The ABBL Digital Banking and FinTech Innovation Cluster (DBFI), in cooperation with the Working Group “Mutualisation of Functions” of the Luxembourg Haut Comité de la place financière, conducted a study aimed at ABBL members to explore the functions prone to be mutualised in the financial services sector of Luxembourg.
In the context of the study, mutualisation of functions in finance refers to situations where financial institutions, together with other partners such as technology providers, law firms, consulting companies, pool their resources in order to set up a separate utility or a hub that could provide its services that were previously internal business functions. Examples might be regulation and compliance, payments and cybersecurity. By setting up a mutualised service projects, financial institutions can save costs, improve quality of the specific business function in question and focus on core areas of their business.
Data collected from banks and credit institutions in Luxembourg in Autumn 2019 revealed that 93% of respondents believe that mutualisation of certain functions between institutions is valuable for the financial services community. Compliance related functions such as regulatory and prudential reporting (82%), Know Your Customer (KYC) / Anti-Money Laundering (AML) / Combating Financing of Terrorism (CFT) (71%), and standardisation of KYC documents exchange (67%) are the most attractive areas to embark on mutualisation, according to surveyed financial institutions. KYC / AML / CFT, regulatory and prudential reporting, and customer on-boarding are seen as the most promising mutualisation areas that could constitute international competitive advantages of Luxembourg.
Financial institutions in Luxembourg are aware of several national and foreign mutualisation initiatives that either already exist, or are emerging in the marketplace. According to the survey, technological (85%) and economic (78%) macro-factors have an overall positive impact on bankers’ decision-making process related to joining mutualisation projects. Among hindrances are socio-demographic (17%), regulatory (15%) and political (11) developments.
Professional associations (63%), software / IT vendors (52%), and consultants (52%) have an positive impact on existing and potential engagement of financial institutions in mutualisation projects in Luxembourg.
Meanwhile, headquarters, group members (18%) and competitors (15%) and law firms (15%) are seen by some respondents as obstacles with regard to mutualisation initiatives.
Concerning internal factors, Luxembourg bankers refer to IT infrastructure (67%) and project partners (59%) as positive drivers of engagement in mutualisation projects in finance. However, budget and project costs (26%), availability of competent and skilled staff (22%), and the limitations of market size are seen as major barriers for mutualisation initiatives. Confidentiality and sensitivity of data in the processing of mutualisation, as well as organisational culture and resistance to change, are among other potential issues on the road to mutualisation.
Financial services providers suggest that professional associations in Luxembourg should:
- Federate, coordinate and facilitate initiatives of its members with regard to mutualisation;
- Select, drive, promote and support such projects;
- Define standards and codes of conduct;
- Lobby for mutualisation projects vis-à-vis regulators.
According to financial services providers, regulators and government agencies in Luxembourg should:
- Enable, promote and support mutualisation initiatives contributing to the development of national competitive advantages;
- Put in place a regulatory framework and taxation regime that would create opportunities for mutualisation of functions in finance;
- Consider being centres of documentation and stakeholders of such initiatives.
The ABBL thanks all its members for taking part in the survey.
The outcome of the study will be conveyed to regulators and major decision makers in Luxembourg with a strong believe that this will positively contribute to making the national financial sector robust, agile, compliant, innovative, and competitive in the global financial marketplace.
By Andrey Martovoy, Adviser, FinTech – ABBL