If you want to read the complete edition of Best of the Web, Fiancial edition 13. Sep 2016, click here.
On March 10th, 2000, the burst of the so called Dot-Com Bubble started. After nearly doubling within only one year and peaking at 5048, the NASDAQ index fell as much as 78% in the aftermath of that day. Clearly, estimates vary, but it is said that the astonishing sum of USD 1.7 trillion were lost in less than a year.
Shedding the “e-“ prefix and “.com” suffix
The vanishing assets were the most obvious and immediate consequences of this remarkable period. Yet, the burst of the Dot-Com Bubble had also other ramifications. Expressions, names and language changed rather abruptly. While the “e-“ prefix was widely adopted for products and firms before March 10th, companies were now shedding the “-e” attribute faster than an Alaskan Malamute its winter coat during springtime. The same happened to the “.com” suffix. All of sudden no firm wanted to be associated with eCommerce any longer; bricks and mortar became fashionable again. Even email turned into mail and – to make it distinguishable – to what was previously termed mail, postal mail became snail mail.
Absorbing Dot-Com technology
Yet, the eCommerce and Dot-Com technology did not disappear. On the contrary, the innovations made in the years leading up to the bubble burst prevailed. Web technologies have never been as pervasively applied as today. A Web sales channel or at least an information outlet has become a standard for most enterprises in the western world. Hence, Internet technology did not disappear with the burst of the Dot-Com Bubble. Rather than that, it was absorbed, transformed and adopted by the majority of firms and turned into a business standard.
After the burst of the Fintech bubble
The same will happen to Fintech. It is safe to say that we will see a Fintech bubble burst in the years to come. Turning into an outcast in the eyes of investors Fintech will then disappear as a label. However, a good share of the innovations brought forward by Fintech firms will then be absorbed by other players, such as by incumbent banks, insurers and software companies.
In 1996 Wesley Willis released his album “Rock ‘n’ Roll Will Never Die”. The Rock ‘n’ Roll that evolved in the United States during the late 1940s and early 1950s has ever since been absorbed, transformed and adopted by other musicians around the world. In that sense Rock ‘n’ Roll is truly immortal. The same will apply to Fintech.
Dr. Patrick Schüffel, Professsor, Institute of Finance, Haute école de gestion, Fribourg Chemin du Musée 4, CH-1700 Fribourg, email@example.com, www.heg-fr.ch
Nr. 168 vom 31.08.2016 Seite 030
Sie sind, mit ihrer Mischung aus hochkompliziertem Denken, Intuition und mitunter leidenschaftlich verteidigten Grundsätzen, sozusagen die Theologen des Kapitalismus: die Ökonomen. Kaum ein Berufsstand im Bankbereich genießt so hohes intellektuelles Ansehen. Nirgendwo sonst spielt akademisches Denken im Geschäft eine vergleichbar große Rolle. Aber wie wahrscheinlich ist es, dass auch im Jahr 2033 Banken noch Ökonomen beschäftigen? Nach Meinung von Patrick Schüffel, Finanz-Professor im schweizerischen Freiburg, wird dieser Job zwischen 2023 und 2033 mit einer Wahrscheinlichkeit von 43 Prozent vom Computer übernommen. Ein Beispiel dafür, dass der digitale Kollege, der uns in den letzten Jahren mehr und Routinearbeit abgenommen hat, künftig auch intellektuelle Aufgaben übernimmt.
Schüffel stützt sich bei seiner Prognose auf eine Arbeit von Carl Benedikt Frey und Michael Osborne mit dem Titel “The Future of Employment”. Darin haben die beiden Wissenschaftler, gestützt auf offizielle Jobbeschreibungen der US-Regierung, 702 Berufe untersucht. Sie prüften mit einem mathematischen Modell, das auf Basis bisheriger Trends Prognosen erstellte, die Wahrscheinlichkeit des Verschwindens von Jobprofilen. Ihre Schlussfolgerungen sind dramatisch: “Nach unseren Schätzungen sind 47 Prozent der Stellen in den USA einem hohen Risiko ausgesetzt. Das heißt, die entsprechenden Tätigkeiten können irgendwann in der Zukunft, vielleicht in zehn oder 20 Jahren, automatisiert werden.”
