The private sector is proving an enthusiastic partner in a government-launched foundation aimed at promoting luxembourg’s fintech industry and extending its international reach. Bob Currie reports.
It is more than half a century since UK prime minister Harold Wilson told an audience that if the country was to prosper, a “new” Britain would need to be forged in the “white heat of scientific revolution”. Science has advanced in the meantime and discussion is as much around digital transformation as it is around high-temperature engineering. But there is a similar tone of endeavour in Luxembourg’s efforts to apply technical innovation to the economy and public life.
As part of this grand plan, the Grand Duchy has created a public-private partnership to encourage innovation in financial services. A key participant in this is the Luxembourg House of Financial Technology (the LHoFT), which was created to promote the Luxembourg financial technology ecosystem and extend its reach by connecting with other fintech hubs around the world.
LHoFT operates as a non-profit foundation, receiving half of its funding from the Ministry of Commerce and half from donations from its private-sector financial services partners. Senior executives of 13 private-sector organisations sit on its board, along with finance minister Pierre Gramegna and leaders of the Luxembourg Chamber of Commerce, Luxembourg for Finance (LFF) and Profil, the Luxembourg Finance Industry Federation.
The idea of an incubator for fintech companies is not original to Luxembourg. Level 39 has been active in London since 2013, for example, owned by Canary Wharf Group and providing three floors to fast-growth tech companies at One Canada Square. But LHoFT is perhaps unique in receiving such a major financial contribution and senior representation from government, alongside the close partnership it has with its private-sector backers and with the academic world.
LHoFT CEO Nasir Zubairi says that “among its many activities, the LHoFT facilitates research, as well as bringing together industry stakeholders to address big needs that are thus far unmet – for example, the development of a KYC [know-your-customer] utility for the funds sector, and a recently launched platform, Fin5lab.com, to drive agility and efficiency in fintech procurement.”
Innovation lab
Zubairi has wide experience, having been director of algorithmic trading at RBS and the architect of multiple fintech ventures. On being approached by LFF to take on the chief executive role, he took the opportunity to meet with its associated private-sector partners and was impressed with their positivity and dynamism. The message he received on several occasions was: “Let’s do something special for Luxembourg.”
This energy, he says, is complemented by an effective working environment that has been created for financial services companies active in Luxembourg. Alongside strong technology skills and a powerful spirit of innovation, the jurisdiction provides flexibility in the legal structures it can support, including Anglo-Saxon-type legal arrangements if required. It also has a multicultural workforce with diverse language skills.
The Association of the Luxembourg Fund Industry (Alfi) and the Luxembourg Banking Association (ABBL) have encouraged fintech development. François Drazdik, Alfi’s head of administration and senior industry affairs adviser, says that it started structuring its digital fintech strategy in 2016 in response to widespread discussion around the importance of promoting Luxembourg as a digital nation. Under this initiative, Alfi created a Digital Fintech Forum through which member firms can articulate their technology requirements and fintech companies can profile their solutions. This initiative has given rise to four Alfi working groups specialising in blockchain and cryptocurrencies, data management (including its application to anti-money laundering and KYC legislation), peer-to-peer lending and digital investing. The forum is working on the launch of a fifth working group, which will focus on cyber security.
A primary objective, says Alfi director general Camille Thommes, is to raise awareness around fintech and digitalisation across the funds industry. Alfi’s position is to encourage dialogue between member firms and fintech companies, but not to involve itself in the selection process. “We provide a forum where fintech companies can showcase their solutions and link them to Alfi member firms. However, we allow competition to play out fully and leave it to individual member firms to select which technology providers they wish to partner with”.
In parallel with these initiatives, a number of financial companies have set up their own innovation labs in Luxembourg, including BGL BNP Paribas, KPMG, Deloitte Luxembourg, Societe Generale Securities Services (SGSS) and RBC Asset Management.
SGSS’s Luxembourg Innovation lab, labelled #LePlateau, is one of the firm’s seven fintech labs: similar centres exist in France, Germany, the UK, Israel, Senegal and India, all co-ordinated from Paris. Societe Generale is also a founding partner of LHoFT. One aim is to reinforce its presence as an investor in innovation and prime user of these solutions; another is to raise employees’ awareness of the digital economy and its implications for SGSS and its customers.
The Luxembourg lab, created in September 2018, focuses on developing technology in artificial intelligence and data management, distributed ledger technology (aka blockchain), cyber security and regulatory technology (regtech). Laurent Marochini, Societe Generale’s head of innovation, says there are plans to establish projects in each of these streams, but SGSS will be selective about the projects that it chooses. “We currently have three start-ups in the lab and we do not intend to grow much above this number,” he adds. “We intend to remain focused.”
Regulatory technology
Technology development and data engineering are changing the advisory and audit world. Pascal Denis, partner and head of advisory at KPMG Luxembourg, says that given the importance of technology to clients’ business and the significant risks associated with technology failure, the ability to audit technology is becoming as important as the ability to audit financial statements or to provide guidance on regulatory compliance. “This is what is expected from the modern audit firm,” he says. “The ability to provide assurance across all areas of our clients’ business, including their IT and data security.”
