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InsideNOW

Luxembourg beyond COVID-19

New challenges or opportunities for FinTech companies?

Authors

Authors

Patrick Laurent - [Sponsoring] Partner - Technology and Innovation Leader - Deloitte

Francesca Messini - Director - FinTech Leader - Deloitte

Lynn (Yun-Chen) Cheng - Senior Consultant - Advisory & Consulting - Deloitte

Giulia Pescatore - Senior Consultant - Advisory & Consulting - Deloitte

Published on 28 July 2020

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As the COVID-19 pandemic continues to create uncertainty, many FinTech companies (FinTechs) are under stress on several fronts. In Luxembourg, many of the early-stage startups are reliant on proof of concepts with prospects, which now have shifted to focus on other more pressing issues such as reduced access to funding, and with the economic slowdown the client appetite is decreasing.

However, as the broader economy shifts from response to recovery, the pandemic may create new opportunities. As Luxembourg’s Finance Minister said in an address (1) to FinTech companies: “You might come up with new ideas that will show you not only the light at the end of the tunnel, but new ideas that might be the way to the success of tomorrow”.

This article shares an overview of how FinTechs in Luxembourg are tackling COVID-19 challenges and capturing newly emerging opportunities. In addition, we have invited Alex Panican, Head of Partnership and Ecosystem from the Luxembourg House of Financial Technology (2) (LHoFT) to share what he has seen during the crisis and his view of the market beyond COVID-19.

(1) Source: LHOFT—COVID-19 FinTech Briefing—Pierre Gramegna, Luxembourg Finance Minister

(2) The Luxembourg House of Financial Technology is a public-private sector initiative that drives technology innovation for Luxembourg’s financial services industry.

COVID-19, A NEW CHALLENGE FOR FINTECHS?

The COVID-19 pandemic has resulted in a critical economic slowdown worldwide and has radically changed many industry assumptions for 2020 and beyond. FinTechs were no exception and were directly affected.

Like every industry and company worldwide, the most immediate concern for FinTechs is to manage their financials through the current uncertainty. Conceivably, many have gone into overdrive responding to the crisis by shoring up their capital and implementing stricter cost-saving measures, including workforce reduction. As many of their business models for revenue are transaction- and volume-based, simply put, the strategy right now is to ensure that as many expenses as possible are variable and fixed expenses are minimized.

As Luxembourg FinTechs are mostly business to business (B2B) and regulation related (RegTech), who largely serve the financial industry and do not have business models that are highly dependent on transaction and volume, their businesses have not been affected on a major scale. Instead, a rethink of their solutions and strategies is required to collaborate with the traditional financial services industry. In addition, the government is helping FinTechs (amongst others) either financially or by sponsoring new projects during the crisis through different initiatives such as the COVID Fit4Start edition and #ReACT program by the House of Entrepreneurship.

FINTECHS, THE HEART OF THE DEVELOPMENT THAT THE FUTURE NEEDS

Despite the aforementioned effects, FinTechs are well placed to weather the storm due to their lean operating models and structures. For example, the total cost of operations of a challenger bank is much lower than a legacy bank with a large branch network. Challenger banks’ systems are cheaper to run, more flexible, and are built to scale resiliently.

The years preceding the pandemic already saw a rapid rise of FinTechs in different categories (e.g., payments, RegTechs and InsurTechs), and the outbreak has only emphasized the importance of digitization.

The current COVID-19 crisis has ushered in a new era for operating models, remote working and the collaboration of technology, and the financial services industry has realized how dependent and critical digitalization is to their competitiveness and sustainability as a business. Namely, no business continuity is without technology, and the FinTech sector offers solutions to business continuity issues including homeworking, cashless payments and new use of technology. Beyond COVID-19, FinTechs will be part of the solution; they are at the heart of what the future needs, and observing the shortcomings of the current system will help devise new systems for the future.

KEEPING AN EYE ON THE OPPORTUNITIES FOR THE SUCCESS OF TOMORROW

After COVID-19, FinTechs may be forced to rethink their business operating models, and the key question here is how to leverage both existing and newly developed assets to seize these new opportunities. It is apparent that social distancing is accelerating customers’ use of digital and online solutions; therefore, we could expect to see an increase in FinTech players in payments, e-signatures, cloud computing, cybersecurity and regulation. It is an opportune moment to aim big, and the rapid growth in Luxembourg’s FinTech landscape shows what is possible for the bold.

