In November 2016 Switzerland’s Federal Department of Finance received approval to introduce a fintech license. Aimed at enticing start-up companies to enter the market, the license will increase competition in the Swiss wealth management space.
On a macroeconomic level, low taxes and a relatively stable economy make Switzerland an attractive market in which to do business. But for start-up fintech companies, current regulations can pose barriers to entry. Subject to final approval, the license will grant exemption from some of the regulations Swiss banks currently face.
For example, the minimum capital requirement of CHF10m needed by Swiss banks would be reduced to CHF300,000 under the fintech license, making it possible for start-ups to compete more easily. Since eligible companies must have limited acceptance of client assets (less than CHF100m in deposits) and no lending activity they would not be covered by Switzerland’s deposit protection scheme, which lends these companies to less stringent requirements.
In addition to the new license, a sandbox is also proposed that would allow fintech start-ups to trial their offering so long as the total deposits they take do not exceed CHF1m. For approved companies, a license would be granted by the Swiss Financial Market Supervisory Authority, the country’s financial regulation arm.
Wealth management start-ups in the fintech space will benefit from the proposed license. In 2014, the median financing round in Switzerland amounted to CHF1.8m ($1,800,500), with investments of less than CHF1m ($1,000,280) being the most common. Lowering the minimum capital requirement eases pressure on start-ups in terms of making decisions such as whether to offer shares, which could impede future financing rounds. The proposed sandbox will also provide the opportunity to test business models and receive guided advice on how to best bring the company to market.
With the proposed license, start-ups will have a greater chance of entering the Swiss market, which will help drive competition. Although these start-ups will not pose a threat to incumbents initially, they will differentiate among themselves in order to remain competitive, with the aim of one day competing with established players. Differentiation will most likely take the form of addressing items that deter individuals from investing through a wealth manager. Our 2016 Global Wealth Managers Survey shows that nearly a third of HNW investors in Switzerland choose to invest directly in order to avoid management fees. Start-ups that recognize the need for more affordable wealth management solutions and provide an attractive pricing model will pique the interest of individuals who prefer to invest with a wealth manger but are dissatisfied with the cost of management fees.
By Nicole Douglas, Wealth Management Analyst