Swiss FinTech Market: The Growth Engine Sputters

In recent years, the Swiss FinTech industry has developed from a niche market into a relevant provider of innovative solutions for the Swiss financial industry. The majority of companies offer solutions in the area of investment management and banking infrastructure. Their business models are predominantly based on technologies from the areas of process digitization, automation and robotics. This Swiss FinTech market also grew last year: at the end of 2020, a total of 405 Swiss FinTech companies were based in Switzerland. This represents an increase of 23 companies (plus six percent) compared to 2019, according to a recent study by the Lucerne University of Applied Sciences and Arts.

Swiss FinTech market: growth slows down

Despite the rising number of FinTech companies based in Switzerland, there are also initial signs of a slowdown in the sector's development in 2020. "Since 2015, the growth rate has never been this low," says Thomas Ankenbrand, study director and lecturer in Banking and Finance at the Lucerne University of Applied Sciences and Arts. Other indicators pointing to a slowdown in the Swiss FinTech sector include the median total capitalization of companies falling and the median number of employees remaining constant. A look at the workforce of Swiss FinTech companies also shows that the proportion of their employees who are not based in Switzerland but abroad is rising steadily. At the end of 2020, this group already accounted for more than a third of all employees of Swiss FinTech companies.

The good conditions in Switzerland are tending to deteriorate

Switzerland continues to fare well in an international comparison with regard to the prevailing framework conditions for FinTech companies, according to the FinTech Hub Ranking of the HSLU study. "However, conditions have tended to deteriorate in recent years compared to the other leading FinTech ecosystems," explains Ankenbrand. This is particularly true of social and economic environmental factors. Further analysis shows that the quality of the environment has a clear positive correlation with the size of a FinTech sector. "Taking care of these general conditions is not only important for the resident FinTech sector, but also for the Swiss financial industry as a whole," says the FinTech expert.

FinTech is slowly arriving in the real world

A large part of the volumes, whether in payment transactions, loans or investments, is still handled by traditional financial institutions and individual established FinTech companies. It can be seen that Swiss banks have become more efficient over time. Gradually, the effect of digitalization is becoming clear. This is due, among other things, to FinTech solutions, the majority of which, according to the findings of the study, are aimed at business-to-business transactions, which also includes innovative solutions for established banks. In general, traditional financial institutions have been able to increase volumes under management while keeping costs stable. "However, this development is not reflected on the revenue side," said Thomas Ankenbrand. According to the study's authors, this indicates that the efficiency gains are being passed on directly to customers.

Open Banking is realized via platforms

Driven by pressure on business models, technological advances, changing customer needs and regulatory requirements, open banking, in which banks and third-party providers exchange certain data or services with each other, is considered a significant trend in the financial industry. However, a survey of IT managers at Swiss banks presented in the study shows that the pressure to open up bank interfaces as well as the need for corresponding solutions, especially in the business-to-consumer area, is relatively low. Other obstacles to the implementation of open banking solutions are the high costs and effort involved, as well as concerns about IT security and the lack of standardization. The latter is, at least in part, due to the fact that Open Banking in Switzerland is market-driven and not imposed via binding guidelines (PSD2) as in the European Union. As a result, various platforms have emerged that enable the secure and standardized exchange of data and services. These platforms are also increasingly being used by banks, especially in corporate banking.

"Skin in the game matters"

Venture capital activity is the indicator with the highest significance in the FinTech hub ranking. In this respect, Switzerland is basically well positioned. Indicators of this are the volume of venture capital invested in the FinTech sector and the low level of difficulty perceived by Swiss FinTech companies in raising new funding. In total, the sector was able to raise around 260 million Swiss francs in new capital in 2020. Total capitalization is also important for individual companies. In addition to revenues and the number of employees, this shows a significant correlation with the valuation of a FinTech company, as shown by a quantitative analysis in the study.

Source: Lucerne University