Expanding partnership strategy with legacy banks

The past few years have already seen an increase in large banks actively investing or collaborating with promising FinTechs. As the economy starts to recover from COVID-19, this trend is expected to accelerate, as legacy banks are more likely to acknowledge they need a greater degree of scaled collaboration with FinTechs to offer more digitized services and benefits to their customers.

Driven by the European revised Payment Services Directives (PSD2), LUXHUB emerged from the joint vision of four major Luxembourgish banks (BCEE, BGL BNP Paribas, Banque Raiffeisen and POST Luxembourg) in 2018 to provide an open banking application programming interface (API) platform for financial institutions in Luxembourg and throughout Europe. In early May 2020, LUXHUB secured additional internal funding of €7.4 million. The new round of funding will be used to accelerate the development of its proprietary open banking and open finance products, aiming to become a key catalyst of the European financial industry’s evolution towards open banking.

Payment and e-wallet services are expected to boom, digital identity and know-your-customer (KYC) services will likely prosper

While the COVID-19 lockdown was a particularly difficult time, it provided an opportunity to payment and e-wallet service FinTechs to demonstrate the added value of these services, especially to unbelievers of the benefits of digital payments. Not only do they allow secure cashless transactions but also guarantee the ability to pay at a safe distance.

The Italian digital payment leader Satispay, in its home market, has seen a +115% peak in consumer signups and +50% in merchant signups compared to the weeks before the lockdown in March. Since Satispay always planned to expand its business in Europe, it had already arrived in Luxembourg at the end of 2018 and originally planned to start its operations at the beginning of March 2020. However, due to the COVID-19 crisis, its official launch was delayed until April. Nevertheless, Satispay has successfully closed partnerships not only with big merchants, such as Auchan in Luxembourg, but also with more than 100 local merchants including bars and restaurants such as Urban Bar, Bistrot Beim Renert, Charles Sandwiches, Go Ten Bar, Njörd and Häagen-Dazs and Concept Partners, who are now collaborating with Satispay to offer their customers this contactless and secure means of mobile payment.

Simultaneously, the demand for payment solutions, digital identity, and KYC services will likely increase due to the significant recognition in digital payments and onboarding clients. MANGOPAY, headquartered in Luxembourg, is an end-to-end, white-label payment solution for marketplaces, crowdfunding and FinTech platforms that can be integrated seamlessly into their customers’ design. Today, over 2,500 platforms use MANGOPAY’s white-label APIs, and recent processing statistics boast about 10 billion accumulated payment transactions.

Another Luxembourgish FinTech platform operator, Finologee, together with Harmoney, a KYC solution provider from Belgium, announced the launch of a joint venture, KYC Manager, in May. It aims to bring to the Luxembourg market a ready-to-use digital customer onboarding and lifecycle management solution. This solution will enable financial institutions to further their digital transformation and reshape the way they manage their clients across the entire lifecycle, while also being fully compliant with local regulations.

Links between financial services and the healthcare industry

Last but not least, with so much heightened awareness of the importance of health and wellbeing, there are also increasing links between financial services and the healthcare industry, with customers seeking solutions at a safe distance. This could be another area for FinTechs with smart new solutions to explore.

Early in May, AXA Luxembourg launched a medical teleconsultation service. Seven days a week, from 9 a.m. to 5 p.m., a client can consult a doctor in Luxembourg via laptop or by phone if they have medical questions and, if necessary, obtain a prescription. Unlike other service platforms, this service will remain completely free of charge until the end of the health crisis for all of AXA Luxembourg’s customers with health, car or home insurance.

INTERVIEW WITH LHOFT, ALEX PANICAN, HEAD OF PARTNERSHIP AND ECOSYSTEM

HOW HAVE FINTECHS RESPONDED TO COVID-19 AND BEYOND?

How did LHoFT react to the COVID-19 situation?

