Innovalogy Capital Management Investment Outlook 2018 by Innovalogy Capital Management

Innovalogy Capital Management INVESTMENT OUTLOOK 2018

FinTech Ecosystem: Cryptocurrency and its Trade Scenarios

Authors: Tra My VU and Dr. Umur CAGLAR

EXECUTIVE SUMMARY FinTech is a new hype for banking and finance industries which simply brings the solutions of the information technology-based services to the field in order to increase the efficiency in financial market and banking transactions for consumers, banks, businesses and all ecosystem members. FinTech phenomena first consider utilizing the software solutions effectively a decade ago after the major financial crisis in the United States. The idea is to prevent possible digital solution-based deficiency of the peer-to-peer (P2P) lending model which was misused in investment banking. However, the use of FinTech and digital cryptocurrency gained popularity starting from the beginning of 2009 when Bitcoin (BTC) was released. In our publication series of the Investment Outlook 2018, we focus on the FinTech ecosystem, its players and provide comparative ecosystem analyse of the selected markets (i.e. Finland and Switzerland). We discussed about the global trends around the FinTech ecosystem and provide examples of FinTech solutions in various banking and finance-related fields. We constitute a deliberative ecosystem map of FinTech industry, which is explained explicitly in each sub-category with the representative use and stakeholder examples by existing company names in finance and banking industries. The consecutive issue of publication series will focus more on the analysis of the existing cryptocurrency, but also on risk determination including the banking regulations and future trade scenarios for investment banking.

30 November 2017 Innovalogy Capital Management

My Tra VU Investment Analyst

Dr. Umur CAGLAR Managing Director & Partner Nordics

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Contents 1.

Analyse of Market Trends and Opportunities for Financial Technology ................................... 4 1.1 Dislocation of FinTech to the Asian Market .......................................................................... 5 1.2 The Partnership of FinTech Companies and Traditional Financial Services Firms ..................... 5 1.3 FinTech Financial Trends...................................................................................................... 6

The Mapping of the FinTech Ecosystem and Comparative Analysis of Selected Markets ....... 11 2.1 Wealth Management ........................................................................................................ 12 2.2 Crowdfunding .................................................................................................................. 13 2.3 Banking............................................................................................................................ 13 2.4 Payments ......................................................................................................................... 14 2.5 InsurTech ......................................................................................................................... 14 2.6 RegTech ........................................................................................................................... 14 2.7 Blockchain and Cryptocurrency ......................................................................................... 15 2.8 Software .......................................................................................................................... 15 2.9 Comparative Analysis of Selected Markets ......................................................................... 16

References ........................................................................................................................... 18

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1. Analyse of Market Trends and Opportunities for Financial Technology Financial Technology, so-called FinTech, is the application of technology such as software, applications, processes and business models in providing financial services. FinTech is not a new phenomenon. However, FinTech has evolved rapidly especially after the global financial crisis in 2008 to change the shape of payment, commerce, financial investment and even money. FinTech continued to grow extensively in 2017 with the new financial industry trends and the vast amount of investments in the banking and technology fields. The new financial industry trends have introduced new financial service products which can change the way financial services firms operate as well as the way consumers transfer, borrow and manage their wealth and assets. The development of FinTech with the booming of thousands of start-ups in this sector has brought significant changes to various industries. In the recent years, the development of internet and smartphones has allowed electronic payments such as online banking and mobile payments to become mountingly popular. The transition from traditional cash to the digital form of money has made the line between money and data become blurred. While transactions such as taxi or restaurant booking and payment can now be conducted using apps, consumers are now offered with more payment methods than ever before. The recent increasing volume of digital transactions is indicating the new trend that money in the form of data slowly replacing money in its physical form or the traditional cash. Several FinTech reports pointed out that the concept of physical money is fast and becoming redundant in this new, digital-only world1. The emerging technologies in money transferring on the internet offer new opportunities for businesses as well as governments. The new low-cost, open-source technologies such as blockchain allow businesses to reach out to a larger number of customers, even those in neglected market segment. Businesses can also focus on the deficiency of the financial services to provide services that are not available by the existing infrastructure such as digital payment, money transferring and lending. Furthermore, the new technologies also allow more convenient methods for international digital commerce and create a new and constantly expanding mobile workforce. While FinTech is exploding and fundamentally changing the financial world, it is also worthwhile to take a step back and have a closer look at some market trends in FinTech. The existing market trends in FinTech might provide some insight into potential investment opportunities in the future.

