The radical change coming to Financial Services; Fintech in Switzerland

Financial Services accounts for 10% of GDP and 5% of employment in Switzerland and the country is a global leader in Wealth Management. So, what happens here really matters and what is happening is earth-shattering (and we normally avoid hyperbolic language on Daily Fintech). 

I mean radical in the positive sense of getting to the root of things (the word radical comes from the Latin word for root).  Switzerland recently got the World Economic Forum #1 rank as the most innovative country; you cannot be innovative without embracing change and doing things that seem radical, weird or outside the box to most people.

I am highlighting this because our usual image of Switzerland is so different – staid, conservative, resistant to change. 

At SIBOS in Geneva, where 8,000 bankers and their vendors gathered for the annual gathering of the Fintech faithful, the staid, conservative side was much in evidence, but we also hung out with some of those radical crypto valley guys (Innotribe has done a great job to attract them as part of its SIBOS rejuvenation).

Once you dig below the surface, Switzerland is a fascinating mix of contradictions.

On the surface, two stories resonate with people outside Switzerland. One is the Heidi mountains dressed up to entertain tourists. The other is evil bankers ready to launder money from all the bad actors around the world.

However consider these radicals who have called Switzerland home – Lenin, Einstein, Freddy Mercury (see this statue to this pioneer of gay liberation in Montreux). Look below the Heidi surface packaged for visitors and you see a deep strand of independent radical thinking.

In this post we look at three strands to this independent radical thinking as they affect financial services:

– Crypto Valley startups at the nascent stage of the Blockchain and Decentralization movement.

– The first country where Bitcoin may go mainstream.

– The first country where Fintechs will be able to compete with Banks on a level playing field.  

Put these three strands together and you get earth-shattering change.

Crypto Valley startups at the nascent stage of the Blockchain and Decentralization movement

Crypto Valley is a branding phenomenon, but it is also real. 

Paul Graham (Y Combinator) famously said that to build an innovation hub, all you need is “nerds and rich people”. The Zurich and Zug corridor (aka Crypto Valley) has plenty of both. However I add the coda to Paul Graham’s law  that the rich people should have made their money in something tech related; Paul Graham takes that for granted in Silicon Valley. Those decades of recycling big exits is Silicon Valley’s real “unfair advantage”. We are starting to see these second generation entrepreneurs emerging in Switzerland. For example there is Dorian Selz of Squirro (and Local.ch in past) and Richard Olsen of Lykke (and OANDA in the past). However, although these are great entrepreneurs and there are other examples, on this front Switzerland can only be playing catch up with Silicon Valley.

What is fascinating about the Blockchain and Decentralization movement (and it is a movement and not just a new technology or a new business model) is that it fundamentally changes the game in 3 ways:

– you don’t need Wall Street East (the bulge bracket Investment Bankers clustered around NYSE and NASDAQ) or Wall Street West (the Momentum Capitalists in Silicon Valley fka as Venture Capitalists) to raise money. You do it using some decentralized token based crowdfunding approach (we explore the background to this trend here and a lot of money has already been raised this way).

– Decentralization means you do NOT need to build giant server farms in order to scale. Your server farm is the machines owned by your users. So you don’t need to raise so much money (so you don’t need Wall Street East and West so much). This also means that you can undercut the incumbents by a big amount and still make plenty of money; that is the definition of disruptive.

– the business models are so disruptive (such as a zero commission e-commerce system) that nobody with a stake in the current way of doing things will go there. True permissionless public blockchains, whether using Bitcoin, Ether, ZCash or any other crypto currency,  are totally different in one key respect – the incumbents do not dictate the pace of change, consumers do.

There are so many amazing companies in Crypto Valley that it is hard to make a list because I am sure I have missed some great ones (please tell me if I have, that is how we do our research):

– Lykke (run by the aforementioned Richard Olsen, revolutionizing how assets are exchanged online).

– Monetas (the technology powering the Tunisian e-dinar and run by a visionary Founder CEO called Johann Gevers). For a broader take of Government thinking about Bitcoin read this. 

– Ethereum (Needs no intro, but just in case here is our coverage dating back to summer 2014 when I first learned about it) 

– Xapo. Last year we reported on an event that took the innovation business by surprise – the first Silicon Valley company (Xapo) moving to Switzerland (as opposed to the normal flow going the other way) because the laws in Switzerland are better for the protection of cyber assets (which is what Xapo is selling).

Shapeshift (enabling a multi-cryptocurrency world by making altcoin swaps easy).

Bitcoin Suisse (making it easy to buy/sell Bitcoin in Switzerland)

Sweepay (came to prominence as the technology behind the SBB Bitcoin launch)

Here is a list of some lesser known ones.

