Introduction

Throughout the past decade, the financial services industry and the economy have experienced a boost in digitalization. The term “digitalization” refers to converting information and processes into digital format and using digital technologies for all kinds of business applications. This affects how companies interact with clients, how they organize production, and on which products and services they should focus. Due to digitalization, new avenues of designing business processes open up, as not all elements contributing to a value proposition for a client are necessarily provided by just one single company. Instead, it may be more constructive to break up traditional value chains and distribute the tasks among those market players that provide the service and product modules more efficiently or in higher quality.

Hence, digitalization does not stop with purely converting conventional processes into a digital format. Instead, what results is an ongoing digital transformation of business models wherever new technologies facilitate transactions and tear down existing boundaries. The COVID-19 pandemic has further accelerated this transition because it forced the substitution of physical interactions with digital ones. The breaking up of value chains can and should lead to a stronger focus on what a firm can do best, such as client relationship management, procurement, product innovation, process management, advancing the latest technology, providing reliable technical infrastructure, or data management and analytics.

Therefore, the question is not whether financial digitalization will impact the demand and supply of financial services but rather how fundamental the ramifications will be and in which time span. Data analytics, new technologies, and new market entrants will have their share in breaking up established value chains and will force financial services providers to focus on those activities in which they have a competitive advantage. Service providers bringing in the technological competencies for financial services, such as FinTechs, InsurTechs, and RegTechs will play critical roles in this process, no less than a regulation enhancing framework conditions for innovative companies and transactions.

Financial Digitalization

When we look at the digital transformation of financial markets and financial institutions, the levels and speeds appear quite heterogeneous worldwide. While in some countries, financial services are already significantly disintermediated, banks and insurance companies still play important roles in the microstructure of their markets. Nevertheless, to cope with the emerging challenges, several banks, for instance, have been setting up new digital sub-companies under the same roof. They act as in-house competitors in some areas. But their main characteristic is that they have a very specific focus on providing additional banking services or multi-banking facilities.

A key driving force of the transformation in the finance sector is a new competition by market entrants, such as technology firms and those controlling, cultivating, and developing the customer interface, resulting in complete coverage of clients’ needs. While banks and insurance companies in Switzerland are advanced in digitizing processes within their current business models, there is a backlog regarding the digital transformation of their business models.

According to a study on this topic,Footnote 1digitalization will be just one of the drivers of business model innovations in the near future. Other factors include demographic changes, globalization, regulations, sustainability, and specific local features. For the banking industry, the likely key drivers will be automation and robotics, blockchain technology, new competitors, such as FinTech firms, digital investing, the Internet penetration rate, biometrics, gamification, and millennials. The latter will significantly impact social trends and moral concepts, such as sharing physical assets, sustainability, and maintaining a healthy work-life balance. Digitalization and its potential ability to satisfy client and societal needs are the drivers of these developments.

Artificial intelligence (AI) and big data should play a key role in developing customer-oriented services, building risk management systems, satisfying legal requirements, complying with rules, and conducting product and contract management. In banking, digital technologies are used for platform-driven architectures, data storage systems (“data lakes”) and big data platforms, AI and machine learning, as well as for microservices and serverless computing.Footnote 2 Platforms are key elements as they create the basis for connecting further applications, also from third-party providers (TPPs). Decentralized computing goes along with cloud-based and flexible architectures for applications.

At the same time, clients have gotten used to new technologies, the omnipresence and immediacy of information, and the convenience of using a large spectrum of smartphone applications. The COVID-19 pandemic has contributed to a massive advance in the willingness to utilize and implement new technologies. Amplified by education and increased financial literacy, the demand for digital offerings has grown substantially. Today, clients want to decide for themselves when and how to access financial services. At the same time, these services should be simple and transparent. The digital channel helps provide access to a broad set of diverse and customizable products and services, for example, in financing, investments, insurance, health, and retirement provision. Transactional services can further be combined with advisory or knowledge-intensive services tailored to the clients’ needs. The digital channel also facilitates self-services for clients.