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1.1 Dislocation of FinTech to the Asian Market Just a few years ago, UK was still considered as the leading FinTech capital hub with increasing FinTech activity in all financial sectors. The success of FinTech in UK was marked with many small start-ups along with innovation from within existing large financial service providers, which attracting millions of GBP investment into UK FinTech sector. It was estimated that FinTech sector generated GBP 6.6 billion in 2015 and attracted GBP 524 million further development investments in the UK. The total workforce of UK FinTech at that time accounted for roughly 5 - 6% of total financial services workforce which surpassed the figures of many FinTech centres in the world2. However, there has been a clear shift in the dominating position from UK to Asia in the year 2016. There has been a significant surge of FinTech funding, owing to the flow of funding for Chinese FinTech companies and the new trend of FinTech investments in insurance technology, or InsurTech. US, Europe and Asia Pacific (APAC) were the leading regions of the FinTech funding. However, the geography of FinTech funding has gradually changed due to the flow of investment in FinTech out of London to other European country and the new rise of China. The emerging dominance of China in the FinTech sector is owing to its large market and high levels of internet and mobile penetration. In recent years, China has surpassed the US to become the largest retail ecommerce market with total sales account for 47% of global digital retail sales3. The development of ecommerce market in the domestic retail market of China offers an opportunity for FinTech companies and incumbents to embrace their digital transformation. It was reported that FinTech investments in China has tripled to USD 10 billion in the first half of 2016, which accounted for 90% of FinTech ventures in the APAC region. The total FinTech financing in APAC is more than the figure in the US (USD 9.2 billion) and Europe (USD 2.4 billion) over the same period4. China also had the leading FinTech adoption rate, with 69% percentage of FinTech users of the total digitally active population while the figure for UK was 42% and US was 33% in 20175. The surge in FinTech investment in China is mainly due to investment in a few largest internet finance companies. One notable example is Ant Financial Services Group, which is the financial services affiliate of the e-commerce Alibaba Group in China. The total investment raised by Ant Financial was USD 4.5 billion, which showed the great potential of digital services in China4.

1.2 The Partnership of FinTech Companies and Traditional Financial Services Firms Several reports in the field are estimated that there are 12000 FinTech companies providing a variety of financial services such as lending, wealth management and capital markets1,6. Due to the disruptive nature of FinTech, many traditional financial services providers used to perceive FinTech companies as a threat to their own businesses. There are a mounting number of consumers starting to adopt services provided by FinTech companies, from payments to transfer services and even personal finance. Investment Outlook 2018 5

However, traditional financial services providers and FinTech start-ups have started to see the opportunities for partnerships. Such partnerships between the incumbents in the financial services sector and FinTech start-ups can offer numerous advantages for both parties. FinTech start-ups look for customers while traditional financial services providers need new ideas and innovation. From FinTech companiesâ&#x20AC;&#x2122; point of view, the partnerships between them and traditional Financial Institutions will allow FinTech solutions to be introduced to the wide masses. They can reach a large customer base thanks to the partnership while getting access to the large data sets of their partners to develop new value-added models. The recent changes of FinTech companies from purely Business-toCustomer (B2C) to Business-to-Business (B2B) have emphasized this trend. One example for this trend could be robo-advisory product orientation. Originally robo-advisory products were directly targeted to consumers. However, recently many robo-advisory firms have changed their direction into partnering with Financial Institutions to create integrated platforms with their established partners and to reach the large customer bases. On the other hand, Financial Institutions can enjoy the benefit of new innovative ideas and solutions to the market as well as outsource part of their R&D owing to the partnership with FinTech companies. It is expected that a large number of Financial Institutions in the world will increase the existing partnerships or develop new consortium with FinTech companies in the next three to five years. Previous FinTech survey reported that there were 62% Financial Institutions in Finland and 59% Financial Institutions in Switzerland having partnerships with FinTech companies. However, the percentage of respondents expecting to increase partnerships with FinTech companies over the next three to five years in Finland is almost 98% and in Switzerland is 82%6. While these partnerships offer a variety of benefits, it also brings about new risks of losing customers that Financial Institutions should realise and develop new strategies. The traditional Financial Institutions also need an open mindset to embrace the changes to keep up with innovation and to increase the customer satisfaction by applying new services.

