The Future of Swiss Banking
The banks which attracted tax evaders can no longer continue in this pattern because the era of banking secrecy is over and an era of transparency has begun.”
Jacque de Saussure, Chairman of Banque Pictet & Cie
An increasingly complex regulatory environment combined with growing clients demands for transparency and profitability has opened the era of strategic developments across the Swiss banking industry. The recent tax evasion scandals have brought a lot of attention to the space; however, not all have been scared off yet. According to the latest data available from the Swiss National Bank, foreign investors have been depositing an increasing amount of assets into Swiss banks.
At the end of 2014, around 45 billion Swiss Francs (approximately $50 billion) were invested in Swiss saving and deposit accounts representing around 30 percent increase in comparison to the previous year. Even though unfair practices seem not to discourage people from using services of Swiss banks, Switzerland itself is being under massive international pressure – regulatory and political – to tidy up its banking system. In the wake of new regulations promoting higher transparency, the legendary secrecy that Swiss banks were able to provide has been limited, forcing banks to disclose detailed information about clients’ accounts to the tax authorities. But in the absence of secrecy as a key competitive advantage of Swiss financial centre, what is the future for Swiss banking?
Swiss Banking’s position has always been synonymous around the world, providing a number one service in wealth management, commodity trade finance and structured products. Switzerland has preserved its stability as the optimal financial centre due to the low public debt, independent currency and positive budget balance. Additionally, Swiss banks are some of the best capitalised in the world, therefore, providing customers with safe and remarkable return over their assets which is increasingly important during current turbulent markets. However, apart from loosing the secrecy, there are other significant challenges that have raised the question about the bright future of the Swiss banking industry. Foremost, increased regulation will impose an extra layer of bureaucracy and will result in substantial additional costs and may put the Swiss financial centre at a disadvantage in the international arena.
At the same time, the cost of ensuring customers are compliant with the tax rules of their home jurisdictions has risen sharply, meaning that banks’ margins have been squeezed. As a result, to stay in the market, Swiss banks have to adapt new cost structures by realigning their business models. In particular, they need to take a closer look at their focus and specialisation, as well as the structuring of the internal value chains. Additionally, increased regulation will lead to the massive consolidation in Switzerland’s banking industry. According to Christian Wiesendanger, Head of Wealth Management Switzerland at UBS, compliance costs forcing banks to offer either pure discretionary accounts or pure execution accounts. That makes the market poorer in terms of choices for the client and it would drive some small banks out of existence. It would lead to an oligopolistic marketplace, which is not a good thing for individuals. The Swiss banks that survive will still have a number of residual advantages, such as high levels of capitalisation by international standards, Switzerland’s political and legal stability, and the strength of the franc.
However, these qualities along would not be enough for the Swiss banking to survive and remain competitive. Banks need to become much more global than in the past, they would need to go beyond Europe to attract a new pool of clients and creating a proactive global model. Moreover, in the absence of secrecy, Swiss banks will also have to stand ready to offer clients better investment performance and advice than in the past. The time that was spent by Swiss banks on helping clients overcome taxes can be used to improve technology of the banks. Technology is crucial for banks to enable service the client at a lower marginal cost for you as a bank, and therefore be able to remain competitive on the fee side.
Long journey of the change for Swiss banking is yet to come. It is clear that not all Switzerland’s banks will be able to cope with this range of challenges. But for those that survive, the prospects are appealing and, therefore, Swiss governmental, regulatory and banking industry bodies must play a proactive role in shaping transnational regulation to ensure an international level playing field and restore the industry’s superior reputation.
