FinTech, Robo Advisers, and the Soul of Swiss Banking
This year, the European Union will start to force continental banks to open their customer interface to third-party providers. However, Swiss banking doesn’t intend to follow suit. Such is the latest development in the fight over the soul of Swiss banking, one pitting the trend-mad robo-ification of (digital) banking against the steadfast anchor and sail of the traditional Swiss model.
To its central banking fans, the payment-services-directive ‘2’ (PSD2) of the EU is being seen as a landmark decision: banks in the EU will have to open their interfaces to third-party providers of services — and that includes Fintechs (which have indeed taken root in the Confoederatio Helvetica). PSD2 is quite the controversial ream of red tape because external service providers may in theory access information about bank clients — a No if there ever was one in Swiss-minded money-mindedness. Proponents claim that customers “will profit from the rule through the best available service” and, of course, “the most innovative products”. In Switzerland, Hypothekarbank Lenzburg and Postfinance proclaimed to be favorable toward such “open banking” regulation. Most rivals however remained skeptical, calling it, by way of the Swiss Bankers’ Association, “an economic thought-experiment with substantial risk.”
To understand what is at stake in the Swiss tradition here, one must first understand the global industry trend towards the all-out digitalization of banking; how far it has come, and why the old school Swiss bankers remain cautious, if not outright put-off.
Readers of this site are well aware that banks around the world are cutting jobs as the industry is undergoing a sea-change transformation by digital technology, and by the increasing application of artificial intelligence and robotics. Vikram Pandit, who ran Citigroup Inc., has predicted some thirty percent of banking jobs will disappear over the next five years. Fintech hubs — cities where startups, talent, and funding come together — are spreading globally alongside this ongoing disruption in the contemporary culture of financial services. Such hubs are competing to become autonomous fintech centers in their own right, and to be at the foundation of what will eventually constitute the financial services “ecosystem” of the future.
Thus, it is no exaggeration to state that society has entered what is perhaps the most significant era of change for financial services companies since the 1970s brought about index mutual funds, discount brokers, and ATMs. To be sure, few, if any, banks, wealth management firms, or any financial services organization will be immune from this kind of disruption. As one Swiss economics journal put it, the most contentious conflicts (and partnerships) will be between “startups that are completely reengineering decades-old practices, traditional power players who are furiously trying to adapt with their own innovations and total disruption of established technology & processes”. That is to say:
- Traditional Retail Banks vs. Online-Only Banks: Traditional retail banks will always retain the cachet of security and stability. Online-only banks, however, are asserting themselves more aggressively in claiming to offer the same services with higher rates and lower fees.
- Traditional Lenders vs. Peer-to-Peer Marketplaces: P2P lending marketplaces are growing faster than traditional lenders—only time will tell if the banks strategy of creating their own small loan networks will be successful
- Traditional Asset Managers vs. Robo-Advisors: Companies like Betterment feature robo-advisors offer lower fees and lower minimums; meanwhile, the larger traditional asset managers are creating their own robo-products while providing the kind of personalized attention for which high net worth clients are willing to pay quite generously.
- Traditional Wealth Management vs. Automated Advice: a plethora of new software platforms and apps feature digital options, including mobile telephone payment services, automated wealth management advice, price comparison apps, tailored social media groups and crowdfunding systems. On the other side, the exclusivity of one-on-one attention is forever and very possibly will take on even more cachet as the somewhat sterile egalitarianism of digital banking erodes the cultural hierarchy of status.
- Traditional Clearing Systems vs. Blockchain. This latter can store and distribute crypto-currencies (such as Bitcoin) and digital contracts (such as land deeds) without the need for banks or formal clearing systems. Proponents of Blockchain maintain that it promises “to reduce fees, improve security and bypass the volatility of central bank controlled fiat currencies”. Major technology firms such as Google, Amazon and Alibaba are also joining this trend.
But are these developments really desirable or even practical in the long term? Switzerland is a key case study here. To begin with, yes, Switzerland in a general sense wants its share of the global Fintech pie with most other advanced economies. A number of players have set up in the so-called crypto-valley around the Zug, the capital of the eponymous canton in central Switzerland. The Swiss Financial Market Supervisory Authority (FINMA) has sought to ease up regulations for these “small and innovative” players. In March, that organization eased rules on verifying new clients by allowing video and online identification. FINMA has also backed the idea of a special Fintech banking license.
However, the Swiss have been critical about the appeal, or lack thereof, of a banking industry that emphasizes convenience over caution; novelty over reputable experience, and market trend over cultural tradition. Then, too, there is simply the question of practical efficiency regarding these Fintech start-ups given the fact that they are still dependent upon established players for access. Thus, a major problem facing Fintechs is the development of a customer base that makes the business worthwhile. One company, Truewealth, an online wealth manager, had to agree to a deal with BLKB (Basellschaftliche Kantonalbank, the cantonal bank of Basel) to access a satisfactory client base. At Descartes Finance, another Swiss robo-adviser, cooperating with long-established asset managers is part of the business model. Additiv, a Fintech developer, has had to bring on board a well-known Swiss investor, Herr Martin Ebner, to help them finance their expansion.
Such caution is, indeed, the Swiss Way of Wealth and robo advisers in Switzerland will continue to face difficulties in acquiring assets, despite the low fees charged. Skepticism in the country about the reliability of the technology is still too strong and many potential investors have other priorities.
As I have written here, what maintains a kind of “stealth” popularity in the country is that prized national product, the Private Banker (as prized as a beat-up alpine barn stocked with gold bars and lakes one can drink out of). Long the rock in the storm and refuge away from globaloney banking, the banquier privé is a special creature managed by partners with unlimited liability on their commercial and personal wealth for the bank’s obligations. For the Swiss, it expresses the idea of free enterprise, independence, personal service traditions, bean-counter competence and, most of all, long-term performance over short-term gains. It is world away from the tempest of “news” headlines, and private bankers have pretty much remained faithful to the values that have always guided them: in the endlessly shifting world of finance, they still do set the benchmark. Christian Rahn, of Rahn & Bodner, one such private banker, is a stalwart defender of this model of “integrity, stability and know-how” despite every possible pressure to go the full-blown robo-digital route.
"We have faced more problems in the past 263 years than what is going on now," said Herr Rahn of Rahn & Bodmer, a family bank founded in 1755, in an interview with the Swiss press at the height of the IRS investigations into Swiss accounts. "We will survive this well."