From Open Finance to Embedded Finance

On the institutional side, the answer to these upcoming challenges during the past decade was “open banking” or “open finance,” in more general terms. Open banking describes a model where banks and other financial institutions set up their technological infrastructure in ways that third-party providers and developers can connect their applications to the system and facilitate an automated exchange of data. The concept of open finance applies the same idea to a broader range of financial services. The Swiss Bankers Association’s definition of open banking further specifies that this exchange of data has to be (a) based on secure, standardized interfaces, called Application Programming Interfaces (APIs), (b) secure to guarantee data confidentiality, and (c) only with reliable third-parties meeting specific criteria.Footnote 3

Meanwhile, financial services providers have repositioned or are converting their services architecture to connect and integrate complementary services and products from other firms and industries and expand into new business models. At the same time, the transaction infrastructure is increasingly capable of outsourcing processes traditionally managed in-house. This has two consequences: With a service architecture, applications so far running separately can be integrated and expand the breadth of the service offering. At the same time, it forces the providers to abandon activities that are not core anymore. This technological shift has spurred business models like “banking as a service” (BaaS) or the usage of “software as a service” (SaaS).Footnote 4

Building on the logic of open banking, the focus nowadays has shifted toward integrating financial services applications from third-party providers into the product offering of non-banks. This integration is referred to as “embedded finance.”Footnote 5 For instance, clients of companies in non-financial sectors might need financial assistance or products, such as car financing or insurance, whereas clients of banks or insurance companies may require help, for example, in health care, relocation, and tax consulting. In either case, combining products and services improves convenience and enhances the customer’s experience.

Banks and insurance companies sometimes try to make these additional services accessible through an “ecosystem.” In a business ecosystem, the different organizations cooperate, compete, and co-evolve around new products and innovations.Footnote 6 Business ecosystems are typically designed to satisfy specific client needs, such as living or health. An ecosystem resembles a marketplace, where many providers offer complementary services. This happens as a one-stop shop, consequently aligned with the client’s needs and not coming from the product offering. Tech firms, such as Google, Facebook, and Tencent, continuously demonstrate the importance of service integration (of eCommerce, communication, and financial services) and a seamless convenience, i.e., of what it takes to control the client interface.

For most ecosystems, the digitalization of the client interface is a crucial precondition. With it, banking and insurance services ultimately become accessible anytime and anywhere. Book entries happen in real-time as legacy systems get gradually replaced. In an increasingly decentralized finance landscape, blockchain and cloud technologies are another basic requirement for guaranteeing a ubiquitous and comprehensive service offering. Data analytics will be indispensable for client advisory. It is therefore essential that financial service providers start collecting, structuring, and analyzing data from their current business processes to use this data asset in the future.

Collaborative Business Models in Banking

In the current transformation, market players focus on what they perceive to be their core competitive advantage. This can be client relationship management or products offering the highest convenience or the lowest price. Some firms focus their business model on process management (e.g., claims settlement in the insurance sector, brokerage, payment, tokenization of assets), others on providing technology (e.g., security systems, access to products and services of different providers, software as a service), infrastructure (e.g., banking as a service (BaaS), or data storage), and data management and analytics.

The latter includes the usage of AI and big data. AI has many definitions. Essentially, it is an automation technology able to learn, detect interrelations, and make decisions. The term “big” data often refers to highly complex data sets, but it may also include aggregating complementary data from different sources. Ideally, processes are designed such that data is generated and structured automatically. Generating, structuring, and analyzing data are keys to providing customized services to the client and institutional functions, such as risk management and compliance.

Figure 11.1 presents seven possible business model archetypes for the banking sector.Footnote 7 In this categorization, banks can either strategically position themselves about customer focus or value chain focus. The first dimension captures the breadth or specificity of the bank’s offering to its clients. The value chain focus refers to the bank’s resources and capabilities concerning its positioning either at the customer end or at the back end. Applying this typology to the Swiss banking landscape shows that some business models have existed for decades (such as trusted advisor and utility bank). In contrast, other business models have not evolved until some years ago (such as focused digital players, ecosystems, and BaaS).

Fig. 11.1
A graph has value chain focus versus customer focus. It plots blocks of the ecosystem, supermarket or platform, trusted advisor, utility bank, banking as a service provider, focused digital player, and product specialist with various examples.

(Note Swiss companies (marked in bold) are allocated to the business models by the authors. Source Authors’ representation based on the concept adopted from M. Buermeyer, W. Weinrich, K. Heuschröck, O. Lehner, K. Holtkamp: Retail banking business models—defining the future: Challenges and opportunities of new business models, October 19, 2019, BankingHub by zeb, https://www.bankinghub.eu/innovation-digital/retail-banking-business-models [Accessed on July 17, 2022]

Business models in banking

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Three of these models have a back-end and hence a business-to-business (B2B) focus:

  • Banking as a Service (BaaS) providers serve the industry with basic technological infrastructures, such as core banking systems (e.g., Avaloq, finnova), platform solutions for specific applications (e.g., Crealogix, ti&m), and outsourcing facilities (e.g., InCore Bank, SIX Group).

