Jean-Francois Lagassé, consolidation is progressing. A large-scale merger project has come up again. Will the Swiss financial center gain in importance?
Jean-Francois Lagassé (pictured above): I am sorry to disappoint you. I rather believe that the weight of the Swiss financial industry as a whole in relation to gross domestic product will continue to decrease unless Swiss innovation in the sector accelerates or geo-political tenses increase. Instead, globally active fintech players will increasingly eat away at the earnings of Swiss banks.
«Switzerland will lose without a shot of innovation»
If you look at the payments sector: Apple or Google Pay are globally compatible, while the local banking solution Twint is only applicable in Switzerland. Or the credit card business: neobanks like Revolut are now influential competitors.
Your colleague Reto Savoia focused on the importance of Swiss wealth management.
In this discipline, I am also rather confident. The Swiss private banks will continue to benefit from global economic and social developments and the stability of the country. And yes, size can be an advantage in wealth management. Nevertheless, the Swiss financial centre needs a huge boost in innovation – otherwise, it will lose its importance.
What kind of innovation boost?
The Swiss banking centre should consider how, for example, blockchain technology can be used to scale a business or activity on a truly global scale. Libra, the crypto-currency of Facebook, is one such example. Look at China: there, the central bank is working on a China Coin, and Ant Financial has an internationally recognized payment system with Alipay. The Chinese are way ahead of us went it comes to digital and electronic payments. The strategy is to provide an alternative to the US dollar as a sovereign currency.
Do scenarios such as a merger between UBS and Credit Suisse or a cross-border merger with another major bank not seem like an act of helplessness?
This is a different issue: it is primarily about competition with U.S. banks, which the European banking sector has lost over the last ten years. No European bank is still among the top ten global investment banks. The Americans consolidated immediately after the financial crisis.
«Champions of Europe need to emerge»
On the one hand, protectionism prevails in Europe and governments protect so called national champions. However, we are now seeing some movement, for example, in Italy and Spain, where major mergers have already taken place. The European banking consolidation will truly happen when cross-border deals take place.
Do you doubt that there will be cross-border consolidation within Europe?
It will certainly be difficult given nationalistic interests. However, consolidation is and remains necessary as the regulation and digitization of banks is costly and scale is required. The fact remains: the European banking sector is constantly losing value because individual institutions are generating return on equity that lower than their capital costs. If this continues, sooner or later, American or Asian financial groups will emerge and act as consolidators. It is important that «European champions» emerge.
Within Switzerland, consolidation among private banks is underway. Is there a threat of uniformity of offers and services if more small and mid-sized institutions disappear?
Consolidation among private banks is not so far advanced that one can speak of too much standardization. It also has two faces: a first wave of foreign banks selling their Swiss private banking business after receiving state aid during the financial crisis. Examples are Lloyds, ABM Amro or the Royal Bank of Scotland with Coutts. More recently it is the Swiss-owned banks that lack scale, capital base, and access to global network that are the object of the consolidation.
Is Reyl such an example?
The Reyl Group has developed very well in the 15 years since Francois Reyl and his partners took over the helm. At that time, Reyl was an asset manager with nearly half a billion Swiss francs of client assets. Now the bank manages a remarkable amount of 14 billion francs.
«Reyl needed balance sheet, Intesa has it»
This is the success of a niche strategy that focused on entrepreneur clients and offers family office and corporate advisory services. However, Reyl being independent needed a stronger balance sheet to continue to fuel its growth. With Intesa Sanpaolo as a partner, Reyl no longer has this problem and can now grow faster.
Both of these factors are fundamental to the need for innovation in Swiss banks. Now banks are more like «late adopters» anyway, but now the urgency is immediate. What is stopping the banks?
Reto Savoia: Empirically speaking, important innovations practically never come from large companies with pronounced hierarchical structures. Another point is – and the still very comfortable salaries paid in Swiss banking speak for themselves – that the level of suffering in the banks is not yet high enough. Until a few years ago, a certain arrogance towards fintechs and other new market participants prevailed, even in the executive floors.
Jean-Francois Lagassé: When we look at banks 30 years ago, they were really at the top of their class in terms of technology systems, for example. Today they are lagging behind other industries. One reason for this is that banks and insurers lost touch with technology after the financial crisis due to the adoption of new regulation. In the meantime, fintech and the big tech companies have disrupt and continue to disrupt their businesses. They are catching up, but are still struggling to adopt new technologies, apply them profitably and find means to develop new business.
What do you mean by that exactly?
Look at data management: banks and insurance companies still know little about their huge amount of data. Used correctly, banks and insurance could mutate into marketplaces that manage all financial matters for their customers. But companies are still in the early stages of that journey.
Do financial services companies even have the ability to innovate on their own or do they have to rely on consultants like you?
I think that the use of new technologies in banks and insurers has recently focused on becoming more efficient and automating a number of business processes. Going forward focus of the banks and insurers should be directed towards possible cooperation with infrastructure providers, fintechs, regtechs, and insurtechs of this world. Cooperations or even takeovers, are also proven methods of accelerating internal innovation in other sectors, such as the pharmaceutical industry.
Reto Savoia: If you take a broader perspective, you might conclude that the Swiss economy is an incremental rather than a radical and disruptive driver of innovation. I can also see from my children's timetable how late technology and business topics are included in the curriculum. Furthermore, Swiss culture lacks the element of striving for size and significance - this has advantages and disadvantages. We tend to cultivate an engineering culture; we improve and optimize things. But «think big» and «go bold» is less the Swiss way of thinking.
Reto Savoia has been the CEO of Deloitte in Switzerland since June of last year. He is a tax expert who previously led Deloitte's client and industries practice in Switzerland. An economics and law graduate, Savoia is also a board member of Deloitte North West Europe and part of the leadership of Economiesuisse.
Jean-Francois Lagassé leads Deloitte's financial practice in Switzerland and is the consulting firm's global wealth management practice head. He has conducted countless merger-and acquisition as well as valuation mandates in his more than 20 years of consulting experience, most recently the takeover of Reyl through Intesa Sanpaolo.
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