As soon as the Luxembourg government announced the lockdown on 13 March, the LHoFT team brainstormed our response to the crisis and tactically began pivoting our activities online by focusing on three main pillars:

  • Business continuity: doing what we can to help ensure our FinTech residents and members are informed and have access to government support measures, general know-how, and business processes to minimize the impact on their business. For example, by facilitating digital meetings with our institutional partners and broader network, or just scanning their physical mail and sending it to them digitally. Critically, we compiled and kept live a "cheat-sheet" of all the various government support schemes with simplified and key information, as well as setting up information sessions with the relevant public sector stakeholders.

  • Community: daily calls with our ecosystem to check in with them, both personally and to hear how we could help their business. We also kept our monthly Fintech Friday alive, switching to a digital platform where our community could join, network with each other, and listen to a live DJ.

  • Education: we switched our workshops online and increased both their quantity and frequency. A variety of webinars were and continue to be organized with local and prominent international speakers and educators. The goal was to provide expertise to our entrepreneurs and help them fill gaps in their skill set both generally but also specific to the COVID-19 situation: e.g., workshops about selling online, digital communication, raising funds, recruiting, etc. We gave them access to key players in Luxembourg, like the Ministry of Finance, the Ministry of Economy, the Chamber of Commerce, Luxinnovation, ADEM and many others. Digital helped to bring a plethora of incredible international speakers face-to-face with the ecosystem, people we would not normally hear from or see in Luxembourg; for example, the Director of the IMF speaking about data, the Head of Blockchain Policy from the OECD, the Global Head of Wealth Management and the Insurance and Chief Strategy Officer from Group Santander, the Chief Scientist from AIG, etc.

How did LHoFT react to the COVID-19 situation?

As soon as the Luxembourg government announced the lockdown on 13 March, the LHoFT team brainstormed our response to the crisis and tactically began pivoting our activities online by focusing on three main pillars:

  • Business continuity: doing what we can to help ensure our FinTech residents and members are informed and have access to government support measures, general know-how, and business processes to minimize the impact on their business. For example, by facilitating digital meetings with our institutional partners and broader network, or just scanning their physical mail and sending it to them digitally. Critically, we compiled and kept live a "cheat-sheet" of all the various government support schemes with simplified and key information, as well as setting up information sessions with the relevant public sector stakeholders.
  • Community: daily calls with our ecosystem to check in with them, both personally and to hear how we could help their business. We also kept our monthly Fintech Friday alive, switching to a digital platform where our community could join, network with each other, and listen to a live DJ.

  • Education: we switched our workshops online and increased both their quantity and frequency. A variety of webinars were and continue to be organized with local and prominent international speakers and educators. The goal was to provide expertise to our entrepreneurs and help them fill gaps in their skill set both generally but also specific to the COVID-19 situation: e.g., workshops about selling online, digital communication, raising funds, recruiting, etc. We gave them access to key players in Luxembourg, like the Ministry of Finance, the Ministry of Economy, the Chamber of Commerce, Luxinnovation, ADEM and many others. Digital helped to bring a plethora of incredible international speakers face-to-face with the ecosystem, people we would not normally hear from or see in Luxembourg; for example, the Director of the IMF speaking about data, the Head of Blockchain Policy from the OECD, the Global Head of Wealth Management and the Insurance and Chief Strategy Officer from Group Santander, the Chief Scientist from AIG, etc.

What is the impact of COVID-19 on the Luxembourg Fintech ecosystem?

In Luxembourg, the incredible growth of the FinTech ecosystem has mostly focused on B2B startups as well as a strong payment vertical. On the whole, the overall sector has remained robust; digital payments were positively affected by COVID-19, while B2B FinTech firms, though generally suffering a pause in business development, remained solvent and excitedly worked on refining their solutions to the likely boom in demand from the institutional sector driven by COVID-19.

The LHoFT surveyed the Fintech community here in Luxembourg. Only about 15% said they had been highly affected, which is relatively low compared to the results of similar surveys with other FinTech ecosystems across Europe that have perhaps more of a business-to-customer focus. That 15% are mostly very early-stage startups, who did not manage to raise capital or launch their product before the health crisis and were hit with capital shortfalls. For them, the lockdown has been tough.

We also saw some FinTechs flourish by seizing opportunities. Solutions that helped the financial industry to conduct board meetings remotely, protect their infrastructure from cybercrime, or communicate digitally and efficiently with their clients have been very much in demand. This is proof that we have awesome entrepreneurs in Luxembourg who can adapt.