  • Utility banks offer specific service components, which financial services providers can then integrate into the customer journey. Such components comprise payment or card services (e.g., Viseca, Swisscard AECS), brokerage (e.g., SAXO Bank), and storage of tokenized assets (e.g., Sygnum Bank). A utility bank’s services may also include the provision of a platform for generic transactions.

  • Product specialists focus on providing financial products and services to the industry, such as funds, structured products, and information services. Some products may be sold to a selected clientele beyond a pure B2B focus.

Four of the models are customer-centric and apply to the business-to-customer (B2C) market:

  • Focused Digital Players offer only a narrow choice of products. Their value proposition is high convenience for clients, competitive pricing, and an appealing design on a 100% digital channel. Convenience contains speed, availability on demand, and self-service options. Examples include digital banking solutions (e.g., YAPEAL, neon), digital retirement provision solutions (i.e., “3a” solutions) such as viac, and specific investment themes. For instance, Yova’s Inyova app makes it easy to manage a portfolio based on sustainability criteria. Several banks in the retail segment follow similar approaches and offer digital tools under the same roof but with a different brand (e.g., “frankly.” by Zürcher Kantonalbank, “Zak” by Bank Cler).

  • Supermarkets/platforms aggregate products on a platform, while it is the client’s task to select the appropriate product combinations. This approach is suitable for relatively homogenous products that are, to some extent, exchangeable among the providing institutions. For example, Comparis started in 1996, providing comparisons of health insurance tariffs in Switzerland, and since 2012, MoneyPark has listed mortgage offerings from several banks, among which clients can choose.

  • Trusted advisors offer access to various services along the customer journey. The customer journey refers to the sequence of touchpoints a customer has with a product or service provider before the purchase. This category includes most banks and insurance companies (e.g., UBS, Julius Bär, cantonal banks, regional banks, Raiffeisen banks, Zurich Insurance, and Swiss Life).

  • Ecosystems give access to many financial service providers offering complementary services, hereby maximizing customer value. For example, iptiQ, a subsidiary of Swiss Re Group, provides an end-to-end digital insurance platform, creating an ecosystem comprising over 50 partner firms.Footnote 8 Most ecosystems employ so-called platform-as-a-service offerings.

On a global scale, digitalization has tightened competition among established financial services providers and forced them to transform their business models digitally. This has led to an emerging number of platform-based business models that foster cooperation and innovation and better client services. At the same time, new players increasingly push into finance, such as big tech firms like Google, Apple, Amazon, Facebook, Tencent, and Baidu.

Likely, these dynamics in digitalization will lead to a commoditization of basic financial services. It further speeds up both the merging of some financial players and the withdrawal of others from markets or selected production stages that were part of their value chains. At the same time, this transformation spurs stronger customization of products and services and hence a stronger value proposition to the client. For financial service providers, supplemental benefits offered as part of an ecosystem become more important.

The strategic positioning of incumbent banks in an open banking setting can vary depending on the specific market and competitive position. The Swiss Banking Association has identified four archetypes of strategic positioning: (1) the integrated role, (2) the supplier role, (3) the orchestrator role, and (4) the aggregator role.Footnote 9 These base models help the banks define the key roles they can play in an open baking ecosystem.

On the downside, this transformation process may increase the volatility of income sources and lower margins because of higher competition. In addition, digital business ecosystems also bring a host of challenges. Examples include IT security, customer attribution, accountability, data ownership, the usage of AI, and a strong dependence on start-up companies. Moreover, participating players (banks, insurance companies, neobanks, InsurTechs, SaaS providers, etc.) typically follow different strategies that are not always easy to harmonize. Table 11.1 provides a list of cooperative efforts by Swiss companies in 2022.

Table 11.1 Cooperative efforts in banking and insurance in 2022
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FinTech

To speed up the business transformation process, financial intermediaries selectively but intensively cooperate with companies from the technology sector that are providing new tools and innovations to banks and other financial service companies. These innovative financial technology firms are called “FinTechs,” and financial technology firms that cooperate with insurance companies are called “InsurTechs.” For financial services players, regulatory technology (“RegTech”) firms are becoming increasingly important for automating legal procedures and compliance tasks.