Schüffel hat gezielt die Daten für die Bankbranche für das Jahrzehnt bis 2033 aus der Studie herausgezogen. Die Ergebnisse zeigen eine große Bandbreite. So liegt die Wahrscheinlichkeit, dass Verkäufer im Wertpapierbereich überflüssig werden, bei nur 1,6 Prozent. Auf der anderen Seite sind “persönliche Finanzberater” mit 58 Prozent Risiko in hohem Maße bedroht. Noch schlimmer sieht es für Leute aus, die lediglich per Hand Daten erfassen: Mit 99 Prozent Risiko hat der Beruf kaum eine Überlebenschance. Dasselbe gilt aber mit 98 Prozent auch für Buchhalter und Kreditsachbearbeiter. Zum Teil enthält die Aufstellung allerdings kaum erklärbare Differenzen: Finanz-Analysten sind nur zu 23 Prozent bedroht, Kredit-Analysten dagegen zu 98 Prozent.
Das letzte Beispiel zeigt die Grenzen derartiger Prognosen. Letztlich handelt es sich um Gedankenspiele, bei denen der eigentliche Wert weniger in den Prozentzahlen liegt als darin, Denkanstöße zu geben. Ein wichtiger Punkt ist dabei: Arbeiten, die allein eine hohe abstrakte Intelligenz erfordern, gelten als durchaus ersetzbar. Je mehr hingegen soziale Intelligenz und Kreativität gefragt sind, desto weniger Chancen hat Kollege Computer. Daher sind Verkäufer schwer zu ersetzen, auch wenn sie vielleicht weniger abstrakte Intelligenz brauchen als Ökonomen.
Soziale Kompetenz als ein Ausweg Ausschlaggebend für die Einschätzung der jeweiligen Berufe ist daher, wie die damit verbundenden Aufgaben eingeschätzt und gewichtet werden. Besteht die Aufgabe des Ökonomen vor allem darin, eine Konjunkturprognose für das nächste Quartal abzugeben? Dann hat der Kollege Computer eine gute Chance, ihn abzulösen. Schon heute gibt es Unternehmen wie etwa Now-Cast, bei denen selbstlernende Software kurzfristige Prognosen übernimmt. Oder besteht die Aufgabe der Ökonomen eher darin, Daten zu erklären und Rahmenbedingungen für die wirtschaftliche Entwicklung zu analysieren? Da tut sich der Computer schon schwerer. Viele Bank-Ökonomen arbeiten zudem de facto in der Kundenbetreuung. Sie unterhalten sich mit Großkunden über ökonomische Fragen.
Das dient nicht nur dazu, harte Schlussfolgerungen, etwa für Investitionen, logisch abzuleiten. Anleger, die ihre Entscheidungen unter hoher Unsicherheit treffen müssen, suchen versierte Gesprächspartner, mit denen sie die Last dieser Unsicherheit teilen können. Bei dieser Aufgabe ist das persönliche Gespräch durch nichts zu ersetzen, nicht einmal durch Videokonferenzen, geschweige denn den Computer.
Das Beispiel zeigt, dass der Computer viele Berufe nicht ersetzt, sondern sie verändert und die Gewichte verschiebt. So gibt es etwa bei freien Finanzberatern in den USA den Trend, Anlage-Entscheidungen tatsächlich Computern, den sogenannten Robo-Advisern, zu überlassen. Kernaufgabe des Beraters ist dann nicht mehr, dem Kunden einen angeblich heißen Aktientipp zu geben. Vielmehr muss der Dienstleister helfen, eine Einschätzung seiner finanziellen Situation und Risikobereitschaft herzuleiten. Diese kann dann Grundlage für die maschinelle Verwaltung eines Depots werden.
