Reflections on the Future of Swiss Banking
The financial sector is currently facing one of its biggest challenges with the Corona pandemic: A collapse in economic growth, high unemployment, credit defaults and volatile stock markets. Furthermore, the old problems such as pressure on margins, increasingly intense competition, the shift of the customer interface towards innovative fintechs and the ubiquitous digitalization have not yet been solved. These developments challenge traditional business models of banks, but also offer opportunities for those who are willing to reinvent themselves.
The digital transformation has long since begun and is a journey with many facets for which there is no universal formula for success. Banks have recognized that they will continue to need a direct relationship to their customers and must provide them with digital services that offer added value by integrating a diverse set of data. However, this insight is far from being fully realized in existing and new business models, and there is a lot of catching up to do, both in contrast to fintechs and to other countries. Large universal banks often lack a clear commitment from the board of directors. The digital transformation is changing all areas of the organization. It must be directed from above and implemented by the management in the form of strategic initiatives. However, the shortage of 40,000 ICT specialists in Switzerland by 2026[i] will be slowing down developments in areas such as artificial intelligence, blockchain technology or the Internet of Things (IoT).
Rising Financial Centers
Change usually happens slowly. Only rarely do we find ourselves confronted with unprecedented developments like what we have been experiencing since the lockdown as a result of the Corona pandemic. In general, the speed of change has increased rapidly over time due to digital information and communication technologies. The importance of financial centers can well illustrate this principle: Augsburg, a small city in Germany, was an important financial center for four hundred years between the 13th and 17th centuries – an eternity by today’s standards. In contrast, European financial centers have lost much of their importance in the relatively short period from 2007 to 2020 alone, as the GFCI ranking shows.[ii] Winners, in terms of financial sector development, business environment, infrastructure, human capital and reputation, are Beijing, Shanghai, Singapore, Hong Kong but also Guangzhou and Shenzhen. Europe is continuously losing in terms of its share of world GDP, while countries such as India and China are growing at above-average rates. Professor Klaus Wellershoff identifies five reasons for this development: Financial centers follow economic activity, margins shrink in competitive markets,[iii] concentration follows from homogeneity,[iv] entry barriers create further concentration,[v] and innovation is key.[vi] The latter is now widely recognized, thanks to Joseph Schumpeter’s theory of creative destruction. As long as marginal costs continue to fall due to ever cheaper information and communication technologies, digitalization will continue and crowd out firms that do not adapt. European banks, in particular, have not developed their digital innovation capacity sufficiently and now find themselves under threat.
In China, conglomerates have emerged over the past ten years that no longer recognize company boundaries. Diverse data from different industries are being linked with the sole purpose of offering customers individualized solutions. Non-banks provide more and more financial services via their digital platforms. There are already more than 6,000 fintechs in China, 150 of them with a banking licence. It is no coincidence that some of these companies are now gaining global importance. The combination of digital innovation and open business models is decisive for global competition.[vii] Another success factor is the systematic support provided by the Chinese government. For example, China aims to become the leading country in the field of artificial intelligence by 2030. Company founders, investors and management are thus required to embrace digitalization.
In addition to local competition, our financial institutions are also faced with the challenge of deploying technology strategically and thus offering innovative services to customers in Switzerland and, where appropriate, internationally. To remain competitive, Swiss banks must act now. The current situation has shown more than ever how important it is to be digital. The more proactively you approach change, the higher the chance of success.
Private Banking Is the Pillar of the Swiss Financial Center
Performance for the client and profitability for the client advisor remain the main objectives in asset management. Increasing regulatory requirements make growth and returns increasingly challenging to achieve, especially for small private banks and independent asset managers. With the information and documentation obligations arising from the regulator, banks are requested to knows everything about their clients and must be able to provide information at any time. Further regulations for independent asset managers are forcing established companies to change their traditional business models, which have been legally compliant for the past 20 years. Experts agree that consolidation in the market will intensify. The focus on core competencies and the supplementation of the range of products and services through cooperations and mergers of asset managers will increase. One-man-shows, former client advisors who migrated from big banks, took their clients with them and continued to look after them as independent asset managers, will become extinct. Many small companies can no longer meet the high risk and compliance requirements. This often means additional investment in applications and digital tools, which leads to financial problems for many small companies.