The interplay of FinTechs and incumbent financial services providers has evolved over time. In the early years after 2010, FinTech companies were often seen as challengers to established market players, competing for the same client base. The focus was not on offering a broad spectrum of products but on improving convenience, increasing speed, and advancing user experience to the next level. Due to lean structures, a digital-only channel, and lack of regulation, pricing was highly competitive. Over time, however, many FinTechs have evolved with strong competitive advantages in technology. These FinTechs now partner up with banks and help them enhance and modernize their bank processes and strengthen customer solutions instead of product solutions.

Business Areas of FinTechs

Two ways to classify FinTech companies are their key product areas and technological approaches. The annual IFZ Fintech Study identified four key product areas where FinTechs are predominantly activeFootnote 10: (1) Payment, (2) Deposit and Lending, (3) Investment Management, and (4) Banking Infrastructure. With regard to their technological approach and irrespective of the business segment, FinTechs were categorized into (a) Process Digitalization, Automation, and Robotics, (b) Analytics, Big Data, and AI, (c) Distributed Ledger Technology, and (d) Quantum Computing. The resulting matrix is updated annually by tracing the number of companies in these fields. Figure 11.2 illustrates the number of Swiss FinTech companies subdivided into their key product areas (left-side bars) and their core technologies (right-side bars).Footnote 11

Fig. 11.2
A 3 D grouped-cum-stacked bar graph of number of Fintech companies, from 2015 to 2021. 2020 has the highest value for most of the product and technology areas, while 2015 has the lowest value for the areas.

(Note For each year, the left-side bars depict the “Product Areas” and the right-side bars depict the “Technology Areas.” The abbreviations for “Product Areas” are: Payment = Payment, D&L = Deposit & Lending, Inv. Mgt. = Investment Management, and Banking Infrastructure = Banking Infrastructure. The abbreviations for “Technology Areas” are: DLT = Distributed Ledger Technology, Analytics = Analytics, Big Data, AI, P/A/R = Process Digitalization, Automation, and Robotics. Source Authors’ representation based on data obtained from “IFZ Fintech Study 2022”, Hochschule Luzern, https://craft.finnova.com/assets/downloads/IFZ-FinTech-Study-2022.pdf [Accessed on July 18, 2022])

Number of FinTech companies in Switzerland

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Table 11.2 shows the percentage of firms in each product area and technology in 2019 and 2021. In 2021, almost 40% of all FinTech companies had their primary business in “Investment Management” and about one-third in “Banking Infrastructure.” By contrast, in 2021, the markets for “Payment” services (16.6%) and “Deposit & Lending” support (12.6%) were concentrated on fewer firms. Regarding technology, 44% of all FinTech companies in Switzerland focused on “Process Digitalization, Automation, and Robotics,” and 26.7% focused on analytics, big data, and AI. Almost 30% of FinTechs drew upon their Distributed Ledger Technology (DLT) competencies. Driven by innovative FinTech entrepreneurs, universities, and a conducive legal framework, Switzerland has developed as a hub of Distributed Ledger Technology early on.

Table 11.2 Business Models of Swiss FinTech Companies (2021 vs. 2019)
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Compared to the growth phase from 2015 to 2018, the number of FinTech firms in Switzerland stayed almost at the same level between 2018 and 2021.Footnote 12 Despite this seeming stability, the average characteristics of FinTechs changed substantially over time. While investment management has evolved into the dominant business area since 2015, deposit and lending services have lost some importance in relative terms. Furthermore, in 2015 and 2016, 62% of the FinTech firms built their business model on DLT, and this segment fell below 30% by 2021. At the same time, looking at Swiss DLT FinTechs only partially mirrors the effective importance and relevance of DLT. In particular, large financial institutions also collaborate with international DLT specialists.

Table 11.3 compares the specialization of Swiss FinTechs with their global peers. It shows that the product area of “Investment Management” was significantly more critical for Swiss FinTech firms (39.1% for Switzerland versus 16.0% worldwide). In comparison, the fields of Banking Infrastructure and Payment were more prominent in the case of FinTech firms globally (31.8% in Switzerland versus 45.6% worldwide for Banking Infrastructure, 16.6% in Switzerland versus 23.3% globally for Payment). Concerning the technology base, almost 70% of FinTechs globally, as opposed to only 44% in Switzerland, focus on Process Digitalization, Automation, and Robotics. Nearly 30% of Swiss FinTech firms exhibit skills in DLT compared to only 14.4% of FinTech firms worldwide.