1.3 FinTech Financial Trends Payment services continued to be one of the most important services of FinTech. However, aside from payments, other services from lending, money transfer, personal finance management to InsurTech and Blockchain are also getting more attention from the public. Cryptocurrency and Financial Services and Trends When it comes to FinTech currency, Blockchain is probably the first term that comes into mind. Blockchain is a shared database that has attracted a lot of attention from the public these past few years. Blockchain is best known as the technology that supports Bitcoin and other cryptocurrencies. Thanks to the popularity of Bitcoin, Blockchain has gained competitive advantage and momentum from that raising interest.

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Bitcoin transactions and blockchain business models have still been in a limited number of uses and the FinTech transaction volumes are still quite modest compared to the transaction volumes of the total financial services market. Their impact has been significantly realised, which can be seen from the increasing investment in Blockchain along with Bitcoin and other cryptocurrencies. Blockchain technology and its potential applications have been convincing many technology employees of the finance industry and dissidents of Bitcoin in general by demonstrating its benefits and applicability in finance. Even though some investment bank leaders were sceptic about the technology which can bring high risks in security breach and possible fraud scenarios during the financial transaction, they also praised the technology behind Bitcoin as a “good” and “useful technology” to enable different possibilities 7. For example, Blockchain technology allows stock traders including buyers and sellers to interact directly without the need of a third party and all transactions can be almost immediately recorded. For that reason, financial industry has been observing the development of Blockchain for its potential applications in order to speed up financial transactions and extending services to their customers. Several major investment banks in the US including JP Morgan Chase and Goldman Sachs and their counterparts in Europe have been conducting research on Blockchain and starting new development projects for their internal use. FinTech Trend in Investment and Wealth Management Robo-advising is rapidly becoming the biggest disruptive technology in the investment field and online stock trading. The new technology has been one of the most mentioned segments of FinTech. The automation of advisory can benefit firms and their customers in various ways, especially in meeting the needs of an increasing number of customers to customize individual customers’ needs. The demand from a large number of customers makes it difficult for financial advisory firms to process the information from the market research and to conduct those data in order to develop an advice. For that reason, new roboadvisory start-ups have infiltrated the advising market with their new strategy to solve the complexity of data management by the help of robo-advisers. While traditional wealth management firms are limited by online technology capabilities and tools, roboadvisory start-ups have realized these weaknesses and find their opportunities to gain access to this market, leveraging the rise of mobile and cloud. Previous FinTech survey in the North America reported that 79% of the survey respondents would use robo-advice for their personal investment allocation and 69% for assistance in retirement planning8. However, it is also important to consider the risk of flaws financial advice algorithm and data protection from this new robo-advisory trend. FinTech Trends in Retail Banking Online banking has become popular along with the growing of the smartphone market. It was estimated that 46% of consumers use only digital channels such as mobile phones, PCs and tablets for banking services, which was a huge increase from 27% in 2012. Concerning for demographic aspects, young consumers are reported to be the main users of mobile banking, with 82% of smartphone owners in the age of 18 to 24-years old using mobile banking9. Investment Outlook 2018 7

The new technology and smartphone application has led the way for a number of new digital-only banks which provides services online and exclusively via several digital applications. The new generation of FinTech banks is able to operate without offices and facilities, which significantly reduce the brick-andmortar costs. Free from facilities costs and benefit from new technology, the FinTech digital-only banks can introduce lower rates and fees to its clients along with innovative services. By using the benefits of FinTech and its technologies, those banking platforms can also offer its clients with more user-centric services that can meet the needs of individual clients. Furthermore, digital-only banks offer their clients with 24/7 accessibility without visiting a bank branch during service hours for banking services. In the US, surveys showed that four out of ten American have not visited a bank branch in the last six months10. While digital consumers shifted their preferences to online and mobile banking, they also have higher expectation for online services. They demand easy-to-use digital experience with seamless approval and processes. In serving this arising need, digital-only banks are at the advantage of focusing all their resources on the supporting technology to enhance clientsâ&#x20AC;&#x2122; digital experience. Digital-only banks have all the great advantages to flourish in the near future. However, they are still facing the challenge of building a customer base from scratch. At the moment most customers are still doubtful about shifting their money from well-known established banks to new start-ups banks. Several surveys show that 62% of respondents still believe in the importance of local branches for their bank, and 25% of respondents refuse to open an account with a bank that has no local branches9. This challenge made digital-only banks at a clear disadvantage compared to traditional banks. However, once these digital-only banks gain the trust and favour from the public, their positions may change and their potential influence on the way financial services are conducted now may be enormous. The Rise of InsurTech The insurance industry is also taking technological advantage and benefits that are derived from FinTech applications in order to enable new innovations so called InsurTech (Insurance Technology). InsurTech have started to flourish due to the slow pace of development of the traditional insurance services compared to other financial services in the industry. Several InsurTech reports pointed out that 86% of insurers think that they have to innovate to retain a competitive edge while 96% of insurers think that digital ecosystems are showing an influence on the insurance industry11. The leaders of online investment advisor and digital wealth management companies in Europe refer insurance sector as â&#x20AC;&#x153;ripe for the pickingâ&#x20AC;? due to their lag in adapting to the constant changing in consumer habits and preferences and addressing the need of digital technologies in this field. While insurance is a huge sector for FinTech firms to join, it is also difficult for them to gain access to this sector due to increasingly complex regulations and massive capital requirements. However, there has been increasing Venture-Capital-Backed funding for InsurTech companies in recent years. InsurTech is on the rise to become one of the most active segments of the FinTech ecosystem as it has started to seize the opportunity to simplify and to improve the efficiency of traditional insurance. It was Investment Outlook 2018 8