Heute schon gibt es auch Firmen, die vom Handel an den Kapitalmärkten leben, ohne einen einzigen Händler zu beschäftigen. Die Aufträge werden vom Computer erledigt. Aber die jeweilige Software entsteht in Zusammenarbeit von Computer- und Kapitalmarktexperten. Für viele Banker dürfte gelten, was Frey und Osborne als Schlussfolgerung ziehen: “Damit Beschäftigte das Rennen gewinnen, müssen sie kreative und soziale Kompetenz erwerben.”
ZITATE FAKTEN MEINUNGEN
Nach unseren Schätzungen sind 47 Prozent der Stellen in den USA einem hohen Risiko ausgesetzt. Carl Benedikt Frey, Michael Osborne Professoren in Oxford
Fintech is steaming ahead at an incredible pace. What robots used to be for the automotive industry, algorithms have become to the banking industry.
Common wisdom had it that one’s job would be secure if one was well educated and kept up-to-date on the job. Now, however, we are increasingly facing a situation when even highly sophisticated occupations such as personal finance advisors as well as accountants and auditors will fall prey to digitalization.
The Future of Employment
In their 2013 study “The Future of Employment” Karl Benedikt Frey and Michael Osborne estimated the probability of computerization for 702 professions based on three factors: perception and manipulation tasks, creative intelligence tasks and social intelligence tasks.
Applied to Banking
Of those occupations examined by Frey and Osborne I have extracted those that I find relevant to the banking industry. The percentage figure displayed indicates the likelihood of that profession being computerized in “a decade or two”, i.e. between 2023 and 2033.
Occupation: Probability of Computerization
Sec., Commod., and Fin. Services Sales Agents: 1.6%
Financial Managers: 6.9%
Management Analysts: 13.0%
General and Operations Managers: 16.0%
Financial Analysts: 23.0%
Business Operations Specialists, All Other: 23.0%
Managers, All Other: 25.0%
Financial Specialists, All Other: 33.0%
Customer Service Representatives: 55.0%
Personal Financial Advisors: 58.0%
Administrative Services Managers: 73.0%
Loan Interviewers and Clerks: 92.0%
Accountants and Auditors: 94.0%
Credit Authorizers, Checkers, and Clerks: 97.0%
Loan Officers: 98.0%
Credit Analysts: 98.0%
Brokerage Clerks: 98.0%
Bookkeeping, Accounting, and Auditing Clerks: 98.0%
New Accounts Clerks: 99.0%
Data Entry Keyers: 99.0%
Dr. Patrick Schüffel, A.Dip.C., M.I.B., Dipl.-Kfm.
Institute of Finance
Haute école de gestion Fribourg
Chemin du Musée 4
Currently the Annual Academy of Management (AoM) Meeting is taking place in Anaheim, California. Some 10’000 Management scholars from 88 countries are meeting to discuss the current affairs of Management and its outlooks. In more than 2’500 sessions topics are discussed from the disciplines of Entrepreneurship, Technology and Innovation Management, Organization Development and Change, and Operations Management, just to name a few. The meeting program spans a whopping 608 pages and contains literally hundreds of thousands of words. Yet one word is missing: FINTECH!
Already today more than three dozen Fintech unicorns exist, most of which are not even five years of age. Moreover we are witnessing the appearance of novel Fintech companies almost on a daily basis. This development has caught the attention of business people, regulators and politicians alike. Yet, this development has largely gone unnoticed by the academic world as far as management sciences are concerned. Clearly, there are noteworthy exceptions from this rule, but at large Fintech is simply not existing in this academic setting.
This situation gives rise to several questions. For instance, how do we educate Management students for today’s banking and finance world if the Fintech phenomenon remains untouched? How do we train executives? How does academia intend to give sound advice to policy makers in view of this neglect? If the ultimate purpose of science – among others – is to explain, control and predict, academia must swing into action and intensify its efforts in the field of Fintech.