Table 11.3 Business Models of Swiss and Global FinTech Companies (2021)
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Distributed Ledger Technology (DLT) and Decentralized Finance (DeFi)

Although the number of Swiss FinTech firms with a technology focus on DLT has fallen over time, blockchain-based activities have become more relevant and mature in the past years, in terms of both use cases and the clarity of the regulatory environment. Blockchain allows for distributed ledgers where no central counterparties, intermediaries, or registries are needed. Applications in finance using Distributed Ledger Technology (DLT) are therefore also referred to as Decentralized Finance (DeFi) and comprise blockchain-based business models with cryptocurrencies (such as Bitcoin, Ethereum, Ripple, Litecoin, and Cardano), smart contract solutions, and tokenized assets (or crypto assets). In addition, open blockchain technology fosters further innovation and assures the compatibility of solutions.

FinTechs and the Digital Transformation of the Finance Sector

In general, FinTech firms positively contribute to the development of the financial services industry by pushing banks to become more innovative and customer value oriented. FinTechs typically are smaller, faster, leaner, and less regulated than banks. This impact is not to be underestimated, as the focus of banks’ digitalization efforts has primarily been on automating and enhancing processes within existing business lines. These projects are referred to as “run-the-bank” projects. In contrast, so-called “change-the-bank” projects are more profound and exhausting for organizations and tend to happen only when perceived as inevitable. Automation, cloud solutions, tokenization, biometrics, and AI are some of the key technologies relevant in finance.

Swiss Fintech Innovations (SFTI) supports innovation and collaboration of financial institutes in Switzerland and FinTechs.Footnote 13 This is a joint initiative of some of the main players in Swiss banking and insurance. One key topic is the analysis and discussion of collaboration models, such as outsourcing, platform businesses, joint offerings of a third-party provider with a bank, and emerging legal challenges.Footnote 14 On a broader scale, digitalswitzerland supports innovation in the field of digital solutions, such as cybersecurity.Footnote 15

One word of caution: With FinTech firms getting more powerful and influential, they might become systemically relevant, particularly when software solutions, product components, security systems, cloud infrastructures, and critical data and information are widely used by the banking sector. This is the case for FinTech companies active in the B2B space and those interacting with an investment clientele. As a result, they should become more regulated in the future. Otherwise, Switzerland’s financial stability might be jeopardized. This is why regulation of Switzerland’s DLT activities has increased (see paragraph below on Swiss DLT regulation).

InsurTechs

Technological innovation in digital solutions for financial services has emerged chiefly in the context of FinTech companies. FinTech firms that have partnerships primarily with insurance companies are called InsurTechs.

The IFZ InsurTech study identified 50 InsurTech companies in Switzerland and 497 companies in the rest of Europe.Footnote 16 Although there is no universally applicable definition of InsurTech, the authors of the report identified five key product areas where InsurTechs are potentially and predominantly active: (1) Marketing and Distribution; (2) Product Development, Pricing, and Underwriting; (3) Claims and Customer Service; (4) Asset Management; and (5) Infrastructure. With regard to their technological approach and irrespective of the business segment, InsurTechs have their core skills in (a) Process Digitalization, Automation, Robotics, (b) Analytics and AI, and (c) the Internet of Things.

Table 11.4 shows the percentages of firms in each product area and technology. Over 40 (30)% of all Swiss (European) InsurTech companies have their principal business in Marketing and Distribution, about 30 (42)% in Infrastructure, and 18 (15)% in Claims and Customer Service. Product Development, Pricing, and Underwriting is of minor importance as a product area, and Asset Management is practically irrelevant. In terms of technology, more than 50% of all InsurTech companies in Switzerland focus on Process Digitalization, Automation, and Robotics, and more than one-third on Analytics and AI. While DLT skills are relevant in 30% of all FinTechs, only 6% of InsurTechs use this technology. Marketing and Distribution on the one hand and Process Digitalization and Automation on the other seem to be more relevant in the Swiss InsurTech landscape compared to the other European countries.

