Before the coronavirus pandemic, Luxembourg was preparing for the next stage of the digital revolution in its financial services sector. Now, the crisis has accelerated the push to prioritise the needs of clients and investors.
Banks are looking to attract customers “by showing them that they can open an account fully digitally and transact fully digitally,” says Pascal Martino, a partner and banking leader at Deloitte Luxembourg. “Four or five years ago, it was a question of ‘why, and if’,” he says. Now, it is “a question of ‘how, and how fast’”.
Luxembourg — which according to FT data had an average of 39.7 new coronavirus cases last week, compared with a high of 165.9 in March — was already working on change. Digital Luxembourg, a government initiative set up in 2014, was intended to help the transition to a digital society by promoting public and private sector projects, such as technology education in schools and colleges, and the Luxembourg House of Financial Technology (LHoFT), a foundation set up in 2017 to link fintechs with traditional financial services companies, investors and the government to develop business ideas.
Nasir Zubairi, chief executive, says the pandemic has forced banks to act. “One of the greatest things that has come out of Covid-19 is that the banks have realised they are not slow-moving beasts. They can do things quickly, and they need to be able to digitise.”
The private wealth-management sector has adapted in similar ways, says Frank Roessig, head of cloud applications, data and AI at ICT company Telindus-Proximus Luxembourg, which supplies technology to the financial sector in Luxembourg.
Because it was impossible to visit a physical bank during lockdown, many technology-averse clients took to smartphones and tablets to confer with robo-advisers — digital platforms that provide automated financial advice on services such as portfolio management powered by algorithms. Many of them, he says, were older investors taking up robo services for the first time, and technology will now have to adapt to their needs, he says. Pre-pandemic, it tended to serve younger investors. He estimates the use of robo advisers by senior clients has quadrupled under lockdown.
To cope with their new users, Mr Roessig says algorithms will become more sophisticated more quickly, drawing on what he calls “multi-bot solutions,” — banking powered by AI technology that is subtly different for each and every investor. He predicts the next stage of the digital revolution will be an “invisible acceleration” — machine learning will improve without investors realising it.
The AI algorithms that power robo advisers are getting better because more people are using them (a trend which he deems based on increased data and collected feedback).
Françoise Kauthen, board member of Luxembourg’s financial regulator CSSF, says both digitisation and fintech are “primordial” if Luxembourg’s €4tn fund management sector is to stay competitive.
This year, the Luxembourg Stock Exchange launched FundsDLT, a blockchain-based fund distribution platform that automates administrative processes for investors and fund administrators. Blockchain technology records all transactions on a peer-to-peer network in which each “peer” holds an identical copy of the ledger.
In the case of FundsDLT, the automation helps to cut administration costs while the technology renders these processes more secure and transparent.
Elsewhere, Tom Kettels, an operational lead at Infrachain, a non-profit blockchain forum backed by Digital Luxembourg, says blockchain will
“trigger a change” in Luxembourg’s financial sector.
Kettels predicts that administrative tasks will be reduced, particularly those carried out by third-party services such as transfer agents, fund registries and fund administrators.
Clive Bellows, head of global fund services Emea at private bank Northern Trust, says AI and application programming interface (API), a software intermediary that allows two applications to talk to one another, allow organisations to digitise more quickly than blockchain.
Mr Bellows says the aim is to allow businesses to grow more quickly through efficiency, and to reduce costs. “Why do people digitise? Because it’s easier, it’s cheaper and it’s cheaper mainly because you have [fewer] people doing things. And you have more work done.”
Recently, investors of funds domiciled in Luxembourg have reaped the benefit from cheaper fees and portals that allow them to track their investments electronically, Mr Bellows says.
“Our industry has long been focused on the asset manager,” he says. Now, the pandemic is forcing a new focus on clients’ needs.