I therefore also strongly welcome efforts such as the ones by Thomas Puschmann of the University of Zurich who is actively building a bridge between the practical Fintech world and academia by establishing the “Swiss Fintech Innovations” association as a port of call for practice and academia alike.
In Luxembourg Anne-Laure Mention is one of the commendable academics at CRP Henri Tudor who attempts to narrow the gulf between innovation in financial services in practice and academia.
If there are other such initiatives in other countries, please do drop me line! I am keen to learn!
Increasingly often I am being asked by students, colleagues, investors, even friends and family “What is Fintech?”. I then typically answer “Fintech is an industry made up of organizations using novel financial technology to support or enable financial services”. And then, to avoid misunderstandings I add “A Fintech is an organization that uses novel financial technology to support or enable financial services”.
Yet, what sounds like a pretty straight-forward answer, was a hard nut to crack. In fact, the term Fintech is so often and widely used that some people even increasingly shun using it altogether.* To them the concept of Fintech has become too comprehensive and too ubiquitous to have any conclusive meaning any longer. For me it required quite a thought process to come up with a telling definition. This is due to several reasons.
Definitions are never true or false
First, a definition is never true or false per se, but more or less useful in a specific context. For instance, think about the term “power”. How would a physicist define it? How a politician? Which definition would a judge provide? Which explanation would an athlete give? Moreover, even within the domain of sports you are likely to receive different answers, depending on whom you ask. A weight lifter will most probably provide you with a different answer is than the fellow athlete from the same Olympic team who competes in synchronized swimming. Hence, we have to accept that – contingent on the counterparty you ask – one may well receive varying answers on the identical question. The same applies to the expression Fintech.
Looking at the most popular encyclopaedia of our times, Wikipedia, we can read that “[f]inancial technology, also known as fintech, is an economic industry composed of companies that use technology to make financial services more efficient.” (Wikipedia, 2016a). Conveniently enough for the reader, Wikipedia also provides us with the source for their definition. Wikipedia refers to the Wharton FinTech Club which provided this definition (Wharton Fintech, 2014). In a similar vein Susanne Chishti and Janos Barberis state in their landmark book on Fintechs that “Financial Technology or FinTech is one of the most promising industries in 2016” (Chishti & Barberis, 2016, p.5). The Oxford Dictionary tells us that Fintech is a mass noun (Oxford English Dictionary, 2016). More specifically this most authoritative source for British English suggests that Fintech are “Computer programs and other technology used to support or enable banking and financial services: fintech is one of the fastest-growing areas for venture capitalists”. In this context it may also be noteworthy that the most widely used dictionary and thesaurus for American English, Merriam-Webster, does not offer any definition for the term (Merriam-Webster, 2016).
On one popular Web sites in the Fintech sphere one can find the following definition “Fintech is a line of business based on using software to provide financial services.” (Fintech Weekly, 2016). Interestingly enough on that very Website reference is made to Wikipedia which – at least today – provides a different definition. On another blog from the finance world one can read a definition provided by Harry Wilson of Claro Partners: ”FinTech is an ecosystem of startups” (Wilson, 2015).
We could almost indefinitely continue this exercise of extracting definitions for the term Fintech from various authors. Yet, already from this very short although not representative selection of definitions, we can conclude that there is a vast range of meanings of the word Fintech: from “computer programs” and “other technologies” over “line of business” and “ecosystem” to an “industry”. This plethora of connotations makes it hard, if not impossible, to distil one commonly accepted explanation.
Interestingly enough even some of the biggest consultancies which certainly employ some of the smartest minds on the planet shy away from defining the term Fintech. Regularly one can find reports on Fintech related topics which do not provide any definition of the term Fintech itself; see for instance the McKinsey report on the effects of Fintech on banks by Dietz, Khanna, Olanrewaju & Rajgopal (2015) or the BCG report on the opportunities Fintech provides to corporate banks by Dany, Goyal, Schwarz, Berg, Scortecci & Baben (2016).
