Happy Birthday, Switzerland, where Wealth Management 2.0 is being built on transparency

Tomorrow is Swiss National Day. I feel very lucky to be living in this wonderful country and to be celebrating the birthday up in those glorious Swiss mountains.

I think Switzerland is becoming one of the world’s major Fintech Hubs. I have to be careful not to take sides in the Fintech Capital of the world debate. Daily Fintech is global blog. I am a Brit who married into an American family and lived in Asia before moving to Switzerland. Efi Pylarinou, another Founding Partner of Daily Fintech Advisers who covers Investing Tech is a Greek who used to work on Wall Street and now also lives in Switzerland. Rick Huckstep another Founding Partner who covers Insurance is based in London. The soon to be announced fourth partner is based in America. I will be moderating a session at SIBOS (in Singapore in October) on Fintech Hubs.

So while being as neutral as Switzerland I do want to celebrate Switzerland’s growing strength in Fintech on Switzerland’s birthday.

Most of the Fintech Capital of the world debate is media driven. The reality of global trade is the emergence of specialization. To put it more simply, it is “horses for courses”.

I do not think it is a big deal where the venture funding is located. Capital flows to innovation. If it temporarily flows the other way you can be confident that will change. Today we have that temporary dislocation where Swiss investors fly to London to meet Swiss entrepreneurs. With all those great Swiss hotels, one assumes that a congenial meeting place could be found within the country 🙂

With so many Family Offices and Wealth Managers based in Switzerland, the trip to London to invest in innovation may be a temporary phenomenon.

What matters is innovative customers who will use the new services created by entrepreneurs. That innovation is what attracts both entrepreneurs and investors. That is the single native ingredient. Everything else (including capital and talent) can be imported.

Switzerland scores low when it comes to innovation from mainstream consumers. The reason is the lovely problem that things mostly work pretty well in Switzerland, so consumers have little reason to innovate. American consumers have been great early adopters. So have UK consumers. In different ways, consumers in Asia and Africa are driving innovation today.

However in Wealth Management (aka Private Banking) there is both a great motivation to innovate as well as the expertise to innovate effectively.

The easy world of Swiss Wealth Management 1.0 is morphing into something more complex to which we can affix the 2.0 label. This transition is full of opportunity and risk. Therein lies the motivation to innovate.

Swiss Wealth Management 1.0 was more Private than Banking. To keep transactions secret, banks offered numbered accounts and “hold all mail” capability. Keeping the money hidden was more important than delivering good investment returns.

Post FATCA and GATCA, that secrecy USP has gone. Now the challenge is how to deliver good risk adjusted returns.

The transition from Swiss Wealth Management 1.0 is the transition from secrecy to transparency.

I don’t mean transparency to governments. That is the realm of FATCA, GATCA and KYC/AML. Swiss Wealth Managers will be as transparent as they have to be by law – no more and no less.

I mean transparency to customers (aka investors/traders). This is where Swiss Wealth Management has a big opportunity to rebrand and offer a unique value proposition.

To understand this one has to go back to those wild days in September 2008 when the global financial system had a cardiac arrest (and nearly died). The problem – the clogged arteries if you like – was very simply the lack of transparency.

Look at the two biggest problems manifested during the Global Financial Crisis. Both were fundamentally transparency issues:

1. Subprime Mortgages. There is nothing wrong with Subprime Mortgages – if the risk is priced properly. If the data is opaque, risk cannot be properly priced. In other words, an investment bank saying “buy this lovely bundle, it is AAA, no really it is AAA and we know its is AAA because we say it is AAA” is not transparent. Transparent means being able to drill down to whatever level of granularity you want and apply whatever algorithms you want. In short – the issue is transparency and transparency is a data problem.

2. Madoff. He said “our returns are consistently x% per annum and no, I cannot tell you how I do that because it is a secret”. In short – the issue is transparency and transparency is a data problem.

This is NOT a regulatory issue. Sure, regulators are demanding greater transparency as a baseline. However any bank that sees that as a cost burden only is missing the point. The opportunity is to get ahead of the regulators by offering a level of transparency that customers would be asking for if they knew that it was technically possible – which it is.

The reason that Switzerland can seize the initiative on transparency is that Switzerland was only a bit part player in the Global Financial Crisis. Of course there were Swiss banks that bought and sold Subprime Mortgages recklessly. Of course some Swiss Wealth Managers failed to do their due diligence on Madoff. However that was true everywhere. Switzerland was certainly not the epicenter of the Global Financial Crisis. That dubious prize went to New York and to a lesser extent London.

Of course that does not stop a bank or Fintech venture in New York or London rising to the challenge of offering transparency to investors . However it may be harder to do this in London or New York because ventures arise out of a culture and the trading culture that led to the Global Financial Crisis in those places is all about opaqueness – the opposite of transparency.

It is hard for incumbent to give up the revenue streams from the old way of doing things.

Swiss Banks have a hard time giving up the revenue streams related to secrecy. Consider something as simple as banks keeping customer statements and correspondence in-house. “Hold all mail” was not only essential in delivering secrecy, but was also a significant revenue stream where banks could more easily bundle other fee-based services such as brokerage.

This is the same as in all technology driven disruptions. Newspapers for example, had to keep print revenue going as long as possible while concurrently investing in digital lines of revenue.

Global Wall Street (which includes Canary Wharf in London) has an equally difficult time giving up the revenue streams based on opaqueness to investors. This is why there is so much resistance to the regulatory push to move derivatives from OTC to exchanges. Once data moves to exchanges it becomes transparent and low cost. Therein lies massive opportunity to add value higher up the stack as well as massive risk to the incumbents.

Swiss banks are invested in secrecy to governments. They are not so invested in opaqueness to investors.

Switzerland should be a major Fintech hub. It has both the Fin and the Tech. It has a big and vibrant financial services business – the Fin – and great universities turning out the people who create the Tech. It is also a big deal that Bitcoin is legal tender (thanks to the legacy of the WIR which I spotted this week “in the wild” in a sports shop in a remote mountain village)

That legal status for Bitcoin as well the legal protection for privacy is why we see ground-breaking moves such as Xapo moving their HQ from Silicon Valley to Switzerland and Ethereum choosing Switzerland as the jurisdiction for their Foundation.

Fintech is of course a global market. However Fintech is different from other markets because of regulation. Bits don’t stop at borders, but money has to show its passport. In Switzerland that means Bern, the sleepy old capital that is half-way between those two vibrant financial centers of Zurich  and Geneva. The Fintech MeetUps in Zurich (German-speaking) and Geneva (French-speaking) take place in English as befits a global market and are run by people with deep background in Wealth Management (John Hucker in Zurich and Al Gaillard in Geneva).

Fintech grows out of a culture. The Fintech that grows in New York and London will suit both institutional trading as well as innovative consumers. The Fintech that grows in Singapore and Hong Kong will suit the innovation coming from the growth of Asia. The Fintech that grows in Switzerland will suit the massive wealth management business. Where this intersects with institutional trading, Switzerland Fintech will be competitive with New York and London.

I think a single-minded focus on transparency for clients (whether individual or institutional) will be the key to Switzerland rebranding its financial services business and competing with London and New York.

I am heading out to enjoy those Swiss mountains.