Switzerland’s financial markets are crucial to its economy and prosperity. The country is seen as a safe haven for investors because of the strong Swiss Franc and its world-famous financial centre. The global financial crisis, subsequent regulatory changes and ongoing digitalisation have radically transformed the country’s financial sector. The COVID-19 crisis and the consequent extension of low interest rates will further test the industry. The regulatory framework should take competitiveness into account to a larger degree, not least due to the likely increased competition from financial centres such as the UK (London) and the Channel Islands. Companies need to ramp up their digitalisation strategies and optimise their liquidity management.

Our recommendations

Here are what policymakers and businesses need to focus on - improved regulations, accelerated digitalisation - to power up Switzerland’s financial sector in the decades ahead.

Policymakers

    Rethink the regulatory framework for the financial sector

    Rethink the regulatory framework for the financial sector

    Switzerland’s financial sector has been through turbulent times recently. Between 2007 and 2017, the proportion of GDP earned by the sector fell from almost 13% to 9%, and the global financial crisis prompted substantial restructuring and consolidation in banking. The regulatory framework should take competitiveness into account. Changes worth considering in this context might include abolishing stamp duty and reforming withholding tax. Switzerland needs to make use of the scope it has to remain competitive in relation to other countries and, particularly, the EU. This is even more important as a result of Brexit, there will be increasing competition from London as it seeks to build on its reputation as a major financial hub. But Switzerland faces obstacles in differentiating itself from the EU: as well as using the domestic scope available to it, it needs access to other markets – and particularly to the EU market, which requires at least some harmonisation with EU rules. One contentious issue is stock market equivalence for the Swiss stock exchange. A satisfactory solution here will likely depend on a successful conclusion of the Swiss-EU framework agreement. In terms of market access for private banks, if the bilateral negotiations do not succeed in securing more favourable conditions, Switzerland should rethink its approach to incorporating EU regulations and consider a more pragmatic approach to better serve growth regions.

    Smart regulation of cryptocurrencies

    Smart regulation of cryptocurrencies

    Switzerland has been central to the development of bitcoin and other cryptocurrencies, notably as the location of major start-ups in this area. The Swiss authorities have also been receptive to new digital currencies and distribution ledger technology. As a result, the country has become a market leader in this small but promising area, but there are now growing calls for tighter regulation.

    Any regulation must not hamper technological progress: the financial sector must be able to make use of the benefits of new technologies, including greater efficiency, reliability and security in payment transactions and in asset management. However, the sector must also contain the risks associated with them and ensuring protection against abuse. Greater transparency and security could increase consumer confidence and help the sector to make an earlier breakthrough.

    No expansion of state investment controls

    No expansion of state investment controls

    Switzerland is one of the OECD’s most important investment locations: foreign direct investment totalled 147% of Swiss GDP in 2019, and direct investment abroad by Swiss investors was even higher, at 167% of GDP. Cross-border direct investment is extremely important to Switzerland: it promotes productivity and keeps the country competitive. In recent years, though, there have been growing calls for greater investment controls and the Swiss government has been has been obliged to consider introducing controls in particular in response to China’s growing economic power.

    Greater state controls on investment would jeopardise Switzerland’s attractiveness as a place to do business, hamper direct investment as well as represent a considerable intervention in property and ownership rights. Switzerland already has safeguards in place to protect key sectors, such as infrastructure and energy, where there is a clear public interest, so it is sensible to protect these sectors against foreign takeovers. Compared with other countries, Switzerland can hardly be accused of a laissez-faire approach regarding investment controls. Indeed, the OECD FDI Restrictiveness Index shows that the country actually regulates foreign direct investment more strictly than the OECD average. However, today’s data-driven economy poses new challenges. If telecommunications infrastructure is not adequately protected, for example, then data protection and data security are vulnerable in such areas as 5G. Switzerland must consider how it will manage foreign 5G supply chains and improve its cyber security.

    Formulate clear standards for sustainable finance

    Formulate clear standards for sustainable finance

    Businesses are placing increasing emphasis on sustainability, including those in the financial sector, as investors become more and more concerned about sustainable practices. Growing numbers now want to see investments reflecting sustainability criteria, rather than solely economic criteria, including reducing harm to the environment and promoting social participation. Some international organisations are attempting to set standards and targets in this area, with the EU taking the lead, but such regulations are taking longer than planned. Switzerland should consider becoming involved in such projects or formulate its own initiatives, with the state focusing not on regulation and subsidies, but rather on changing the framework within which the sector operates. Given the delay of the EU regulations, there is an opportunity for Switzerland to be first to introduce clear guidelines and regulation. It would be helpful for the government to adopt sustainability standards and define clearly what sustainability means. Consistent standards could create the necessary momentum to promote sustainable investment and establish clear guidance for businesses, making Switzerland a pioneer of sustainable investment.

