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Switzerland's fintech boom puts pressure on traditional banks

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Switzerland's fintech boom puts pressure on traditional banks

The exponential growth of the Swiss financial technology sector in recent years has increased the pressure on traditional banks to attract new clients and retain existing ones, according to two recent studies.

While banks see fintechs as less threatening than big technology corporations or digital-only lenders, fintechs have sped up digitalization in the sector, which is disrupting financial intermediation — a space traditionally dominated by banks.

Lenders are increasingly worried about the impact of digitization and heightened competition on their ability to retain clients, according to the latest sector survey of the Swiss National Bank published Aug. 27.

"Customers are less likely to maintain a permanent relationship with a single financial institution in the future, and will instead increasingly turn to different intermediaries from the banking and nonbanking sectors to find the best service," the SNB said.

Friends rather than foes

The two biggest emerging competitors in the race for new clients are big techs and digital-only banks, while fintechs remain third because banks still see them more as potential partners rather than direct rivals, the survey shows.

Partnerships between banks and fintechs have proved to be a winning strategy as their services are complementary, according to the Swiss Bankers Association's latest Banking Barometer study published Aug. 29.

While fintech startups offer "an ideal platform for developing and swiftly implementing new business ideas," banks have expertise in regulatory matters and the safekeeping of assets and data, the SBA said. The difference in business focus between fintechs and banks is already reflected in regulation given that fintech companies that operate outside the core banking, interest margin business, have been able to apply for a so-called fintech license from the beginning of 2019, the SBA said.

Although collaboration between banks and fintechs can help traditional lenders digitize their offerings and increase innovation, the challenge on the banking sector is considerable.

There is a big gap between the traditional banks' current and targeted level of digitalization, the SNB survey found. This is the case especially with larger institutions that have set themselves more ambitious goals in that area than smaller players.

Digital challenges

The gap "implies some uncertainty with respect to the implementation of digitalization strategies and the extent of the cost reductions, but also with respect to the banks' ability to retain clients," the SNB said.

For smaller banks, the challenge is more whether the advantage of having "a local presence, loyalty and personal contact with customers will be sufficient to compensate for potential differences in process efficiency," according to the central bank.

Switzerland is overbanked with the number of bank branches per resident above the international average and the overall number of banks per capita also ranking high. As a result, the banking sector has been shrinking for years, with smaller regional and private banks hit hardest. This trend is expected to continue over the medium term and digitalization is likely to contribute to the consolidation, according to the SNB.

At the end of 2018, the number of Swiss banks had fallen to 248 from 253 a year ago, according to the SBA.

Fintech grows, banks disappear

Fintech, on the other hand, is likely to expand further owing to the Swiss regulators' friendly treatment of the sector and the country's ambitions to establish itself as a global blockchain hub.

The number of fintech companies in Switzerland reached 356 at the end of 2018, an increase of 62% year over year, the SBA said in its study, citing data by the Institute of Financial Services in Zug. The growth spurt was strongest in the distributed-ledger technology sector where the number of startups jumped more than three times within the year, the SBA said.

Since December 2018, the Swiss Federal Council has been working on legal options for DLT-based trading and the transfer of DLT assets. DLT is the underlying technology used for blockchain and initial coin offerings, which enable investments in crypto assets.

Switzerland will soon launch the world's first fully integrated trading, settlement, and custody infrastructure for digital assets, the SBA said.