmedia AG
Several specialist publications, many blogs, innumerable events from developer meet-ups to large conferences, start-up accelerators here and there. For some, however, this is too much of a good thing. As Rino Borini says: “We have countless associations, initiatives, accelerators. Everyone wants to make a contribution. But these efforts are not being coordinated, there's too much petty-mindedness –an egosystem instead of an ecosystem.” And it’s all talk and no action. Borini knows a way to describe this too: “Less paper, more pepper!”
The scene has confidence in Switzerland as a fintech hub. Urs Haeusler: “In five years’ time, we will be one of the top 5 hubs globally. We have all the prerequisites: a stable currency, a banking centre with tradition and a solid image in terms of dependency, quality and security.” However, as Rino Borini points out, Switzerland needs to concentrate on certain areas. “You can’t do everything. Switzerland stands for wealth management – not least because we have the world’s largest asset management bank in the UBS. Switzerland should also assume a leading role there when it comes to fintech too.” Switzerland, as a stable country, also has a lot to contribute to security and identity technologies. When it comes to cryptofinance and blockchain technology, Switzerland is already well positioned with Cryptovalley and is internationally renowned. Switzerland could, however, also lose ground in this area, because the general conditions are sub-optimal. Borini mentions applications related to the insurance business as a fourth key topic, which is known as insurtech in industry jargon.
Daniel Heinzmann largely agrees. He also sees good opportunities for cryptofinancial technologies, and mentions insurtech as a factor for future success. “It’s still in its infancy – the digital insurance broker Knip is just one example. When it comes to insurtech, Switzerland can absolutely take the lead.”
A study titled “The Digital Future of Switzerland”, prepared by the EPFL on behalf of Swisscom and Six, estimates that the potential offered by the fintech infrastructure does not have a leading position like London, Singapore, Hong Kong and the USA, but nevertheless competitive. Innovative capability is therefore top in Switzerland, data protection and data security is good, however the market activity for start-ups is only assessed as “rising”. Just like the start-up associations, the EPFL study comes to the same conclusion: “Start-ups should obtain better financing, and tax legislation that caters to their needs.” The “Swiss Fintech Report 2016” by EY strikes a similar tone: “When it comes to fintech, Switzerland has, to date, failed to profit from its strong position as a financial centre, and in terms of support from the state, there is plenty of room for improvement.”
Thomas Ankenbrand from the University of Lucerne draws the following conclusion from his IFZ Fintech Study 2016: “Substantial efforts still need to be made in Switzerland to create attractive general conditions and to hold its own in global competition.” The conclusion the authors of the study does, however, end with a positive note: The Swiss fintech market is internationally competitive and has positioned itself well for further growth.
Fintech trade associations
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