To help clients adapt to the digital economy, KPMG has itself had to refine the way that it provides advice. This, inter alia, has demanded changes in how it manages talent. “Where previously we were recruiting graduates heavily from law school or business school, we are now increasingly recruiting expertise in artificial intelligence, data science, distributed ledger technology and robotic process automation,” says Denis.
For cross-border areas in which it operates in the asset management and asset servicing sectors, KPMG applies a strategy that is fundamentally geared towards technology. It has created a team known as the Khube (the KPMG Hub for Entrepreneurship and Innovation) to oversee this objective, co-ordinating technology application in areas such as e-payments, artificial intelligence (AI), data engineering, data science, cyber security and regtech. KPMG is also a founding member of the LHoFT.
A second component of this strategy is to promote delivery of fintech projects and technology transfer into the real economy. One example has been the FundsDLT platform, which links together the activities of transfer agent, asset manager, payment systems and investor to process fund transactions on a blockchain. KPMG has also established an alliance with governance.com, a company that helps management companies to improve their data governance, process automation and data security at the same time as supporting analytics and reporting around a management company’s data.
LHoFT’s Zubairi highlights the major resource cost investment management companies in Luxembourg are facing in managing compliance and regulatory reporting commitments. In some cases, up to 30%-40% of their operating cost is associated with managing regulatory compliance and reporting. In an age of fee compression, this is creating heavy pressure on margins.
Each new item of legislation can precipitate a new cycle of technical adaptation and legal cost. For instance, in December 2018, Luxembourg passed bill of law 7217 to create a central register of ultimate beneficial owners (or ‘robeco’) in accordance with anti-money laundering and terrorist financing provisions of EU Directive 2015/849. Matthias Forsingdal, digital finance solutions innovation manager at Proximus Luxembourg (formerly Telindus), says that there has been a surge in enquiries about regtech solutions that may help to meet this compliance obligation before the March 1, 2019 enactment date.
Several companies within LHoFT are also addressing the challenges presented by regulatory and compliance obligations. Tetrao, for one, uses robotic cognitive automation to assist with document preparation and reconciliation, using AI to help populate key message fields and check consistency of documentation – ensuring, for example, that information in a Key Investor Information Document aligns with that in a fund prospectus. Its natural language-processing algorithms can support documentation written in a range of languages.
Similarly, UME offers a solution to ease the burden for asset management companies of conducting due diligence across their global distribution networks.
Lingua Custodia brings translation expertise and AI together, providing an automated translation solution that is adapted specifically to financial documentation, enabling companies to increase the speed of their translation and proofreading when compared with traditional in-house capability. This is delivered via the software-as-a-service (SaaS) model, which enables customers to access technology via the cloud.
Data engineering
The ability to manage big data sets is an essential skill for firms wishing to thrive in a world of AI and process automation. In supporting its international client base, KPMG has access to a large body of client data. “We see ourselves as a large data hub, collating data from multiple different sources,” says Denis. “Our ability to collate, verify and improve data across multiple reference points has enabled us to build a high-quality ‘golden record’ that is an important resource for the industry.
In the areas of data engineering and data science, we have also been re-evaluating how we process this large hub of data that we hold.” For roughly three years, KPMG has been exploring moves from SQL-type relational databases to NoSQL structures, along with the use of big data technologies to enhance the speed and flexibility of database queries.
For the Societe Generale group too, data is a strategic asset at the heart of its digital transformation. “As a large international bank and asset servicing specialist, we have a huge amount of data in our systems,” says Marochini. “Our transformation towards a data-centric company is to provide better, more personalised services to our clients. This is reflected in the use of AI to monitor customer purchasing preferences and to build predictive analytics. It also has important applications in managing the EU General Data Protection Regulation (GDPR) and other regulatory obligations.” Marochini says SGSS launched a major GDPR programme as soon as the regulation was announced, widely used within the group and by external clients. “Within the bank, we have created a GDPR learning programme which is mandatory for all staff across the organisation, including temporary staff.”
But the financial services industry still lags well behind others – particularly technology giants such as Amazon, Google, Netflix, Apple and Facebook – in putting artificial intelligence (AI) applications to work. A number of firms are using robotic process automation (RPA) to remove manual intervention and to improve straight-through processing rates across their operations. In some cases, banks and insurance firms in Luxembourg have applied RPA to client service, using ‘chatbots’ to process simple customer queries. Some firms are also exploring the use of algorithms for credit scoring. However, these projects are typically at a preliminary stage.
With new competition on the horizon, financial services companies must be ready for change. “In ten years, we estimate that the biggest competitors to the ‘big four’ advisory companies may be huge technology players such as Google,” says Denis. “When financial accounting is done on a centralised, standardised system such as a blockchain, a large technology specialist such as Google or Amazon may be well placed to extract data, apply suitable algorithms and to create the first level of financial accounts verification.”
This will not be the end of the story, since trained audit, tax and regulatory experts will still be needed to provide detailed analysis and final validation. But the first level of reporting may well be delivered by technology companies with access to large amounts of data, powerful AI software and cloud computing capability.
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