Definitions change over time
The second reason, why it is so inherently difficult to define the concept of Fintech is because definitions change over time. Also here we have some analogies. As an illustration think about the expression “information technology” (IT). In the early days of computing IT stood for items such punched tapes and cathode ray tubes. Today, however, we much rather associate things such as Motion User Interfaces, Bots and the Internet of Things with IT. Consequently, it is also safe to assume that the expression Fintech undergoes change. The definition provided by Investopedia pays tribute to this fact: “Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions. Since the end of the first decade of the 21st century, the term has expanded to include any technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment and even crypto-currencies like bitcoin.” So, for the authors of Investopedia, Fintech was originally an expression describing banking backend technology, but widened over time to also encompass technological innovations in financial services and related areas (Investopedia, 2016). Following the authors of Investopedia Fintech is not just a mere industry, but also a technology and an expression for innovation.
The big difference of a small article
So far we have been talking about “Fintech” – without prefixed article. However, during conversations, but also in texts one also regularly encounters the expression “a Fintech”. Is there a difference between “Fintech” and “a Fintech”? If so, what is the difference? To my experience people typically refer to a Fintech company or more specifically to a Fintech start-up when they talk about “a Fintech”. Hence, the difference is the “level of analysis” as the scientist would say. As explained above “Fintech” without article typically relates to an entire a group of objects whereas “a Fintech” is just one single entity. This apparently small difference by the prefix “a”, can give rise to serious misunderstandings. To a politician, for instance, it will make a world of difference, whether he or she is asked to support creating an industry cluster or even entire industry or just one single firm. The same goes for a venture capitalist albeit with opposite signs.
Definitions vary across languages
Fourth and last, confusion about the term Fintech emerges from the fact that definitions can vary across languages. To illustrate this fact, I recommend to take a look at the various definitions of Fintech provided by different language versions of Wikipedia. The Italian site, for instance, states that Fintech is the “provision” of financial products and services using information technologies [“La tecnofinanza, o tecnologia finanziaria (in inglese Financial Technology o FinTech) è la fornitura di servizi e prodotti finanziari attraverso le più avanzate tecnologie dell’informazione (TIC)”] (Wikipedia, 2016b).
By contrast, the German Wikipedia definition of Fintech suggests that Fintech is an umbrella term for “modern technologies in the area of financial services” [“Finanztechnologie (auch verkürzt zu Fintech bzw. FinTech) ist ein Sammelbegriff für moderne Technologien im Bereich der Finanzdienstleistu ngen”] (Wikipedia, 2016c).
The French Wikipedia version is much closer to the English one, yet it does not define Fintech as an industry, but more loosely as an “area of activity” [“La technologie financière, ou FinTech, est un domaine d’activité dans lequel les entreprises utilisent les technologies de l’information et de la communication pour livrer des services financiers de façon plus efficace et moins couteuse”] (Wikipedia, 2016d).
Hence, just by comparing across languages one can already fathom the potential for misunderstandings. While the Frenchman may be talking about Fintech as a business segment, the German may be speaking about technologies, the Italian about a delivery channel and the native English speaker may refer to an entire industry. Being aware of potential pitfalls is all the more important as the term Fintech is derived from the English words Financial Technology and also used as such in various other languages. Thus people may automatically assume that they talk about identical things whilst they are not. In addition one should bear in mind that Fintech is a global phenomenon. Running into questions of semantics across languages may happen easier than anticipated.
Coping with ambiguity
However, we can live with this ambiguity in definitions. In fact we have been living with this ambiguity for years, if not decades, in other fields of business and academia. For example, think about the term “strategy”, “innovation” or “business model”. We use them on a daily basis, yet we have not established one common definition for any of them. Hence, having not one single definition for the word Fintech has not and should not prevent us from using it. However, when talking about Fintech we should make clear to our audience what we mean by Fintech. Providing a little explanation for our audience may therefore significantly improve the efficiency of communication and reduce the potential for misunderstandings. If you want to be extra polite you may also want to explain to your vis-à-vis why you use one specific definition and not another.