For decades, private banking has been considered a guarantor of success for the Swiss financial center. It can remain a safe haven for wealthy clients – even after the relaxation of the Swiss banking secrecy. Criteria such as political and economic stability, the strong Swiss franc, trust and consistency of monetary policy will continue to be essential and cannot simply be integrated into a mobile app. However, stability sometimes reflects two sides of one coin. For example, the Swiss National Bank (SNB) has increased the money supply by factor 13 since the financial crisis, while in the EU it has “only” tripled. If the banking system implodes because monetary policy is too expansionary and the money supply too high, this will have an impact on the confidence in the Swiss franc and the Swiss financial center. The rapidly growing number of wealthy people from Asia will not automatically find their way to Switzerland, because private banking is currently not good enough, as Professor Wellershoff notes.[viii] The growth in new money for Swiss private banks in the coming years is more likely to come from repatriation and inheritance.[ix]
The banking country Switzerland still has 248 licensed banks today (a decline of 25% within ten years), and of the 2,400 independent asset managers, a quarter will disappear in the next few years.[x] In Germany, too, only 150-300 of the 1,600 banks currently in existence will have survived by 2030.[xi] If we do not tackle change and renew business models, traditional private banking will lose its importance.
Private banks have the problem of integrating the implicit information from client advisors into a system that spans the entire organization. Still, many client advisors see clients as their assets rather than those of their employers. On the other hand, this is a process in which, in particular, long-standing client advisors with less affinity for technology need support. Also, external data must be linked with private client information to generate even more client value. Gaps in knowledge and the associated mastery of complexity are reasons why some will get hit hard by the wave of consolidation.
Future Business Models
It is impossible to predict how business models will look in the future. However, it is possible to predict the trends they will follow: customer centricity, availability anytime (on demand) and anywhere (mobile-first) with simultaneous physical presence at the user’s location and transparency are just some of them. In formulating their strategies, banks must increasingly take into account the needs and behaviour of millennials as customers, employees and investors. Therefore, moving away from pure shareholder value towards corporate social responsibility and sustainability is the way to go. Differentiation will take place through customer services that seamlessly integrate physical contact and algorithms and chatbots.
The individualization of customer needs and the use of digital trends have long been an integral part of the business models of Google, Amazon, Facebook, Apple and, in Asia, Baidu, Alibaba and Tencent. They reach out to their customers right where they are: on their digital platforms. In order not to leave the field to them without a fight, digitization strategies are among the most important new leadership tasks. The digital transformation, however, goes far beyond the digitization of existing business processes and includes a re-evaluation and, if necessary, a redesign of the customer experience and business model. It is crucial to involve employees in the transformation process.[xii] The culture and values in the digital world are changing what in turn causes discomfort for many employees. A cultural change in the organization takes a long time and should not be underestimated. Fears must be taken seriously. Because if employees avoid change, the transformation cannot advance. Accompanying change management measures are indispensable.
Since many of the skills required for digital transformation are not necessarily among the core competencies of banks, it is advisable to call in specialists. They could support the design of the transformation process itself and for the provision of the offering, thereby expanding value creation with the help of an organically growing ecosystem. Targeted coaching, for example, helps to identify the need for transformation and to draw up a precise roadmap. In this way, the transformation can be approached systematically, and the organization can be prepared for the future. Companies can hardly adapt fast enough to all trends that affect them simultaneously. The continually changing demand from customers and the competition from non-banks and fintechs from Asia call for new, open approaches. Agile forms of organization, collaborative business models and ecosystems are recommended strategies.
The Business Engineering Institute St. Gallen defines an ecosystem as a dynamically developing community of independent social and economic actors. Interaction and value creation takes place via coordinated technologies, norms and rules within the network.[xiii] Platforms provide the necessary organizational and transactional infrastructure for the exchange of resources and services. The promise to place the customer at the center is an essential prerequisite in this context. However, many financial actors still display strong self-centeredness, in the sense of “we make” and “we control”. Such an attitude does not help to design ecosystems. Particularly in light of cost pressures, banks should take action on this issue. Focusing on core competencies and entering into cooperation agreements pays off. The i.AM Innovation Lab, a Credit Suisse spin-off, shows that an open innovation approach in asset management can serve as a speedboat or accelerator for digital innovations. The company uses design thinking, lean and agile methods. These approaches would hardly work in a large organization.
Open banking should be seen as a great opportunity. Community initiatives such as the OpenBankingProject.ch are particularly interesting because they create financial ecosystems and generate added value for fintechs, neo-banks and traditional banks alike. The cantonal bank of Thurgau has been engaged in the concept of open banking. Their journey led to the breaking up of conventional value chains within product development, transaction management, customer access and client advisory. With innovative APIs (application programming interfaces), business areas of companies from outside the industry can also be integrated and add value.
