• Reto Gareus, Partner |

Although “Crypto” has experienced severe headwinds and digitalization in the financial sector seems to have lost momentum, a few recent developments indicate that the digital revolution won’t stop at the gates of the financial service industry.

Last week, while the Swiss National Bank (SNB) issued their study of digitalization and Fintech at Swiss banks, well-established players announced plans to heavily invest in a new digital service offering. At the same time, Switzerland issued the first bank licenses for so-called crypto banks. This is sending a strong signal that market participants want to see new technologies fully integrated in the banking sector.

The market snapshot – will the big fish eat the small fish?

Comparing services planned by the new Fintech market participants to the result of the SNB’s study reveals that the gap between the traditional and Fintech models couldn’t be any greater.

Traditional banks are facing increasing competition with each other and with so-called “neo banks” which use Fintech to provide leaner services. Two brand new market participants represent this changing landscape as they approach their clients based on their specific cravings to use new technology. And, one of the new participants even aims to apply blockchain technology for anti-money laundering purposes.

When looking at the findings of the SNB’s recent study, it appears traditional banks aren’t making the most of Fintech and digitalization. Despite facing increasing competition on all sides, there’s untapped potential.

  • Cost cutting. The SNB report’s findings show that banks aim to digitalize their services primarily to obtain a leaner business model to cut costs and only in second line to stay attractive for actual and future customers demanding different services from financial institutions than traditional banking services.
  • Size matters. A bank’s ability to digitalize depends greatly on its size and market position. Larger banks are better able to implement faster digitalization to a bigger extent. It’s no surprise that the big players lift their “sandbox” projects with significant investment – revitalizing the digital revolution and giving it the necessary substance and credibility to transform the financial industry.
  • Few rank new technologies a top priority. Interestingly, the study states that just a small number of banks regard blockchain or distributed-ledger technology as one of the most important innovative technologies for the next three years. The same applies to artificial intelligence, cloud computing and virtual reality which are all rated as only secondary importance.
  • Limited scope. Digitalization is most advanced in the payments area but not as developed as expected five years ago. According to the study, new technologies such as blockchain and Fintech solutions didn’t find their way into other areas and services provided by traditional Swiss banks.
  • Regulatory hurdles. The majority of banks in Switzerland regard the regulatory regime as sufficient according to the SNB’s study. However, action is required to regulate the legal basis and necessity for contracts to be physically signed for certain transactions. Without this legal basis, end-to-end digitalization doesn’t seem possible according to the study’s participants.

Anti-money laundering a major hurdle to Fintech

To help banks with laws and regulations to be followed the Swiss Bankers Association issued a revised version of the “Guide to the Opening of Corporate Accounts for DLT Companies”. While the guide was updated with regards to terminology and content, it still does not define any industry-wide minimum standards, but is intended to support the member banks in discussions with their clients.

And last but not least, FINMA published its “Fintech Dossier” online and at the same time specifies how it applies Swiss anti-money laundering rules to financial services providers supervised by FINMA in the area of blockchain technology. This adds another layer to the challenges new Fintech and blockchain financial intermediaries face when entering the Swiss market.

FINMA opposes traditional payment services involving cryptocurrencies where sender/recipient information (according to Art. AMLO 10) can’t be transmitted reliably within the payment system. FINMA has therefore chosen to follow a stricter application of anti-money laundering rules in blockchain banking. Institutions supervised by FINMA are only allowed to receive tokens of other wallets belonging to the same customer and send tokens to wallets held in the name of the customer as long as the sender/recipient information can’t be transmitted. FATF standards however foresee the exception that information about the client and the beneficiary must not be transmitted with the transfer of tokens as long as unregulated wallet providers are involved.

This means that in Switzerland establishing payment services in cryptocurrencies will require a more centralized crypto-system analogous to Swift – rather than the use of the decentralized system proper to blockchain technology.

Huge untapped potential

Banks and the Swiss regulator have to keep up their efforts in order to continue to play a central role in financial intermediation on the world stage. Especially as more and younger clients use services provided by market participants outside Switzerland such as Revolut, N26 and, maybe in the near future, cryptocurrencies issued by their favorite social media providers.

Digitalization and the need for Fintech solutions in banking seem to be more important than most of the study participants are willing to admit.

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