Once more I want to stress that none of the definitions provided above are right or wrong as such. Rather than that they are more or less useful in certain contexts. The definition I provided above, “Fintech is an industry made up of organizations using novel financial technology to support or enable financial services”, is very similar to the one provided by the Wharton Fintech Club and which is being promoted by the English Wikipedia site. Yet, I prefer to use the more broadly defined word organization instead of company. Companies are typically profit seeking and hierarchically organized. More and more often, however, we see non-hierarchical organizations such as The DAO to play a major role in the Fintech domain (The DAO, 2016). I purposely want to include these organizations in my definition. What is more, I tightened my definition in comparison to the Wharton definition by extending it for the word “novel”. I did this because otherwise the more comprehensive Wharton definition would also include just any incumbent bank running on Cobol-coded host systems as they are using this (admittedly ancient) technology to be more efficient. Lastly, I added the verb enable to my definition of Fintech as I am convinced that Fintech is not just about enhancing efficiency, but also more fundamentally about enablement. The distributed ledger rendered possible by Blockchain technology or micropayments made available through telecommunication systems are just examples for theses empowering technologies. Attention should be paid to the fact that innovation emanating from Fintech can be anything from purely complementary to highly disruptive. If the innovation is barely supporting an existing business model in financial services it is likely to be complementary, whereas it will receive the label disruptive if it jeopardizes existing business models.
I am well aware of the fact that the definition I use is far from perfect. For instance, it does not provide definitions for its components. Hence, one could rightly ask, “So what do you specifically mean by ’industry’ and what by ’novel’”? And how do you delineate ’industry’ from ’ecosystem’?”. Moreover I am certain that also the definition I use nowadays will change over time with the advancement of technology and the evolution of business. Last but not least, there are many terms up and coming that constitute for spin-offs of the overall Fintech theme. Among those are “InsurTech”, “WealthTech”, “RegTech”, just to name a few. Time will show how are they will be used.
Nicolas Steiner, one of the founding members of Level39 recently shared an anecdote about a meeting with a couple of French speaking experts from the telecommunication industry who asked him whether Fintech stood for “the end of technology”. The reasoning for that being that they believed that Fintech was short for the French expression “la fin de la technologie”. I hope by providing and spreading sense making definitions of Fintech we will encounter less and less of such misunderstandings in the future.
Spiros Margaris, who is often referred to as one of the Key Influencers of Fintech scene, once stated “Fintech will never disappear, only some fintech startups will disappear.” No matter which definition was used here, it is almost safe to say that this statement will come true.
*At this point greetings go out to Nasir Zubairi who is considered to be one of the big Fintech minds of Luxembourg
Chishti, S., & Barberis, J. (2016). The FinTech Book: The Financial Technology Handbook for Investors, Entrepreneurs and Visionaries. Chichester, UK: John Wiley & Sons Ltd
Dany, O., Goyal, R., Schwarz, J., Berg, P. v. d., Scortecci, A., & Baben, S. t. (2016). Fintechs may be corporate banks’ best “Frenemies”.
Dietz, M., Khanna, S., Olanrewaju, T., & Rajgopal, K. (2015). Cutting through the FinTech noise: Markers of success, imperatives for banks. In G. B. Practice (Ed.): McKinsey & Company,.
Fintech Weekly. (2016). Fintech Definition. Retrieved from https://www.fintechweekly.com/fintech-definition
Investopedia. (2016). Fintech. Retrieved from http://www.investopedia.com/terms/f/fintech.asp
Merriam-Webster. (2016). fintech.