Business

    Improve digital banking maturity

    Improve digital banking maturity

    The COVID-19 crisis gave many Swiss banks that had not already ventured into online banking a strong incentive to do so. More and more customers now want to bank online and, according to a Deloitte study, Swiss banks are well placed to offer such services. The study assesses the digital banking maturity of 238 banks across 38 European countries, analysing a wide-ranging list of online functions spanning the entire customer experience. Switzerland ranks second of the 38 countries surveyed, making it a market whose banks provide extensive online functions. In particular, Swiss banks have the offer a wide range of functions. However, they do less well in terms of the user experience, where there is plenty of room for improvement.

    The same applies to open banking, an area where Swiss banks already demonstrate considerable digital maturity. Open banking offers substantial potential and is likely to transform the banking sector, so it is particularly important that Swiss banks improve their capabilities in this area. The COVID-19 pandemic has substantially boosted consumer demand for online solutions in retail and private banking, therefore it is vital that banks use this opportunity to develop their online services to enhance the customer experience. Even more important, they need to devise a convincing multichannel strategy that includes hybrid solutions, especially for banking transactions such as mortgages, credit cards and consumer credit. Such a strategy is essential to underpin banks’ efforts to win over all their customer groups.

    Make better use of the cloud

    Make better use of the cloud

    Use of cloud technology is likely to be crucial for Swiss banks in future. Cloud-based services create new scope for innovative business models, and shifting banking infrastructure from bricks-and-mortar systems to a cloud environment is likely to provide a substantial boost to the competitiveness of the entire Swiss financial sector. Until now, though, Swiss banks have been slow to embrace cloud-based systems, primarily because of concerns about regulatory compliance and data security. In 2019, the Swiss Bankers Association published guidance and recommendations to support the banks in expanding their provision of cloud-based services. Swiss banks now need to seize the opportunities the cloud offers and take a structured approach to minimising risk as they introduce more cloud-based services. They must have a clear strategy for using cloud-based services that supports their business objectives, defines risk management and organisational challenges, and includes a business case that justifies the financial investment required. In addition, cloud providers and its ecosystem also need to adapt their offering to comply with financial services regulation and reassure banks and insurance companies planning to adopt the technology.

    Expand digital payment systems

    Expand digital payment systems

    The importance of cash has declined steadily over recent years while the use of digital payment systems, such as debit and credit cards and smartphone apps, has expanded. The COVID-19 pandemic has accelerated this trend, with many companies outside the finance sector – including retail businesses – switching to digital payment systems. Some have made significant changes very rapidly. In the long term, companies will need to embrace digital payments and consider new, future-proof systems, including facial recognition, which enables customers to make payments without having a wallet, purse or smartphone with them. Companies need to trial such systems at an early stage and identify and tackle the data protection issues that arise. Equally important, Swiss businesses should not rely on international providers but innovate to come up with their own, future-proof systems. Hybrid solutions and broad-based services will be needed to satisfy the wide range of customer preferences. For example, around one-third of customers experimenting with online payment systems for the first time during the pandemic report that they will be returning to non-digital systems once the crisis is over. Hybrid solutions would offer scope for savings in the banks’ volume business. The banks could use the savings to improve customer services in more complex transactions. However, both online and in-person features will need mesh seamlessly.

    Optimise liquidity and financing management

    Optimise liquidity and financing management

    The COVID-19 crisis has seen the business volumes and revenues of many companies plummet and those with previously limited finances have been plunged into a liquidity crisis. The Swiss government worked with the country’s banks to launch a programme of business loans, enabling many companies to access emergency help relatively rapidly and without much bureaucracy. What is important now, though, is for these companies to prioritise their working capital management and take a proactive approach to ensure a smooth recovery. Companies need to consider developing not only a sound financing structure, but a detailed short- to mid-term liquidity plan.

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Contacts

Jean-François Lagassé
Jean-François Lagassé

Financial Services Industry Leader

+41 58 279 8170

Simon Walpole
Simon Walpole

Insurance Lead Partner

+41 58 279 7149

Patrik Spiller
Patrik Spiller

Wealth Management Industry Lead Partner

+41 58 279 6805