Table 11.4 Business Models of Swiss and European InsurTech Companies (2021)
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Furthermore, on a per capita basis and across Europe, the highest densities of InsurTech companies have been in Liechtenstein, Luxembourg, and Switzerland. While the number of newly founded InsurTech companies was growing steadily from 2010 to 2017, the trend has been declining since then.Footnote 17

SWISS Distributed Ledger Technology Regulation

The private sector and regulatory bodies made efforts to clear the way for beneficial framework conditions for new technologies in the financial market. On August 26, 2019, FINMA assigned the first banking licenses for two crypto banks, Seba Bank and Sygnum.Footnote 18

On September 25, 2020, the Swiss Parliament adopted the “Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology.”Footnote 19 The law came into force on August 1, 2021. Its purpose was to adjust ten existing federal laws and create favorable framework conditions for companies in FinTech, blockchain, and distributed ledger technologies (DLT) and make Switzerland a forerunner of modern regulation in this field.Footnote 20

The first step, in February 2021, was Article 973d of the Swiss Code of Obligations, which introduced ledger-based securities or registered uncertificated securities as a new category. This instrument makes it possible for Swiss companies to issue DLT securities, for example, to issue stocks or debt as tokenized assets.Footnote 21 The novelty is that securities registered in a securities ledger can only be exercised and transferred within the respective security ledger, i.e., the same protocol.Footnote 22 There is no specific technological requirement; that is, the regulation can be applied to ledgers based on different types of technology. However, the ledger has to meet specific requirements. In particular, it must guarantee the power of disposal over the rights, technical and organizational integrity, the recording of the registration agreement on the ledger or in accompanying data, and accessibility of relevant information by the creditors, i.e., publicity.Footnote 23 Thus, trading on electronic ledgers has a precise and reliable legal basis.

The second wave of the new regulatory framework followed by August 1, 2021: An essential pillar hereby is the license for DLT trading systems (or DLT trading facility). This new instrument allows for a trading infrastructure for DLT securities and regulates who is an entitled market participant.Footnote 24 Private investors are likewise admitted as financial intermediaries. The new rule also differentiates between normal and “small” DLT trading systems. For small DLT trading systems (up to a trading volume of CHF 250 million, a custody volume of CHF 100 million, or a settlement volume of CHF 250 million), there are certain facilitations concerning organization, equity capital, liquidity, emergency plan, and internal audit.Footnote 25

In the Banking Act, crypto assets have been includedFootnote 26 as well as transactions for third accounts on DLT trading systems.Footnote 27 The regulations of the Banking Act are also applicable to financial market participants dealing with crypto assets. This entails that they need a “fintech license” or a banking license as soon as the criteria of the law are met.Footnote 28 In particular, this is the case when crypto assets are used as payment tokens. This regulation is supposed to limit regulatory arbitrage and makes sure that all banking-related businesses, irrespective of whether crypto assets are involved or not, are regulated the same way.Footnote 29

The segregation of crypto assets and their transparent treatment in a bankruptcy procedure is another critical element of the new regulation.Footnote 30 The segregation of digital assets attributable to a client can become relevant in case a custodian goes bankrupt. In the Anti-Money Laundering Act (AMLA), virtual currencies have been explicitly included as part of payment transactions.Footnote 31 In addition, the new DLT trading facility counts as a financial intermediary according to the law.Footnote 32 In the Financial Services Ordinance, the term “Swiss trading venue” was complemented by “Swiss DLT trading facility.”Footnote 33 Further major adjustments in laws and their respective ordinances concern the audit supervision, FINMA fees, and the Capital Adequacy Ordinance.

With all these adjustments, an essential basis for new business models and digital innovation has been laid. Both asset and utility tokens can now be registered as DLT securities on the electronic ledger. The direct and secure issuance of debt and equity securities registered on a blockchain opens up new routes for financing and trading. Likely, it will have a cost-reducing effect for the issuers and enable new business models in the financial sector.

Bankruptcy procedures benefit from higher transparency, data access, and clarity about segregated digital assets. The segregation of client’s crypto assets from other financial intermediary assets is an important element in a bankruptcy procedure. With the new regulation, the custodianship of digital assets has a solid legal basis, providing a fertile ground for new business activities in this field. For banks, keeping client’s digital assets off-balance sheet reduces their capital requirements.Footnote 34 With the DLT trading facility, no central securities depository is needed, which makes execution much more efficient, faster, and less risky in terms of counterparty risk. At the same time, trading providers can offer additional services, such as custody, clearing, and settlement.Footnote 35

Hence, the Swiss DLT regulation in force since August 2021 has significantly lowered the threshold for incumbent banks and insurance companies to extend their offering toward crypto assets and move into new business models around securities issuance and the trading of digital assets. At the same time, DLT players are likely to challenge established services, such as trading and custody, traditionally provided by conventional banks and asset managers.