estimated that global InsurTech investment reached USD 1.7 billion in 2016, which nearly doubled the figured in 201411. Even though the US is leading the InsurTech trend with more than 50% of total deals, other countries such as the UK, Germany, France, China and India also are following the trend with a strong growth in investment10. The question now is whether the rise of InsurTech can threaten the traditional players in the insurance market. While mainstream insurance companies are facing competition from these new disruptive InsurTech start-ups, many customers still have more trust on their traditional insurance firms due to their concern in account security and fraud protection. However, there are also enabling InsurTech start-ups which cooperate with insurance companies to improve the efficiency and to optimize the mainstream businessâ&#x20AC;&#x2122; operations. Incumbents may be slow to embrace new technologies, but they are partnering with InsurTech start-ups to enable digital transformation for their services. In China, the numbers of investments in InsurTech start-ups rose by 40% in 2016 with nearly two-thirds of the deals were funded by insurers12. Such investments will enable InsurTech companies to modernize the insurance industry and to introduce new distribution channels for the ecosystem companies in the industry. The Development of RegTech The technological disruption of FinTech and the fast development of the digital economy along with the virtualization of money have gained attention of regulators and governments in several countries. New regulations such as Markets in Financial Instruments Directive (MiFID II) and International Financial Reporting Standard (IFRS 9) are introduced and institutions and companies are forced to adapt and to implement compliance rules in a short time frame which some are unprepared for the rapid technological change. For that reason, RegTech, the combination of regulation and technology, has grown rapidly due to the needs for addressing regulatory challenges. Annual regulation conferenceâ&#x20AC;&#x2122;s poll of Northern Trust showed that in 2014, 50% of attendees expected to spend more time for regulatory compliance over the coming year. The figures were even higher for 2015 (75%) and 2016 (68%)13. Those data show that many firms still have to invest time and resources in the compliance of new regulatory such as the coming MiFID II. While the new regulatory environment can become a burden for firms to dedicate time and resources to regulatory compliance, RegTech start-ups see an opportunity to bring innovation and to create solutions for established companies. Senior vice-president of regulatory reporting services at Deutsche BĂśrse pointed out that 2017 will be the year of implementation with the long-awaited MiFID II in Europe13,14. MiFID is the EU legislation that regulates firms which provide investment services related to financial instruments such as shares, bonds and derivatives. MiFID II will apply to all member states in the EU from January 3, 2018 14. The new regulation is expected to offer greater protection for investors as well as enhance the transparency of all asset classes such as equities, fixed income and foreign exchange.

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In this context, RegTech can be applied in a number of ways. Among them is the use of tools to help monitor and to manage regulatory text. Companies like Deutsche Bรถrse and JWG offer solutions such as semantic modelling tools to help their clients better implement complex rules. The tools create data model for complex information from the regulatory documentation and then send the relevant information to applications across an organisation to all concerned departments. New technologies are making the compliance process easier for companies with the opportunities to reduce the time and effort to meet existing regulations. The emerge of new regulations in a constant evolving world indicates growing demand for compliance and the needs for RegTech and their tools for monitoring and managing regulatory compliance.