Oxford English Dictionary. (2016). fintech. Retrieved from http://www.oxforddictionaries.com/definition/english/fintech
The DAO. (2016). Overview. Retrieved from https://daohub.org/about.html
Wharton Fintech. (2014). What is FinTech? Retrieved from https://medium.com/wharton-fintech/what-is-fintech-77d3d5a3e677#.kczb2jawk
Wikipedia. (2016a). Financial Technology. Retrieved from https://en.wikipedia.org/wiki/Financial_technology
Wikipedia. (2016b). Tecnofinanza. Retrieved from https://it.wikipedia.org/wiki/Tecnofinanza
Wikipedia. (2016c). Finanztechnologie. Retrieved from https://de.wikipedia.org/wiki/Finanztechnologie
Wikipedia. (2016d). Technologie financière. Retrieved from https://fr.wikipedia.org/wiki/Technologie_financi%C3%A8re
Wilson, H. (2015). The new shape of FinTech is making the world a better place. Retrieved from https://www.finextra.com/blogposting/11518/the-new-shape-of-fintech-is-making-the-world-a-better-place
Professor Dr. Patrick Schüffel
Haute école de gestion Fribourg
Institute of Finance
Chemin du Musée 4
[posted on LinkedIn on July 20th]
Who truly coined the phrase “Banking is necessary. Banks are not.”
Personally, I give Bill Gates credit for many a thing. Without his technology vision and his business acumen our daily lives would look totally different today. Yet, despite many sources on the Web claiming so, I give him no longer credit for the statement “Banking is necessary. Banks are not.”. After some tedious research on the Internet as well as in literature data bases the most convincing source of this quote became for me the former chairman and CEO of Wells Fargo, Mr. Richard M. Kovacevich. See Nocera, Joseph (1998): Banking is necessary-Banks are not. Fortune. May 11th, Vol. 137, Issue 9, p.84.
However, should you have any hard evidence proving the opposite, please do drop me a comment. Thanks!
Dr. Patrick Schüffel, A.Dip.C., M.I.B., Dipl.-Kfm.
Haute école de gestion Fribourg
Chemin du Musée 4
PwC Press Release, 21 April 2016
According to the PwC Luxembourg Report, the Grand Duchy is an emerging FinTech innovation hub
FinTech, a game-changing alloy of technology and finance, blends innovation-focused technology companies with traditional financial sector players. The merger of these two different business approaches, the tech and the traditional one, is the bedrock of the future financial sector landscape. Luxembourg, with its modern financial institutions, is well positioned to take reigns of the FinTech revolution.
Adapting to change: rising FinTech awareness in Luxembourg
With its vibrant ecosystem of financial institutions, technology companies, R&D centres, and a highly diversified and specialised economy, Luxembourg is an emerging FinTech innovation hub. “The country already provides factual support to innovation by encouraging private and public funding, and by building up a true start-up support ecosystem: the government put FinTech as one of the six key domains of the Digital Lëtzebuerg Strategy launched in 2014, aimed at turning Luxembourg into a digital nation, and mandated Jeremy Rifkin to examine and advise on how the Grand Duchy can leverage its FinTech potential” says Gregory Weber, FinTech Leader at PwC Luxembourg.
The Grand Duchy provides an attractive ecosystem not only for FinTech companies, but for business in general. Adding its innovative and responsive regulatory environment, Luxembourg is the epitome of a FinTech aware business environment. Local market players seem to perfectly understand that by embracing the FinTech business model, the Grand Duchy is on the right path to further strengthen its recognition and reputation among investors, clients and the start-up community.
“Internet, mobility, social networking and the rise of price comparison websites have changed the game over the past decade and have created a new generation of customers who demand simplicity, speed and convenience in their interactions with financial providers and even with their peers” highlights Gregory Weber. Traditional market players have started adapting to new market demands. The need to meet changing customer expectations with new offerings (resulting in an increased focus on the client experience) is top-of-mind for 86% of Luxembourg respondents when asked about the most important impact of FinTech on their business.