How do you see the collaboration between FinTechs and incumbents moving forward?

Incumbents have realized they need digital solutions for the fundamentals of their business; they are less in discovery mode for advanced solutions to cater for the evolution of financial services, but are instead looking for technologies that can be implemented and help their business

How do you see the collaboration between FinTechs and incumbents moving forward?

The COVID-19 crisis is a real jolt to the traditional financial sector. It has made many leaders realize that they are exposed to significant risk by not being digital enough in their operations. Institutions were able to shift surprisingly rapidly to remote business maintenance mode; however, as the crisis continues, business growth/new business becomes an increasing priority as well—how do you onboard a new client without face-to-face contact and physical forms to complete and fax? How do you settle security transactions without access to a fax machine? How do you ensure the identity of clients and process their requests without a physical ID? Yes, their employees can work remotely. Yes, they can have their infrastructure on the cloud. Yes, digital solutions for onboarding and providing services to clients do exist.

We saw a huge increase in FinTech scouting requests regarding digital onboarding, digitalization of processes—robot process automation (RPA) and artificial intelligence (AI)—and, in particular, electronic signature solutions.

Incumbents have realized they need digital solutions for the fundamentals of their business; they are less in discovery mode for advanced solutions to cater for the evolution of financial services, but are instead looking for technologies that can be implemented and help their business today.

However, institutions also want to see that solutions have been tested in the market and meet certain criteria regarding business implementation, risk management, IT and legal; i.e., they are still regimented in their due diligence of potential solution providers. In this context, a solution like FIN5LAB, a due diligence service, has been developed in partnership with Deloitte, Telindus, Temenos and Cisco.

To conclude, Luxembourg has a resilient FinTech ecosystem thanks to its B2B focus, the amazing entrepreneurs that we support, the great collaboration we see between the various public and private institutions, and the openness of the financial industry to work with startups. I am sure we will see even more innovation in the industry moving forward.

The COVID-19 crisis is a real jolt to the traditional financial sector. It has made many leaders realize that they are exposed to significant risk by not being digital enough in their operations. Institutions were able to shift surprisingly rapidly to remote business maintenance mode; however, as the crisis continues, business growth/new business becomes an increasing priority as well—how do you onboard a new client without face-to-face contact and physical forms to complete and fax? How do you settle security transactions without access to a fax machine? How do you ensure the identity of clients and process their requests without a physical ID? Yes, their employees can work remotely. Yes, they can have their infrastructure on the cloud. Yes, digital solutions for onboarding and providing services to clients do exist.

We saw a huge increase in FinTech scouting requests regarding digital onboarding, digitalization of processes—robot process automation (RPA) and artificial intelligence (AI)— and, in particular, electronic signature solutions.

However, institutions also want to see that solutions have been tested in the market and meet certain criteria regarding business implementation, risk management, IT and legal; i.e., they are still regimented in their due diligence of potential solution providers. In this context, a solution like FIN5LAB, a due diligence service, has been developed in partnership with Deloitte, Telindus, Temenos and Cisco.

To conclude, Luxembourg has a resilient FinTech ecosystem thanks to its B2B focus, the amazing entrepreneurs that we support, the great collaboration we see between the various public and private institutions, and the openness of the financial industry to work with startups. I am sure we will see even more innovation in the industry moving forward.

Conclusion

The current uncertainty has put businesses everywhere under economic duress, but many FinTechs have quickly adjusted their products and services to meet the needs of customers.

Before the pandemic, FinTechs were already a hot topic and seen as disrupters to the financial marketplace by traditional financial service companies. These past years have proven that FinTechs are shaping and becoming part of what the future needs. To be more precise, FinTechs are at the heart of the development that is needed for the future.

Looking forward, there is no doubt that digital solutions will be an obvious and evident future trend for our society and the way we live tomorrow. The pandemic is only the catalyst that accelerated FinTechs to ultimately become part of the financial ecosystem. FinTechs will no longer stand alone and be seen as a disruption to the financial marketplace but integrate into and become part of the supply chain of the financial system.

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Beyond COVID-19: New opportunities for fintech companies

As the COVID-19 pandemic continues to create uncertainty, many fintechs are under stress on a number of fronts. But, as the broader economy shifts from “respond” to “recover”, new opportunities may be created for some fintechs.

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