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2. The Mapping of the FinTech Ecosystem and Comparative Analysis of Selected Markets The formation of a FinTech ecosystem is an important factor that motivates the types of technological innovation that enables more efficient financial markets and systems 15. A developed FinTech ecosystem can also attract more talents and business ideas, leading to the growth opportunities for a variety of sectors including wealth management, electronic payments, trading platforms, insurance and regulations. The growth in FinTech ecosystem with its stakeholders is significant in 2017 due to the vast amount of investment in this sector. The total investment in FinTech as of March 2016 reached nearly USD 33 billion, while the figure for 2014 was only USD 3.4 billion15. A few years ago, most FinTech investments were located in the U.S. However, the rise of China as the new dominant in FinTech transaction value since 2016 has signalled increasing development of FinTech in other parts of the world. European countries, especially the UK and Germany also experienced significant innovation in recent years. The technology offerings and market penetration of FinTech companies which were 248 in 2014 continued to grow and the number of FinTech companies has reached to 1379 in 201616. FinTech companies operate in various areas, disrupting and introducing innovation to traditional financial products and services. While Bitcoin and cryptocurrency still attracts a lot of attention from investors and media, other areas of FinTech such as robo-advisors, InsurTech and retail bank also gained more recognition in recent years. The FinTech ecosystem consists of various technological companies and global institutions which make it difficult to list all the parties under primal segmentation that are often used in banking and finance industries. However, it is possible to constitute the global FinTech ecosystem of banking and finance industries by adding the technological orientation of existing parties and the new segmentations that are evolved by the new entrant technology suppliers. (Figure 1) In addition, this section of the report provides insights by adding the relative comparison of FinTech industry ecosystems in Finland and Switzerland where leading technological innovations frequently take place in various digital platforms. It is important to notice that both countries considered as one the leader economies in terms of “global innovation index” and as ”the world’s most competitive economies” where various criteria such as human capital, knowledge, innovation, infrastructure and macroeconomic environment are determine the overall ranking.

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Figure 1. The global FinTech ecosystem map 2.1 Wealth Management Wealth management category includes FinTech companies that offer alternative wealth management services and technology-enabled solutions. This includes robo-advisory, investment platforms and portfolio management. The most notable sub-category in wealth management is robo-advisory. Robo-advisory refers to companies which offer automated investment platforms. This service is now targeting both business and retail customers and competing with traditional wealth management services in terms of cost, flexibility and 7/24 online accessibility. Robo-advisor platforms assist their customers to customize their investment portfolio based on analysis of their risk profile and investment goals. Quite similar to robo-advisory, roboretirement focuses mostly on retirement saving accounts. Wealth Management group also include FinTech companies that focus on developing exchange and/or trading platforms for financial assets such as stocks, bonds, foreign exchange and other asset classes for investors. Digital brokerage offers online brokerage platforms for investors to trade assets such as stocks and bonds. Some companies in this category also provide advisory platform for advisors to create Investment Outlook 2018 12

investment portfolios in order to sell to their clients. Others provide social investment network for investors in the platform to interact, to track peers’ investment strategies and to follow each other. Hedge Fund Tech includes companies that offer software solutions or platforms for hedge fund. Some notable wealth management FinTech companies in Finland include Evervest, Helsinki Capital Partners, Benemint, Selma, Haumi, FA Solutions, Shareville and Taviq. Wealth management FinTech companies in Switzerland include InvestGlass, MoneyPark, Advanon, Lykke, Amnis, TrueWealth and FundBase.

2.2 Crowdfunding In this category, companies provide digital platform to raise funding for projects and start-ups so called “seed-stage/start-up funds” in the roadmap of angel investor or venture capital (VC) investments. Crowdfunding is a way for individuals, businesses or organizations to raise funds in the form of donations or investment through internet. There are four types of crowdfunding which are (1) rewards-based, (2) donation-based, (3) equity and (4) debt crowdfunding17. Companies in this category are also different in the types of investment projects for crowdfunding. Some platforms for crowdfunding in Finland include Fundu, Invesdor, Vauraus, Joukon Voima and Mesennatti.me. In Switzerland, some notable companies in this category include Crowdhouse, Investiere, Spendit, Cashare, RaiseNow, ProjektStarter and Veolis.