Business at risk: 26% of the traditional financial sector in Luxembourg may be lost to FinTechs
According to the survey, nearly all (94%) respondents from the traditional financial industry believe that part of their business is at risk of being lost to standalone FinTech companies. Incumbents believe that more than a fourth part (26%) of their business could be at risk due to further development of FinTech, though FinTech companies anticipate that they will be able to take over only 10% of incumbents’ business (compared to 33% globally). “In this regard, the asset & wealth management industry is feeling particular pressure from FinTech companies” adds Gregory Weber.
On the other hand, insurers in Luxembourg may be underestimating the threat posed by FinTech with an estimated share of business at risk of only 10%, compared to 21% for global insurance participants.
However, not only are traditional financial industry providers concerned about losing part of their business to FinTechs, they are also aware that their ways of working and product offerings will be challenged and possibly transformed.
Blockchain: high on the agenda in Luxembourg, but still underexplored
Blockchain represents the next evolutionary jump in business process optimization technology. If blockchain gains wider acceptance, it could lead to significant changes in back-office roles, as ownership could be transferred without the need for intermediaries and reconciliations would disappear once there is a shared ledger that all parties agree on. “In Luxembourg, the majority of respondents (60%) recognises blockchain’s importance and is much more willing to respond to blockchain when compared to global respondents (except for asset & wealth managers). However, none of the respondents declares being extremely familiar with the technology. Only 17% believes being very familiar with it while one in five Luxembourg industry players is not familiar with blockchain at all” highlights Gregory Weber.
The ability to collaborate, at both a strategic and business level, with a few key partners could soon become a competitive advantage of Luxembourg financial industry.
How is the Luxembourg financial sector dealing with FinTechs?
Almost half (44%) of Luxembourg financial sector players believes that FinTech is integrated at the heart of their corporate strategies. However, more than 50% either does not have a fully aligned corporate FinTech strategy or FinTech does not have any role or impact within the strategic corporate agenda. There is no clear industry-wide trend in terms of how traditional players deal and engage with FinTechs. More than a third (34%) engages in joint partnerships with FinTech companies, 31% buys and sell services to FinTech companies, 14% rebrands purchased FinTech services (white-labelling), 14% launches their own FinTech subsidiaries, one in ten establishes start-up programs to incubate FinTech companies and 7% sets up venture funds to fund FinTech companies. Surprisingly, 21% of Luxembourg participants does not deal with FinTech at all. When both parties (traditional financial and FinTech companies) are asked about the biggest impediments when dealing with one another, incumbents name regulatory uncertainty (68%), IT security (45%) and differences in operational processes (45%). FinTechs, on the other hand, are mostly concerned about different management culture when dealing with incumbents (67% of respondents) and IT security (50%) is also a concern.
While the responses from Luxembourg participants are generally aligned with the global ones, the required financial investments for Luxembourg FinTechs when dealing with traditional financial companies (50%) clearly stand out. Globally, this issue is FinTechs’ smallest concern, raised only by 28% of survey participants.
“FinTech is re-shaping the financial sector at such a pace that those players that stay behind today might not even recognise the sector in five years. With their potential, Luxembourg players, however, have all the capabilities to stay at the heart of the FinTech revolution. The golden rule: start embracing FinTech now” concludes Gregory Weber.
Legend:Gregory Weber, FinTech Leader PwC Luxembourg – Nicolas Mackel, CEO Luxembourg for Finance – Jonathan Prince, Co-Founder Digicash Payments SA – Romain Godard, Partner PwC Strategy& – Patrick Schüffel, COO, Saxo Bank AG – Nasir Zubairi, Entrepreneur/Investor
Notes to Editors:
About the report :
The 2016 PwC Global FinTech Survey gathers the view of 544 respondents from 46 countries, principally Chief Executive Officers (CEOs), Heads of Innovation, Chief Information Officers (CIOs) and top management involved in digital and technological transformation, distributed among five regions.
The Luxembourg-focused cut was based on the responses of 36 respondents from the financial industry’s major market players.
For a copy of the report and to see the full results, please visit www.pwc.lu