Nasir Zubairi of the Luxembourg House of Financial Technology tells Nicholas Pratt where he thinks fintech is headed. Plus, we speak to three fintech firms – Moniflo, Next Gate Tech and Lingua Custodia.
The Luxembourg fintech scene has mirrored the Duchy’s long-held strengths in the financial services market, says Nasir Zubairi, chief executive of Luxembourg House of Financial Technology (LHoFT), the public/private sector initiative designed to promote Luxembourg’s fintech start-ups.
In an asset management context, this means an alignment with back and middle-office functions – the broad array of asset-servicing and fund-processing activities carried out in support of Ucits funds and alternative investment funds by the population of custody banks and fund administrators in Luxembourg. But, given that so much of asset management is underpinned by regulation that has grown over the past decade and continues to grow, it is not surprising if there is a concentration of regtech firms in Luxembourg, providing technology platforms or tools to ease the burden of compliance with the likes of anti-money laundering and ‘know your client’ (KYC) rules.
Might there even be too many start-ups in this particular space? Zubairi says no. “We constantly see new start-ups in the regtech space. And it amazes me that there are so many fintechs that believe they have a unique way of addressing KYC. However, there are still so many manual processes used by asset managers. Eventually, we will see some consolidation, but there is still a lot of opportunity for those start-ups that get it right.”
Another potential opportunity stems from the EU rules around sustainable investing, encapsulated in the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation. A report published by the LHofT, in conjunction with Deloitte, looked at the sustainable finance market in Luxembourg, and Zubairi believes most industry players currently see sustainability rules as a challenge rather than an opportunity, owing to the great number of rules and regulations the industry still has to wade through.
“But the subject-matter expertise that many start-ups have in Luxembourg is going to be invaluable for things like the EU Taxonomy and in leveraging their sustainability know-how in a consulting capacity to the traditional industry,” he adds.
Blockchain slowdownAccording to Zubairi, the challenging macroeconomic environment has not put too much resource pressure on start-ups. However, there have been some fintech sectors where investment and activity have slowed in the past 12 months. One of these is the blockchain and distributed ledger technology (DLT) space.
Zubairi puts this down to the fact that a lot of asset managers are currently focused on near-term priorities and are looking for short-term fixes rather than long-term, more radical overhauls. “Blockchain technology requires a large investment, a fully-fledged DLT infrastructure is still some way off, and you need everyone to change for the technology to be effective. We haven’t seen major migrations yet. The likes of SIX are doing great work in this area, but we have also seen the delays to the ASX [Australian Stock Exchange] Chess replacement.”
"It amazes me that there are so many fintechs that believe they have a unique way of addressing KYC. However, there are still so many manual processes used by asset managers."
An area where Zubairi expects to see future change is payment providers entering the funds space. Back in 2012, a report by Russell Investments on foreign exchange costs in asset management lifted the lid on the high fees paid by buy-side firms, sometimes as high as 40 basis points. However, more than ten years on, asset managers are still paying excessive costs and fees in their back-office, says Zubairi. “Not enough asset managers consider FX as part of the performance cost and it is bundled up in back-office costs. But we are now seeing payment firms targeting asset managers because they see an opportunity there,” he adds.
“There are barriers because of the contracts that asset managers have with their asset servicers, but payments firms may also look to focus on reporting and providing information around fees – the transparency and best execution that we see in the retail payments and direct FX trading space,” says Zubairi.
He is also watching for developments in the life insurance sector, where he expects innovation from tech companies in the area of life insurance wrappers for investment products.
So, who are some of the fintechs making waves in Luxembourg? Here are three randomly selected by Funds Europe.
MonifloMoniflo was launched in December 2020 as a market platform for values-based investing that offers order routing and custody. It was founded by managing director Georges Bock, who spent 27 years at KPMG in Luxembourg.
The platform houses a number of Ucits funds, exclusively Article 8 and 9 funds under the SFDR. Asset managers can apply to have their funds listed on the platform, for which they pay a fee. The platform then analyses the fund on its SDG – United Nations Sustainable Development Goals – impact and its exclusions. Investors then use a number of filters to set their investment preferences.