2.3 Banking FinTech companies in banking provide alternative banking solutions for retail banking. Their services include digital lending, personal finance, online or mobile banking, peer-to-peer (P2P) lending and investment management. P2P lending companies in this category allow their clients to gain access to funds through a P2P lending basis where clients can borrow directly from willing lenders. Some companies also provide digital lending service in which they directly lend funds to borrowers. In addition, this category also includes companies which provide personal finance and investment management service. These companies provide tools and advices for clients to manage accounts and various financial planning and investments. Some Finnish companies in this field are Holvi and Euroloan. Some Swiss FinTech companies in banking include Contovista, Flynt, MoneyPark, Numbrs and Qontis.

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2.4 Payments FinTech payments are one of the largest components of FinTech. FinTech companies in payments category provide electronic payment services. Their payment services vary from consumer needs to trading in markets and mobile or internet commerce. In this category, there are companies that offer point-of-sale (POS) payment service such as digital storefronts. Digital storefront, or cyber storefront, refers to websites that offers products and services for sale. Other payment services offered by FinTech companies in this category include personal payment services, mobile or online payment. To meet the needs of the arising trend of cryptocurrencies, some payments companies also offer Bitcoin payment services which use digital currency for fast and secure payment. Furthermore, there are also companies in this category that offer fast and affordable digital solution for money transferring. Some notable FinTech companies in payments in Finland are Mistral Mobile, Seitatech, Payment Highway, Tapp, PayiQ, Enfuce, Giftom, MobiWallet and Wone Payment. FinTech companies in payments in Switzerland include Avance Pay, Cash Sentinel, e24, TawiPay, Paymit, Kickshops and Twint.

2.5 InsurTech Insurtech companies are FinTech companies that provide insurance services with technology innovation. Insurtech companies differ in the various types of insurances and services they offer such as life/annuity, healthcare, rentersâ&#x20AC;&#x2122; and housing insurances. Insurtech companies also bring about disruptive model such as peer-to-peer insurance, which connects a group of customers and pool their premiums together to insure against a risk. Some companies in this field also allow their clients to customize their insurance with the assistance of artificial intelligence (AI). These companies have made insurance more user-friendly and affordable for consumers. In addition, there are also companies that offer mobile purchase and monitor of insurance policies. Some notable Finnish Insurtech companies are Vakuutuskettu, Pretus and Wellmo. Some Insurtech companies in Switzerland are FinanceFox, Knip, MyLibery, Bfox, Esurance, Anivo and Animalia.

2.6 RegTech RegTech (Regulatory Technology) refers to FinTech companies that focus on assisting their customers with the compliance process. These companies provide tools for implementing and monitoring the compliance with regulations or reforms through innovative technology. These firms also help their customers addressing and mitigating risks relating to laws, compliances and regulations. RegTech companies focus on government and legislation. They offer tools for identifying legislation or platform for legislative and regulatory analysis. In addition, some of the RegTech companies focus on tools to help their customers prevent risks of anti-money laundering (AML) or to assist them in the Know Your Customer (KYC) process. Investment Outlook 2018 14

Cybersecurity companies in RegTech provide tools for their customers to detect policy violations and maintain compliance with information security protocols. Others notable fields of RegTech include tax management and trade monitoring. Reports show that US is the leading country in RegTech with 74% of total global deal share since 2013 and followed by UK with 10% of global deal share18. While UK is the leading country in RegTech in Europe, Germany, Ireland, the Netherlands and Switzerland also have increasing shares in this market. A representative of RegTech companies in Finland is MORS Software. Some notable RegTech companies in Switzerland include NetGuardian, Qumram, Apiax, Finform, SwissMetrics, KYC Exchange Net AG, Dydon and Squirro19.

2.7 Blockchain and Cryptocurrency Blockchain and cryptocurrency category include companies that provide products and services relating to blockchain technology and cryptocurrencies. Blockchain is a shared database, best known as the technology that supports Bitcoin and other cryptocurrencies. Cryptocurrency is a form of digital asset that uses cryptography to secure transactions and to verify the transfer of assets. Among different types of cryptocurrency, Bitcoin is the first and the most well-known cryptocurrency20. Blockchain companies develop and implement blockchain technology while cryptocurrency companies provide products and services such as trading and storing of cryptocurrencies. Companies in this category provide a wide range of services. Cryptocurrency mining companies focus on development of hardware, software and other services for mining cryptocurrencies. A large group of companies in this category focus on currency trading by providing trading platforms for cryptocurrencies. These platforms normally allow their users to exchange cryptocurrencies to fiat money. In addition, there are companies operating in wallet services. These companies provide software wallets for cryptocurrency storing and transferring services for cryptocurrencies or money. Another group in this category include companies that provide P2P market platform or lending platform. Finnish players in the field include LocalBitcoins, Prasos and Coinia Wallet. Some Swiss FinTech in Blockchain and cryptocurrency are Ethereum, Xapo, Monetas, iProtus, Metaco, Bitcoin Suisse AG, Bitfinitum, Bity, SwissMine and CryptoCash.