SIX Digital Exchange (SDX)

For existing exchanges, it will be crucial to open up for digital trading and the trading of digital assets. At the same time, central counterparties still play an essential role in clearing specific securities.

On November 18, 2021, SIX Group launched its SIX Digital Exchange (SDX), the first regulated digital exchange worldwide, after it got approval from FINMA on September 10, 2021. The trading infrastructure is based on blockchain technology, enabling SDX to offer various services around crypto assets trading. In addition to the exchange, it also provides storage of digital assets through its Central Securities Depository (CSD).Footnote 36 In June 2022, SDX launched SDX Web3 Services, offering custodial and non-custodial services and technology to institutional clients.Footnote 37

SDX combined its market entry with issuing “the World’s First Digital Bond in a Fully Regulated Environment”,Footnote 38 a senior unsecured digital bond with a volume of CHF 150 million and issued by SIX Group. This volume comprised a digital (tokenized) part A (CHF 100 million, traded on SDX Trading Ltd. and held by SIX Digital Exchange Ltd.) and a conventional part B (CHF 50 million, traded on SIX Swiss Exchange Ltd. and held by SIX SIS Ltd.).Footnote 39

SIX Digital Exchange SDX has set up an ecosystem that is open for partnerships, for example, financing through DLT securities. Even before its official start, SDX teamed up with Custodigit, a joint venture by Swisscom and Sygnum, to create a digital asset gateway that enables third parties to customize products based on cryptocurrencies and crypto assets.Footnote 40 In 2021, SDX conducted an experiment with SNB, BIS, Banque de France, and other partners, to introduce cross-border wholesale central bank digital currencies (CBDCs).Footnote 41 In January 2022, SDX established a basis for trading eNotes which are short-term debt instruments based on a blockchain infrastructure of FQX.Footnote 42

These partnerships help SDX implement cutting-edge technology in its product offering. Further collaborations followed with Aequitec (share registry and cap table services) in March 2022, Daura (equity tokenization platform) in April 2022, Fireblocks (digital asset and crypto technology) in July 2022, and F10 (innovation ecosystem) in July 2022.Footnote 43 Also, in July 2022, SDX entered a partnership with Aktionariat that brings in technology for tokenizing, issuing, and registering shares, thereby facilitating SDX’s custody offering.Footnote 44

Conclusion

Banks and insurance companies have demonstrated a great willingness to digitalize their businesses. For incumbent financial market players with history and established processes, executing operations reliably and making sure regulatory requirements are met while keeping the bank running is a crucial precondition for embarking on the next step, the digital transformation of their business models. Open banking with a host of third-party applications, outsourcing of specific bank operations, and the creation of ecosystems can be seen as the forerunners of more differentiated business models and seamless integration of financial services into product offerings.

FinTech and InsurTech firms play essential roles in this transition process. While some challenge the business models of banks and insurance companies, others collaborate with them, whip their systems and applications into shape, and get ready for embedded finance solutions. To keep up with this development, most incumbent players need to develop and implement a cloud strategy, professionalize their data management, replace their legacy systems, keep cyber security and data protection up to date, and invest in client trust. Digitalization and breaking up value chains will fuel a further consolidation of processes and collaborations with third parties (and competitors), shifting the boundaries between financial services providers. At the same time, players from non-financial sectors but with strong technological competencies are progressively pushing into conventional banking and insurance markets. For incumbents to play a significant role and be relevant in the future, it will be crucial to add value with their specific business model.

Switzerland has taken the lead in shaping excellent market conditions for DLT-based businesses. By 2021, policymakers, regulators, and financial market authorities had set up a modern financial market infrastructure and transparent regulations for distributed ledger technologies. With new DLT securities, DLT trading systems, clear processes for segregating digital assets, rules for transacting cryptocurrencies and crypto assets, and the launch of SIX Digital Exchange (SDX), the first regulated digital exchange worldwide, these framework conditions open new avenues for a wide range of business models in this field.