Luxembourg – An important breeding ground for fintech in Europe

Luxembourg has historically been touted as the “First in Finance” on many occasions owing to the open-mindedness of the country’s financial center, which has developed a strong track record in financial innovation by embracing and implementing change.

Luxembourg has historically been touted as the “First in Finance” on many occasions owing to the open-mindedness of the country’s financial center, which has developed a strong track record in financial innovation by embracing and implementing change.

The trend has continued over the last five years. The first dim sum bond listing in Europe took place on Luxembourg Stock Exchange (LuxSE) in 2011, the country became the first in Europe to regulate the family office industry in 2012, while 2014 saw the listing of the first offshore RMB bond in the eurozone on LuxSE as well as the issuance of the first euro-denominated sovereign Sukuk (sharia-compliant bond). Today, Luxembourg boasts over 3000 issuers from more than 100 countries with securities listed in 55 different currencies.


The picture is no different when talking about tech or, more specifically, Fintech in Luxembourg. The likes of Amazon, Paypal, eBay, Rakuten and many other international tech leaders accessing  European markets via Luxembourg is an indication of the already well established and conducive operating environment available to businesses in the e-commerce and e-payments space.


Some private companies in the e-commerce industry have already started to benefit from this environment – one of them, Global Fashion Group valued at $3.1 billion, is featured among the top three in the leading European private companies on the global Unicorn List of 2015.


Luxembourg’s willingness to innovate and accept change can be judged from the fact that it was the first European country to grant a payment license to a virtual currency operator. Indeed, the number of e-money and e-payment institutions in the country tripled between 2012 and 2015, including big international players such as Amazon Payments and Yapital (part of German retail giant Otto).


For fintech firms servicing the fund management industry, opportunities are ample in Luxembourg. With circa €3.5 trillion in assets under management, Luxembourg is the top-ranked investment fund center in Europe as well as the undisputed global leader in cross-border distribution of funds. The country boasts €778 billion of total assets of banks as of 2014 and more than €350 billion in private banking assets under management as of 2015. Furthermore, the six largest Chinese banks (Bank of China, ICBC, China Construction Bank, Agricultural Bank of China, China Merchant Bank and Bank of Communications) have set up their continental European hubs in Luxembourg to serve the needs of their Chinese clients doing business in Europe as well as their European clients doing business in China. As a result, Luxembourg also hosts most renminbi-denominated investment funds outside of Asia.


Fintech firms domiciled in Luxembourg also benefit from the EU passport that makes cross-border transactions and marketing of services to the whole of Europe a hassle free task. The country’s ability and flexibility to combine the specificities of incorporation structures of various jurisdictions, to offer clients and financial professionals solutions that they are most familiar with, also works in favor of fintech firms by allowing any kind of firm hailing from any jurisdiction to find profitable opportunities without any operating hurdles within Luxembourg.


For fintech startups a broad range of public and private incubators and accelerators offer physical space designed to foster business development and coaching and provide invaluable networking opportunities. In addition, alongside a range of private funding opportunities, such as global venture capital and business angel investors, public funding schemes such as the Luxembourg Future Fund and the Luxembourg Seed Fund, offer startups in Luxembourg a fertile environment to scale up their business.


With a view to further strengthen Luxembourg’s fintech ecosystem, Luxembourg for Finance, the Agency for the Development of the Financial Centre, is in the process of setting up the Luxembourg House of Financial Technology – a partnership between the public and private sector with the aim of fostering innovation within and driving the technological evolution of Luxembourg’s financial services sector. Offering startup incubation as well as co-working spaces, the LHoFT will bring together all parts of Luxembourg’s fintech community – innovators, investors, financial institutions and research institutions.


Separately, the fintech Luxembourg meetup group sponsored by Silicon Luxembourg has 662 members registered to date. The pace of fintech activity, as defined by the number of new players entering the market is quite rapid in Luxembourg. According to Silicon Luxembourg, an entity that strives to profile and promote startups in Luxembourg, four new players have entered the market in Q2 2016 alone. Gloneta and Koosmik focus on free of charge money transfer – Gloneta goes even a step further with its chat application like software and allows the transfer of money from one currency to the other. Ellipsys has raised €150,000 in financing to further development efforts on its business intelligence focused software. Finally, Bitstamp has received a license to operate as a fully regulated payment institution and will become the first fully licensed bitcoin exchange in Europe operating out of Luxembourg.


Theresults of a survey conducted by PWC in April 2016 on how fintech is shaping financial services in Luxembourg reveal some interesting insights. Development of fintech is a priority at the government level with this being one of six key domains of the Digital Letzebuerg Strategy launched in late 2014. The survey highlights that almost half of the existing financial service players in Luxembourg feel that an average 26% of their business may be lost to standalone fintechs in the next five years. However, a key impediment to the growth of Fintech is the need for further education about blockchain – the technology widely used by e-payment solution providers – as 83% of the survey respondents are not fully familiar with the technology.


The top three concerns cited by fintech companies when dealing with traditional financial services players in Luxembourg relate to IT security, required financial investment and differences in management culture. On the other hand, traditional financial services players cite regulatory uncertainty as the biggest impediment when dealing with fintechs, followed by IT security and differences in operational processes.


In a recent development, four of the world’s biggest banks (UBS, Deutsche Bank, Santander and BNY Mellon) have teamed up with broker ICAP to develop a new form of digital cash that they believe will become an industry standard to clear and settle financial trades over blockchain. The group is to pitch the idea to central banks, aiming for its first commercial launch by early 2018. Given that three banks in the group of four hail from Europe, chances are that Luxembourg can benefit. Only time will tell how the country capitalizes on this deal, but one thing is sure: the fintech evolution in Luxembourg is not stopping anytime soon.



Affan Bin Mahmood

Read the full Special Report: Luxembourg: Small but Mighty

With a population of only half a million, Luxembourg is one of the world’s most developed economies and a key seat of the European Union. Thanks to its strategic location at the heart of Western Europe, social and political stability, innovative and international orientation, as well as modern legal and regulatory framework, the Grand Duchy is the Eurozone’s premier private banking center and the world’s second largest fund center, attracting banks, insurance companies, investment fund promoters and specialized service providers worldwide. Both international firms and local firms need to adapt themselves to the changing landscape of legal market.
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