“If you look at the distribution network for retail used by the active asset management market, it comprises traditional financial institutions,” says Bock. “And if they continue with that, it will soon be obsolete. We want to be a connector to a new generation of investors that don’t trust traditional advice and want to take more control of their investments. We believe we can do that through impact investing.”
The new generation of investors also wants affordable and transparent platforms that use digital technology, says Bock. To this end, Moniflo is building a blockchain-based custody service that he says will be a fraction of the cost of traditional custody.
Moniflo is working with Fireblocks for cyber security and Clarity AI for the data on impact and exclusions. In terms of funding, the company has raised €1.8 million from a pre-seed round in April 2021 led by a group of Luxembourg-based angel investors.
For 2023, there are two main goals for Moniflo, says Bock. The first is to secure a custody licence from the Luxembourg financial regulator, the CSSF, so that the platform can begin operations, something that Bock expects to happen in the second quarter. The second goal is to look to form alliances with some of the digital-only banks, such as Monzo or N26, that do not currently distribute any investment products. The final goal is to promote the benefits of impact investing and the Moniflo platform.
Next Gate TechNext Gate Tech was founded in 2019 by Semin Ibisevic and Davide Martucci. It was when Martucci, a former portfolio manager at UBS, left UBS to set up a family office in Luxembourg back in 2015 that the idea for Next Gate Tech was conceived.
“When you work as a portfolio manager in a big firm, you have no idea how the back office operates and what is involved in terms of setting up data feeds with fund administrators, prime brokers and depositary banks and having oversight of these providers,” says Martucci.
At the heart of this is data. Today’s asset managers need data from a range of service providers and from market data firms in order to run their calculations, comply with regulations and ensure oversight of their operations. But this data comes from multiple sources and in different formats. It can be complex to manage.
“If you look at the distribution network for retail used by the active asset management market, it comprises traditional financial institutions. and if they continue with that, it will soon be obsolete.”
Unable to find a data management tool that was affordable, automated and based on current technology, they developed it themselves. And then, four years later, they decided to roll the tool out to third parties.
The Next Gate Tech platform is cloud-based and available on a software-as-a-service (SaaS) basis. It is also automated using machine learning to harmonise the data into a single format. Next Gate Tech describes its product as an exceptions-based system that generates events for operations to investigate.
In terms of clients, Next Gate Tech’s technology is used today by internal and third-party management companies, asset managers and depositary banks. The company is backed by six venture capital firms and has raised around $10 million (€9.4 million) to date.
The focus for 2023, says Martucci, is on data management. “The data management capability of the platform can serve more players in the financial industry, and we want our clients to get better value out of it.”
Lingua CustodiaFormed in France in 2011, Lingua Custodia opened a Luxembourg office in 2019. The company uses natural language processing (NLP) to provide automated translations for financial documents. For asset managers, wealth managers and asset servicers, the work includes fact sheets, client reports, key investor information documents (KIIDs), macro research and regulatory filings.
The company was started by CEO Olivier Debeugny in the wake of the 2008 financial crisis. “The initial idea was to create a specialised translation engine for financial services that works by document type,” says managing director Fred Moioli. In essence, the company provides a more specialised service than Google Translate and a more automated and cost-efficient alternative to traditional translation agencies, producing translations in minutes rather than days.
That said, Moioli does not believe that Lingua Custodia has a direct competitor. “We are not doing the same job as translation agencies, which may still be used for something like an annual report that goes to all clients. But for something like a research report, we are more likely to be used because of the timing and the affordability.”
According to Moioli, the move to Luxembourg was designed to spark the company’s global expansion efforts and to move beyond the French-speaking market. The company currently has around 55 clients, which include the likes of BNP Paribas Asset Management, HSBC Private Banking and Rothschild in the UK.
The company completed a €1 million fundraising round in 2019, and its backers come from the private debt market rather than venture capital firms.
For 2023, there are two main objectives, says Moioli. “Firstly, we want to add more services on the platform and include non-financial information for SFDR and ESG [environmental, social and governance] reporting. Secondly, we want to add new languages. We are currently looking at Arabic, where there is a huge demand. We are also considering opening additional international offices in either Switzerland or the UK,” says Moioli.
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