2.8 Software Companies in software category provide software and develop financial models for financial service companies, financial intermediary and institutions. These companies implemented digital innovations, software and business models for financial services providers to achieve efficiency and unique advantage

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on the market. FinTech software providers have customers in almost all financial areas. They provide software and technical solutions to banks, asset managers, credit institutions and insurance companies. Some Swiss FinTech companies in this category are Additiv, AdNovum, Appway, ArcaGroup, Avaloq, Bottomline and Axeed. Finnish FinTech companies in this category include Bankilon, Empirica, XMLDation, Almax Analytics, AlphaSense and Model IT.

2.9 Comparative Analysis of Selected Markets FinTech market transaction value reached USD 7.6 million in 2016 in Finland while the figure for Switzerland was UDS 12.7 million21. The recorded transaction value of Finland and Switzerland are still quite modest compared to the top countries in FinTech transaction value such as the United State (USD 645.8 million)18. However, the total FinTech transaction value was projected to increase in the next few years in Finland and Switzerland21. (Figure 2)

in million USD

25,000 20,000 15,000 10,000 5,000 0 2015

2016 Finland

2017

2018

2019

Switzerland

Figure 2. Total transaction value in the FinTech market (FIN/CH) Switzerland is one of the biggest financial centres and a prominent FinTech country. The country enjoys the advantage of having elite financial institutions as well as leading software manufacturers such as Google and IBM. In addition, Switzerland is the home country to more than 185 FinTech start-ups as of 201622. Among them, more than 100 FinTech start-ups are in the field of investment, asset management, payments, crowdfunding and data management. The success of these Swiss FinTech start-ups is partly related to the well-developed financial and banking sector and ecosystem environment in the country. Reports show that the FinTech hub in Switzerland was ranked as the first one in the Global Innovation Index and fifteenth in Global FinTech Centre23. The favourable geographic location as well as the excellent infrastructure, regulation and protections for consumers make Switzerland one of the most recognisable FinTech hubs in Europe. It is also worth noting that Switzerland has some big players in Blockchain Investment Outlook 2018 16

technology and cryptocurrencies such as Ethereum, Lykke, Xapo and Monetas. Many of these companies are from Zug Valley, which is also known as Crypto Valley. The reputation and development of IT, privacy and security in this country contribute to the perfect environment for cryptocurrency. As cryptocurrencies are still considered foreign currency in Switzerland, the tax environment here remains to be competitive while no new laws are expected to be issued24. While Bitcoin and cryptocurrencies remain to be a controversial topic, some advisory firms in Switzerland already announced their acceptances of Bitcoin as payment for their services25. Compared to Switzerland, even though the FinTech scene in Finland has not achieved the same amount of recognition, Finland is still rising to the prominence. It was reported that FinTech investment accounted for more than 11% total capital invested in the Nordic countries26 and Finland accounted for 8.9% of Nordic investment. Many of start-ups in Finland focus on SMEs financing, cryptocurrencies and e-invoicing. The high adoption rate of e-invoicing practice in Finland has made way for many FinTech companies to develop with the strong focus on e-invoicing. It was reported that 89% of large businesses and 59% of small businesses in Finland use e-invoicing, while the figure for the global average was only 8.4%27. Concerning the blockchain and cryptocurrency scene, Finland also has a very favourable environment for this field. The low-cost renewable energy and affordable business premises in Finland create a good opportunity for cryptocurrency mining. Bitcoin is also accepted for payment in some shops and restaurants. Furthermore, there are very few regulations imposed for cryptocurrencies in Finland. In 2014, Bitcoin was grouped as VAT-exempt financial service28. All the favourable conditions make Finland become a very attractive environment for business to operate. It comes to no surprise that Finland is one of the top nations in Bitcoin activity per capital. It was estimated that about 50000 people in Finland are in the Bitcoin community, most of them are from an IT background rather than a business one. The Bitcoin community in this Nordic country is not only dynamic but also tech-driven. Finland is also the first country to set up a Bitcoin ATM in Europe25. Concerning SMEs financing, Finland has an advantage to Switzerland as SMEs accounted for more than 99% of Finnish non-financial business economy. These SMEs accounted for 62% of added value, which is more than the value added of SMEs in EU average of 57%29. This strong development of SMEs in Finland creates a favourable condition for some FinTech companies to focus on SMEs financing. On the other hand, the high cost of living in Switzerland and the competitive tax rate lead to many obstacles for SMEs including FinTech start-ups to establish and to maintain businesses in Switzerland.

