Ready for the future of finance

Futuring is about building on experience and anticipating future needs. We talked to the chairmen of Luxembourg’s industry associations, Denise Voss (the Luxembourg Funds Association – ALFI), Guy Hoffmann (the Luxembourg Bankers’ Association – ABBL) and Christian Strasser (Luxembourg’s insurance and reinsurance association – ACA) to discuss latest trends and explain what makes Luxembourg ready for the future of finance.

In a fast-changing world, insurers must continuously adapt to new risks. How will driverless cars, smart homes and other new technology affect insurers? 

CS: Innovation will definitely shape the future of our industry. To which extent and at what speed, it is not clear yet.

As insurers, we cannot have an impact on the speed of innovation or on which technology will be the next big thing, but we will have to take into consideration that our clients use these technologies on a daily basis. Types of risks to be covered are evolving with technology: some are shifting, like those related to driving with driverless cars, some are emerging, like cyber-risks.

The key will be to accompany our clients in this process. To do so, we need to remain close to the market, follow its evolutions and keep an open eye for new solutions that meet our clients’ demands.

Blockchain, artificial intelligence… How is FinTech shaping the asset management industry and adding value for the investor?

DV: New technologies will improve fund distribution, increase efficiency and reduce costs not only for companies but also to the ultimate benefit of investors.

For the asset management industry, digitalisation will tremendously improve the efficiency of the KYC process. Blockchain will allow back and middle-offices to facilitate transaction flows and reporting. It is an added value for record keeping and settlement of fund subscriptions and redemptions. Luxembourg is starting to be recognised as a RegTech hub. It is something that management companies in Luxembourg are involved in and starting to use, including for example some of the many distribution oversight platforms that have been developed in the country.

Finally, dealing with the transformation of our business as a result of technology from a human resources perspective is also of radical importance. How will technology affect jobs in the asset management industry? Clearly, we need to plan this in a thoughtful way, using change management tools allowing us to prepare this transition.

What are the opportunities arising from digital transformation for the banking industry?

GH: Digital transformation will have a major impact on the banking industry. It is important that banks make use of this opportunity to satisfy the shifting demand and expectations of our customers and offer them a range of new innovative services and products designed at enhancing their customer experience such as instant payment, QR Code payment, online billing…

Solutions such as KYC, digital onboarding of customers, blockchain, artificial intelligence or crypto currency are key assets in terms of cost-efficiency and can be used to develop solutions that assist our transition towards a more sustainable economy.

In particular, banks need to have a closer look at the new services which are datadriven and create added-value for customers and risk management functions by using data analytics. We must not forget that banks have a unique opportunity to capitalise on the data they hold on their customers and on the way they use financial products.

Will InsurTech revolutionise insurance?

CS: Which InsurTech solutions will revolutionise the insurance industry is still unpredictable but believe me, I am more than happy to be able to collaborate with them. Insurers and InsurTechs should work together to enhance the industry as a whole. InsurTechs help us to reinvent our products and services, taking us out of our comfort zone.

Personal device connectivity, AI, blockchain, cloud technologies and other new technologies are all getting plugged into the game of insurance. The outcome will be cost savings, increased agility, automation, personalisation, and a better experience for the insured. New technologies will have an impact on the whole value chain.

How will client relations evolve in the future?

GH: Customer loyalty towards banks is decreasing and will decrease more in the future. Banks have to counter this with good services, trust and innovative solutions.

Customers are redefining their expectations. They want convenience, personalisation, accessibility and ease of use. This needs to be on the radar of banks in the future if we want to retain the relationship.

A large number of the players active today in FinTech are not regulated, making them very agile. By contrast, banks face a number of regulatory requirements designed to ensure a trustworthy, high quality service. This will be a key differential going forward.

How is climate change impacting your respective industry?

DV: Sustainability has become a key consideration for investors. ALFI identified many years ago the opportunities offered to asset managers by responsible investing. In fact, we now consider sustainable finance to be one of the three pillars of the industry, alongside UCITS and alternative investment funds.

We firmly believe that what is considered “sustainable finance” today will be mainstream finance tomorrow.

One of our priorities is helping socially responsible investors to have confidence in their investment. Luxembourg plays a key role in this process with the help of LuxFLAG, the Luxembourg labelling agency, of which ALFI was a founding member.

We are committed to supporting the objectives of the EU Commission Action Plan on Sustainable Finance, that is developing a taxonomy, carbon benchmarking and disclosure. In the future, we will need to strike the right balance between clarifying what sustainable investment is and landing up with an overly subscriptive approach that leaves no scope for flexibility and innovation.

CS: The increased frequency of extreme weather is a source of stress, fear and doubts for our clients. The insurance industry has to put new solutions in place and develop a new generation of risk assessment tools designed to understand the impact of climate change on our business. This is vital for an industry whose core business is to manage risk.

The better insurers understand climate risks facing the economy, the more they can make prudent decisions and the more efficient and stable our markets will become.

What are the current challenges facing the asset management industry?

DV: One of the priorities will be to make sure that the industry remains fit for purpose to ensure that we can still meet, in a cost-efficient way, the current and future needs of investors who are going to be more and more responsible for their own financial well-being and retirement.

We need to make sure that we become relevant to younger investors, and I don’t think it is a given. We shouldn’t assume automatically that they will embrace investment funds, nor that they will only be accessed by mobile. We need to keep an open-mind and question all our assumptions.

As increasing regulation puts pressure on margins, the industry will have to rely even more on technology to reduce costs.

Luxembourg has been traditionally known as a fund domicile but, more and more, it is developing into a risk management hub for investment funds and a centre for front-office activities including portfolio management – alternative investment management in particular. We must continue developing the whole value-chain.

What are the most transformational challenges for the future of banking?

GH: There is an increased competition spurred by FinTechs but also between banks themselves, as everyone is trying to get to a certain level of revenues and income. Banks may begin to provide third party services to their clients, acting as a distributor, or else provide services directly to the client – or a combination of the two. Most probably some older business models will disappear and so will part of the revenues. In the long-term, the banking industry might be partly reshaped, and external suppliers will play a substantial part, as happened to the car industry.

Maintaining employability and retaining talent will be key. 50,000 people work in this environment. The challenge must be to keep as many people as possible in the long run.

Where will Luxembourg’s strengths lie in the future?

CS: Our strength will continue to rely on our capacity to reinvent ourselves. The more international we become, the more we must challenge ourselves. Luxembourg’s capacity to embrace digitalisation will be a major advantage. We need to have players who demonstrate what is possible on the digital level and what solutions are available.

For the insurance sector, it is important to combine our long-standing experience and know-how with new trends and new technologies. If we do not challenge ourselves, someone else will. This does not mean that we should follow every trend, but we need to move fast where innovation could be meaningful to our clients.

In what areas of banking do you see the most potential?

GH: Sustainable finance is the future and represents a key business opportunity given the interest among millennials. Banks have a major role to play in financing the transition to a sustainable economy. The challenge will be to move away from a niche sector and make it more mainstream. Luxembourg banks have to find new tools to offer their clients so that we become one of the well-known hubs for green and sustainable finance.

More generally, we need to educate people about the role played by banks in the financing of the economy. We must expect the emergence of new and innovative products for retail, private and corporate customers. New technologies push us out of our comfort zone and force us to think differently, but Luxembourg is firmly on the map where financial evolution is concerned. It is our intention to stay there.

LEO Mag December 2018, Luxembourg for Finance, Ophélie Binet.