Hugues Delcourt, CEO of Banque Internationale à Luxembourg, the country's oldest private banking group, talks to Danielle Myles about the opportunities posed by the country’s fintech boom and what the arrival of Chinese banks means for the domestic market.
Q: Luxembourg has fostered a thriving fintech industry. What makes the country so attractive to these businesses?
A: First, there’s the country’s general business-friendly environment. That includes financial infrastructure, legal framework and the private sector’s ability to gain access to senior decision makers within regulators and the government. When I meet fintech entrepreneurs they are amazed that they can fly into Luxembourg in the morning and meet with [financial regulator] the Commission de Surveillance du Secteur Financier, then a few hours later speak with someone at the Ministry of Finance – even sometimes the minister himself – and then come to a bank like Banque Internationale à Luxembourg [BIL] and meet our head of marketing and innovation or myself. There are few other countries where you can do that. Of course these factors aren’t specific to fintech, but they do make Luxembourg conducive to attracting start-ups.
Second, the financial centre is big enough to present fintechs with a significant number of potential partners and clients. And third, of course, is that the government – starting at the top with the prime minister and finance minister – is really targeting and proactively talking with these fintechs, with the active participation and support of the private sector. A good example of this public-private partnership is the Digital Tech Fund, launched in April 2016. This seed fund for technology start-ups, which is backed by the government and major private sector firms including BIL, has made a number of investments already. Another example is the Luxembourg House of Financial Technology, or LHoFT, a fintech platform which launched earlier this year.
Q: Do local banks such as BIL view the growing fintech sector as potential collaborators or competition?
A: When the industry first came about a few years back, obviously some banks saw them as competitors while others viewed them as complementary. I was firmly in the latter camp. Of course they disrupt part of banks’ value chains, but it would have been dangerous to pretend they would just disappear or to try doing everything ourselves internally. There’s no point crying over spilled milk.
The reason we are complementary is that our weaknesses are their strengths, and vice versa. The fintech world will always be more creative, more agile, will always have a better sense of client experience, and doesn’t have to deal with a legacy platform. Banks, on the other hand, have a lot more clients, an ability to navigate and function in a highly regulated environment and more financial power. Knowing this, it was obvious we needed to start a dialogue with these businesses to see how to co-operate.
We have already partnered with one start-up called Nexvia, which specialises in residential property services. With Nexvia’s help, last year we launched a website within BIL’s portal called myHOME, which enriches the customer experience when making decisions in relation to properties. When anyone is looking at moving house or apartment, there are a huge number of factors to consider: should I buy or rent; how much will it cost; what’s the current and future valuation; what financing is available, and so on. Simulation tools on myHOME enable users to get a clearer understanding of the most suitable property for them based on their particular criteria. There’s no charge for using the site, but in helping customers with their property decisions, we hope they recognise the support BIL has provided them and so select us as their mortgage provider, or open an account with us.
We are also discussing concrete ideas with a number of other fintechs about improving the client on-boarding journey. This can be a very difficult process for banks, and we want to make the experience more pleasant from the client perspective. That’s something we believe fintechs can help us with.
Q: What’s BIL’s motivation for, and return from, fostering Luxembourg as a fintech hub?
A: First, I should note that recently we have partnered with all three incubators helping fintechs in Luxembourg: Technoport, Nyuko and InCub. There are a few reasons why we are doing this. As a sizeable local player, we feel it is our duty to support the start-up ecosystem in Luxembourg’s financial sector. It also gives us the opportunity to kick-start a dialogue with more fintechs – which, as demonstrated by Nexvia, can lead to something positive for us and our clients – and gives us access to a network of entrepreneurs whose knowledge we can tap when we need to assess potential clients in the technology field. For instance, we may not have the internal expertise to assess whether their specific technology, and therefore business case, does or doesn’t make sense, has a promising future or no future, but they have.
Finally, it creates the opportunity for us to finance those start-ups we consider to be particularly promising. This is further encouraged by the InnovFin SME Guarantee Facility, which is backed by the European Investment Fund [EIF] and European Investment Bank [EIB]. We were the first bank to sign up to InnovFin, which sees the EIF and EIB guarantee 50% of our exposure when financing innovative companies that qualify for the programme. That allows us to be a little more supportive in the way we look at some of these companies.
Q: What are the prospects of Luxembourg becoming a European hub for regtech?
A: We have to recognise that this area is still embryonic, but I really do believe Luxembourg has great potential here because it plays to our strengths. Our financial centre is geared more towards regulatory support and compliance rather than sales, distribution and management. Take the fund industry, for instance. Some €3900bn of funds are domiciled and serviced here, but few of the asset managers are actually based here. Most of them are usually based in London. Because our ecosystem is tilted towards those support activities, I see a lot of potential for regtech in this city.
Q: Luxembourg is among the destination cities being considered by banks needing to bolster their EU operations post-Brexit, while many US and UK insurers have already announced their intention to move there. What does this mean for Luxembourg-headquartered banks such as BIL?
A: I think Brexit draws out London and Luxembourg’s complementary strengths. The message from the Luxembourg government, both before and after Brexit, isn’t based on competing head-on with London. It hasn’t spurred firms to leave London for Luxembourg. Rather, it’s encouraging the transfer of certain activities that can be better performed here, especially in a post-Brexit environment, like with my asset management example.
That said, Brexit will affect us in several ways. At a macro level, in the short to medium term it should have a positive impact on Luxembourg’s gross domestic product growth. As far as BIL is concerned, considering that our share of the local banking market is significant, we will grow alongside the economy. The arrival of more people – typically those with significant purchasing power – means more spending and borrowing. BIL is banking many of the banks and insurance companies that are moving operations to – and doing more business in – Luxembourg. We’ve been actively following the announcements by the likes of FM Global, AIG and Hiscox, which have confirmed their intention to open or reinforce their presence in Luxembourg. Both people and companies moving in will also have a supporting effect on the real estate market, where we are a key player.
Q: China’s biggest banks have chosen Luxembourg as their EU headquarters. How has this changed the city’s banking market?
A: The first thing to note is that we aren’t competing with them. You are right in that China’s seven biggest lenders have set up their European entity in Luxembourg, from where they can branch out to other EU countries and passport services. But their focus is on Chinese corporations looking to invest in Europe; small and medium-sized enterprises don’t look to them for financing, and residents aren’t going to them to open a current account, get a credit card or do private banking.
The Chinese banks have actually become our clients. We help finance them and they use our financial markets platform. We also provide them with some regulatory services, which we do for ourselves on-scale, but given their relatively small EU presence they don’t necessarily have the expertise to do in house.
I should note that some are considering becoming more involved in local business. For instance, they are interested in real estate finance but lack the experience, knowledge and scale of a bank such as BIL in this area. So we often work together as a syndicate. If there is a transaction that we find interesting but is too big for us to do alone, sometimes we approach one or two of the Chinese banks here and ask if they would like to work alongside us. Of course they do their own assessment of the deal, but working with a partner such as BIL often gives them confidence to do a project they otherwise wouldn’t have been able to source, and gives them the opportunity to learn.
