20 September 2016
A definition usually applied to the technology startup scene that is disrupting the financial services sector by using new software, global investment in Fintech has skyrocketed in recent years, from $930 million in 2008 to over $12 billion by the beginning of 2015.
Whereas many financial institutions previously were wary of new technology companies, and the technologies themselves, the tide has clearly turned over the past 24 months. In fact, you could even call it a tsunami.
That includes in Luxembourg, where the government is supporting the rise of Fintech by offering reduced tax packages.
In the Grand Duchy’s push to become increasingly digital, it also established the “Digital Luxembourg” initiative in 2014. Within this program, the government and various private investors launched the Digital Tech Fund – a public-private seed fund – whose primary focus is to make venture capital investments in advancing areas such as Fintech, cybersecurity, big data, digital health, satellite and telecommunications, and the “Internet of things.”
Luxembourg is unique for startups, with an established and strong financial services industry complemented by modern infrastructure and an internationally oriented ecosystem that provides access to global customers and assets.
Major financial institutions and support industries here are now jumping in the game in an effort to avoid being disrupted in the near and long-term future by smaller players in an increasingly competitive market.
According to a recent report by the Association of the Luxembourg Fund Industry (ALFI) and Deloitte Luxembourg, one of the driving factors in this shift has been customer demographics.
The report finds that, by 2030, Millennials and Generation X will account for half of the country’s total assets under management.
Such investors bring a new Internet-based culture featuring mobility, social networking and price comparison websites, all of which contribute to this greater focus on simplicity, speed and convenience in interactions with financial services.
In a related survey carried out by PwC, 86% of Luxembourg respondents agreed that the need to adapt to changing customer expectations with new offerings is the most important impact of Fintech on their business.
New customer preferences and expectations will lead to a significant push in robo-advice, a shift in marketing strategies and a change in how portfolios are customized to individual circumstances.
These generations, with priorities different than their elders, will continue to reshape the financial services sector: PwC further found that more than half of Luxembourg financial sector players believe that they do not have a fully aligned corporate Fintech strategy. Yet 94% of respondents say that a portion of their business is at risk of loss to standalone Fintech companies.
Luxembourg, however, has adapted by emerging as a Fintech innovation hub. Financial institutions, R&D centers, Fintech incubators, a highly diversified and specialized economy, and technology companies have helped the country create a promising landscape not only for Fintech companies but also for related businesses.
In addition, there is a gap that Fintech companies can fill, providing Luxembourg’s large organizations and custodians with ancillary services and specialized tools.
Among its advantages, Luxembourg offers a testing ground through its global financial center that provides easy access to senior decision-makers in the financial services industry and government.
Ultimately, the defensiveness that once characterized banks’ attitude in Luxembourg towards disruption has been replaced by an understanding of the value of combining resources and leveraging strengths with Fintech companies.