New business models emerge from technological innovations. Millennials and especially Generation Z want digital solutions and like to interact in social networks. Every day that millennials work successfully with neo-banks creates trust in innovative solutions. This is why established banks have no time to lose and must deal with digital innovations and disruptive business models. Yapeal, for example, a new, fully digital Swiss bank, meets this demand. The company redefines financial services and offers community banking, with the crowd as a resource representing a vital part of the business model. It is the community consisting of clients that co-create value. Specifically, application functions, investment recommendations, tips and experiences can be shared. Thanks to artificial intelligence, the app adapts to the customer’s current lifestyle and supports them with smart savings goals. These can, in turn, be used by other participants. This reflects the trend towards a sharing economy, in other words, it means that customers share their data and help everyone to learn from each other. As a young company, Yapeal has no legacy – so it does not have to go through the digital transformation.
Connectivity and Data
Data sharing is a crucial success factor, as the quality of the value proposition depends heavily on the processing and linking of internal and external data. The example of cross-industry collaboration from China, presented at the beginning of the article, shows how vital connectivity and data exchange are. Swiss financial institutions lag behind their competitors, particularly when it comes to data management. In Switzerland, for example, data is not used for innovative service models or targeted offers. In the investment area, for example, this would be extremely important, especially for wealthy clients, as their investments are often multi-layered and the banking relationship is correspondingly complex. More and more data from a wide variety of sources must be processed in real-time. Clients, regardless of their region, want a holistic view of their investments. Here, Credit Suisse offers an example of successful innovation, since in its role as an incubator it co-financed the Singapore Fintech Canopy at a very early stage. The startup offers a platform for account consolidation and analysis. In addition to connectivity, data quality is equally important. After all, reliable and targeted analyses can only generate added value for customers if large volumes of data from different sources are accumulated and processed efficiently. Artificial intelligence and machine learning are increasingly important for the monetization of data.
Innovative business models that put data in the center of economic activity conflict with data protection laws which are comparatively strong in countries like Switzerland. But this does not necessarily promote innovation. One argument that is often put forward against the extended use of data is that Swiss clients expect their banks to handle their data confidentially. However, big-tech firms provide evidence that people accept technology if it can satisfy specific needs. If there is a benefit for disclosing private data, people usually agree.
The Corona crisis let us realize the urgency of digital tools and as a consequence give digitalization efforts an upswing. Further, digitalization serves as a transformation driver, blurring company boundaries and leading to service-oriented business logic and network-oriented value creation. Digitalization is urgently needed and can no longer be postponed. The digital transformation as an overarching process will change the entire financial sector in the long term and will continue to occupy it for a long time to come.
Banking is not an end in itself, but a means to an end. It is about satisfying customer needs and not primarily about offering banking services. In the future, the focus will no longer be on the product, but on the individualized service used. For the next generation of clients, an app is the most critical point of interaction. They will use it to obtain all kinds of services – regardless of whether these are provided by a bank or a social media or e-commerce company. Ecosystems will, therefore, play a more significant role. They offer banks options for delivering their services in various areas – as a product supplier or infrastructure service provider. By positioning themselves broadly and offering services outside the financial sector, banks can benefit from current trends. While community banking approaches are still in their infancy, Apple launched its credit card, Facebook with Libra a new currency, and Amazon a checking account. Alipay and WeChat Pay established payment services via QR codes that revolutionized the way people pay. Deal with digitalization and disruptive business models now, because one thing is sure: in just a few years banking will no longer be the way it is today. Business transformation leadership is an important responsibility to meet the challenges.
[i] IWSB: ICT-Fachkräftesituation: Bedarfsprognose 2026. ICT-Berufsbildung Schweiz, 2018.
[ii] GFCI: The Global Financial Centers Index 27, March 2020.
[iii] See Léon Walras’ theory of perfect competition.
[iv] Siehe Harold Hotelling’s theory of spatial competition.
[v] Siehe Joseph Stigler’s theory of barriers to entry.
[vi] Klaus Wellershoff: Europe and the Financial Centres–What Happens?, BankersCom, 26 September, 2019.
[viii] Ibid. 3
[ix] BCG: Global Wealth Report, 2018.
[x] Swissbanking: Bankenbarometer 2019, August 2019; Credit Suisse & Universität St. Gallen: Swiss External Asset Managers Industry Report 2017, 2017.
[xi] Oliver Wyman: Bankenreport Deutschland 2030, 2018.