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References [1] EY Report (2017). The future of money. Back to the future: The Internet of Money. <http://www.ey.com> [2] EY Report (2016). UK FinTech on the cutting edge. An evaluation of the international FinTech sector. <http://www.ey.com> [3] EMarketer website (2016) <https://www.emarketer.com/Article/China-Eclipses-US-Become-Worlds-Largest-RetailMarket/1014364> [4] EY & DBS Report (2016). The Rise of FinTech in China. Redefining Financial Services. <http://www.ey.com> [5] EY Report (2017). EY FinTech Adoption Index 2017. The rapid emergence of FinTech. <http://www.ey.com> [6] PwC Report (2017). Global FinTech Report. <http://www.pwc.com/FinTechreport> [7] The Wall Street Journal website (2016) <https://www.wsj.com/articles/j-p-morgans-james-dimon-may-hate-bitcoinbut-he-loves-blockchain-1508146203> [8] Finextra report (2016). The Future of Advisory: Exploring the Impact of Robo on Wealth Management. <http://www.finextra.com> [9] PwC Survey (2017). Digital Banking Consumer Survey. <http://www.pwc.com> [10] U.S News website (2016). <https://money.usnews.com/money/personal-finance/articles/2016-01-07/10-bankingtrends-for-2016> [11] Accenture The Rise of Insurtech report (2017). London, UK [12] The Digital Insurer website (2017). <https://www.the-digital-insurer.com/china-insight-technology-and-insurancethe-rise-of-insurtech> [13] Risk.net Report (2017). Regtech Special Report. <www.risk.net/content-hub/regtech-special-report-20175267731> [14] Financial Conduct Authority website (2017). <https://www.fca.org.uk/markets/mifid-ii/applications-notifications> [15] Strategy & Report (2015). Developing a FinTech ecosystem in the GGG. <http://strategyand.pwc.com> [16] Venture Scanner website (2016). <https://venturescannerinsights.wordpress.com/2016/03/04/fintech-q1-updatein-15-visuals> [17] The World Bank Report (2013). Crowdfundingâ&#x20AC;&#x2122;s Potential for the Developing World. <http://www.documents.worldbank.org> [18] CB Insights website (2017). <https://www.cbinsights.com/research/regtech-europe-market-map> [19] FinTech news website (2017). <http://FinTechnews.ch/FinTech/hottest-regtech-players-in-switzerland/9062>

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[20] Telegraph website (2017). <http://www.telegraph.co.uk/technology/0/cryptocurrency> [21] Statista website (2017). <https://www.statista.com> [22] FinTech news website (2016). <http://FinTechnews.ch/FinTech/swiss-FinTech-companies-overview-map/5494> [23] Deloitte Report (2016). Connecting Global FinTech: Hub Review 2016. <https://www2.deloitte.com> [24] Letstalkpayments website (2016). <https://letstalkpayments.com/FinTech-in-switzerland-a-quick-overview> [25] EY website (2016). <http://www.ey.com/Publication/vwLUAssets/ey-news-release-switzerland-accepts-bitcoinsfor-payment-of-its-services/$FILE/ey-news-release-switzerland-accepts-bitcoins-for-payment-of-its-services.pdf> [26] Deloitte Report (2016). FinTech in the Nordics. A Deloitte review. <https://www2.deloitte.com> [27] Techcrunch website (2016). <https://techcrunch.com/2016/04/08/FinTech-dominates-nordic-startup-investments> [28] InvestinFinland website (2017). <https://www.investinfinland.fi/-/prasos-aims-to-be-the-next-bitcoin-success-storyfrom-finland> [29] European Commision (2017). SBA Fact Shet Finland 2016. <https:// http://ec.europa.eu/DocsRoom/documents/22382/attachments/11/translations>

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