The first country where Bitcoin may go mainstream

Last year we reported on an obscure fact, but one that is critical to Bitcoin going mainstream in Switzerland. At a MeetUp in Geneva in March 2015, somebody mentioned Switzerland being officially a multi-currency country and that led me to understand the WIR. This is an obscure currency in Switzerland used by very few people that was created after the Great Depression. Despite its obscurity, it is legal tender in Switzerland. So other currencies can be legal tender. That includes the Euro; often prices are displayed in Euro as well as Swiss Francs. The WIR is pegged to the Swiss Franc, so it is not disruptive – it is a local currency like the Brixton Pound. More interesting for us Fintechers is that Bitcoin is also a legal currency in Switzerland because the WIR paved the way.

Adoption is NOT in countries with failing currencies

Many people were drawn to Bitcoin by dreams of stateless trust based on math replacing more authoritarian governance. So the meme got established that Bitcoin would first go mainstream in countries like Argentina; we debunked that theory here.

Then we indulged in science fiction fantasies around Greece or Scotland adopting Bitcoin in a breakaway from the Euro or the Pound.

None of this came to pass.

The use of Bitcoin in Switzerland could not be more different. The Swiss love the Swiss Franc, as do investors globally who are concerned with long term wealth preservation. The Swiss Franc is as far removed from being a problem currency as you can get.

Recent news from Switzerland indicate that exactly the opposite may come to pass – mainstream adoption happens first in a country where citizens have an unusually high amount of trust in their currency and the government that issues the currency.

Two news items show Bitcoin moving mainstream in Switzerland:

– Swiss Railway ticket booths become Bitcoin ATMs. SBB (short hand for Swiss Railways) is a a beloved part of everyday life in Switzerland and is Government owned. Even rich people use public transport in Switzerland.  That background matters for American readers who might be tempted to dismiss this as Amtrak offering Bitcoin – that would be both unlikely and probably ineffective. So when SBB moves into Bitcoin it is a seriously big deal. It sends a signal that Bitcoin is respectable and accessible. This is not a pilot – it went live nationally on Friday 11 November.

– Residents in Zug will be able to pay taxes and government services in Bitcoin.This still a pilot and limited to one area. If it gets extended and is copied by other regions it will be a game-changer. It sends a signal that using Bitcoin to pay is respectable and useful in day to day life. Load up at SBB train station and pay your parking or speeding fine (and make mental note to use the car less and the train more).

The first country where Fintechs will be able to compete with Banks on a level playing field thanks to the upcoming Fintech Licence.  

At a Press Conference on Wednesday 2nd November the Swiss Finance Minister, Ueli Maurer,  outlined the direction. This is not yet law, but it is clearly an officially approved direction. The plans include a consultation draft by the beginning of 2017 and draft legislation sent to the Swiss parliament by the middle of 2017.

These are the key features  that Fintechs and Banks need to understand:

 – No “maturity transformation” allowed. This is mandated Asset Liability Management and that eradicates systemic risk (no more bailouts) and favors Market Place Lending without any lending from their own balance sheet (for some background, please go here).

– Deposit Only License. You can provide deposit services, but not lend. You can accept up to SF100m once licensed. Separating Deposits from Lending is a bold and radical move in a world of NIRP (and with Vollgeld coming up as a referendum, see later). Deposits is a nascent area of Fintech innovation.

– Up to CHF 1 million via sandbox innovation area. This allows a startup to build an MVP and get to PMF before investing in being regulated

– minimum of SFr300,000 in capital (vs SF10m for banks). If a startup has got to PMF that is a very manageable hurdle.

– not covered by deposit protection (read, no risk to taxpayers). It is a buyer beware free market. I assume this leaves it up to Fintechs to create a Bankruptcy Remote Vehicle (US terminology) to reassure their customers.

–  crowdfunding grace period in settlement account. This defines when donors can withdraw the money. Today it is 7 days. The proposal is to raise it to a 60 days. which would give the company greater security.

– No limit to how many lenders or investors for crowdfunding services.

– You must abide by money laundering rules applied to banks. 

In background is an upcoming populist referendum called Vollgeld. The Fintech License is a bit like Vollgeld for Fintechs by separating Deposits from Lending.

Switzerland is taking steps that are very conducive to innovation and is looking like a leader in the regulatory realm – a prospect that few would have dreamed of a year ago.

You cannot make an omelette without breaking eggs

Banking has not changed for hundreds of years. This kind of transfer of power and money was never going to happen in an orderly fashion – eggs will be broken. I think the transfer of power and money will mostly be to the people. This will be Fintech4Us (the original name of Daily Fintech). I think this is true, but I could be wrong. But one thing I am confident of is that the pace of change can no longer be dictated by the incumbents.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.