Regulatory demands for data storage are going to be costly but financial firms should turn them into competitive advantages, according to a Swiss firm.

The tidal wave of regulation that is engulfing Europe may provoke cries of frustration from a wealth management industry worried about thinning margins, but one firm is arguing that some of the instructions that financial firms must obey – such as the need to retain data for the benefit of regulators – can become competitive advantages.

This is an argument from Qumram, a Zurich-headquartered fintech that provides clients – such as banks, insurers and other entities – with the kind of data-capturing software that they need to pass muster with their regulators. With businesses using social media and other non-traditional means of communication, such resources are vital for their survival.

MiFID II on the horizon

With the European Union’s Markets in Financial Instruments Directive in its second iteration due to take effect next year, businesses such as Qumram are helping financial firms keep comprehensive records of the communications that their employees and associates make, not least on social media. MiFID II's insistence on firms storing such data (and being able to gain access to it and manipulate it) is a headache for these firms, which also have to meet other burgeoning compliance costs while struggling to make profits in a world of low interest rates. Preparations for the directive could cost financial firms more than $2 billion in 2017 alone (source: IHS Markit and Expand, Financial Times, 29 September 2017).

Making the most of data

Whatever their grumbles, however, many bankers and investment professionals know that if they do not make the most of their valuable data, IT giants such as Google and Facebook will be only too happy to do so.

Mathias Wegmüller, the co-founder of Qumram, told Compliance Matters about this emerging competitive threat: “If you talk to the top bankers the fear is that some of the big players out there, such as Google or Facebook, will kick them out of the market because they have better data and a better – because fresher - digital backbone. Those [financial institutions] that have good digital leadership will do something about it. We work in partnership with firms that understand how innovation will earn them a competitive advantage in today’s digital world. A recent McKinsey report showed that clients of digital wealth management firms express satisfaction levels that are five to 10 times higher than clients of traditional wealth managers. The mobile and digital client experience is becoming the new currency of success.”

This fintech firm, one of a number of Swiss firms that have sprung up in recent years to deal with the crossover of finance and technology, was founded in 2011 and has grown rapidly; it has 35 staff and more than 45 clients. Most of its client base is in its home country but Qumram raised $4.1 million in funding in 2016 and is making inroads into the UK, North America, Spain and the Benelux countries. Clients include the world’s largest wealth management house, UBS; a global asset manager, Russell Investments; four out of the top five Swiss banks; a number of Swiss regional banks like Basler and Luzerner Kantonalbank; and Swiss insurers Suva, Swiss Mobiliar, and CSS Insurance. In Wegmüller’s words, Qumram’s solution is “suited to highly regulated environments but our area of expertise is the financial services industry.”

Wegmüller said that Switzerland, with its bank secrecy fading and new ways of doing business essential, might be able to fight back if it uses data in a smart way: "Wealth managers have lived for a long time with an unchanging customer base, making money at high margins. That’s changed. There has to be real 'customer-centric' thinking. This business has to be more and more digital because this is how the younger generation is interacting and communicating.”

Switzerland is readying itself for a sweeping set of changes to financial regulations that will occur next year. These are designed to run in tandem in some ways with the MiFID II regime with which Switzerland is preparing to comply. The Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) are part of the new landscape and have 'investor protection' as one of their main aims.

Fitter and stronger?

This publication asked Wegmüller if he thought that, after all the upheavals since 2008, today’s wealth management sector is healthier than it was. He had no clear answer, noting that even though it had seen considerable consolidation and restructuring, it had yet to come out with a new brand and business model that would transform its fortunes for the better.

Other luxury brands, or products associated with the good life, have been challenged and forced to change in sometimes startling ways. Wegmüller said that to thrive, firms ought to draw inspiration from the way in which other sectors have rebuilt themselves. He pointed to the example of how a Nestlé business division, Nespresso (with a high-profile TV ad campaign featuring George Clooney), promoted its coffee machines and capsules by giving them a sophisticated image. He also trotted out the oft-used example of the Swiss watch industry, suffering from competition from Japanese digital and other brands in the 1980s, fighting back with the Swiss Watch or Swatch, which associated an old industry with youth and modern culture. Wegmüller also thought that such firms as Rolex or Patek Philippe might have benefited from the enduring renown of their “Swissness” that Swatch helped reboot.

As far as Qumram is concerned, sectors as varied as beverages and fine timepieces have a lot to teach a banking sector that dates back centuries, but faces a very modern set of challenges.

(Wegmüller, whose firm is one of the sponsors of this news organisation's conference on MiFID to be held on 24 May, is also speaking at the event. For more details, and to find out how to register, click here.)