Luxembourg has long been a major financial centre in Europe, with nearly 130 authorised banks. It is also the second biggest market in the world – behind the US – for investment funds, with more than €5.6bn in net assets being managed in the country.
It isn’t surprising that an increasing number of fintech companies are choosing Luxembourg for their European headquarters. The small European country is unique because of the language skills not only among the people working for the different companies, but also among the regulators.
The three official languages are French, German and Luxembourgish. But applications and contracts can be written in English – and still be fully recognised by the courts.
Switzerland offers similar language advantages, and the ability to use English. But one thing that Switzerland doesn’t have compared to Luxembourg is access to the European market. When a company gets a banking license in Luxembourg, the license can be “passported” to all other EU countries.
As part of an overall strategy to capture a larger part of the global market share for fintech, the government of Luxembourg has helped set up The Luxembourg House of Financial Technology (LHoFT), a not-for-profit collaboration between government and the private sector.
The LHoFT aims to drive digitalisation in financial services and ensure the future of the financial services industry in the country. Not only does the collaboration help to incubate more than 80 startups in a facility in the centre of Luxembourg, but it also helps “the new kids on the block” gain access to top executives in established firms and to government officials.
One company that joined the LHoFT and benefited from Luxembourg as a gateway into Europe is Tryolabs – an enterprise that was created in Uruguay by a group of artificial intelligence (AI) experts 12 years ago, when there were very few practical applications of AI. As the market grew, the company built a business developing custom solutions based on natural language processing (NLP), computer vision and predictive models. The startup helped customers solve problems with supply chain management, manufacturing, retail and e-commerce.
More recently, Tryolabs discovered the growing demand for AI in the finance industry – mostly around automating internal processes to scale to higher volumes of information. It applied AI to processing very high volumes of data and picking out the most relevant information.
Two big areas where these kinds of solutions are in growing demand are anti-money laundering (AML) and know-your-customer (KYC). Another area where information is important in asset management, employing a technique sometimes referred to as Alternative Alpha, where alternative data sources are used to better understand markets to provide more valuable insights to decision makers.
Tryolabs recently began building solutions that use NLP to process news sources and sum up the pieces of information most important to the client. Rather than check all the different news outlets throughout the day, brokers can now read a summary to get the right information in 10 minutes.
“We had been working for almost nine years, mostly in the US, with US companies,” says Ernesto Rodriguez, co-founder and COO of Tryolabs. “About four years ago, we began seeing more opportunity in Europe and started working with European companies. We saw a very good market opportunity, but knew we would need a more formal presence in the EU.
“We chose Luxembourg as our gateway to the European market. Through the LHoFT, we developed a great network of fintech companies, banks and insurance companies, and ended up working with some of them.”
The three pillars of the LHoFT
Three pillars drive the actions of the LHoFT. The first is cooperation and ecosystem development – connecting people, making sure the different stakeholders are in touch with one another and aligned. The LHoFT provides a way for people from the financial industry to spot new technologies, new companies and new solutions. Likewise, it helps people from technology companies understand the traditional financial industry, the latest challenges, and the kinds of solutions being sought.
The second pillar is knowledge. The LHoFT runs a series of educational programmes – a mix of webinars, live seminars and entrepreneurial workshops. It runs boot camps, specifically on financial inclusion and on early-stage fintech development.
The third pillar is research and projects. The LHoFT conducts research and publishes the key findings, sometimes in collaboration with other organisations in Luxembourg or abroad. LHoFT also instigates and helps develop a variety of industry-wide projects related to financial technology.
For example, the LHoFT works with industry players in Luxembourg to develop a centralised know-your-customer (KYC) facility. They also plan to develop a centralised, standardised due diligence platform to speed up the process of procurement for all industry players.
“The LHoFT board exemplifies the cooperation we seek to encourage,” says Nasir Zubairi, CEO of The LHoFT. “The chairman of our board, Pierre Gramegna, is Luxembourg’s minister of finance. Other ministries are represented on the board – including the ministry of economy, and the ministry of state.
“They sit alongside the CEOs of 13 private sector institutions, broadly representative of the traditional finance sector in Luxembourg, including banks, insurance companies, the big four advisory firms, and tech firms.
“Our philosophy is that the future is all about collaboration between the traditional finance sector and the fintech sector and getting companies to work together.”
The LHoFT plays an additional role outside of Luxembourg. It acts on behalf of Luxembourg internationally, representing the country on key steering committees and councils around the world – including the IMF steering committee for finance and technology, and the blockchain expert policy advisory board of the OECD.
The advantages of doing business in Luxembourg
“One of the key ingredients that makes Luxembourg such a good place to start a company in fintech is the proximity with decision makers,” says Jonathan Prince, serial entrepreneur. “The LHoFT acts a catalyst to help make those connections.”
In 2010, Prince joined Mpulse, which in partnership with mobile phone operators is now the number one player in Luxembourg around micro-payments, with roughly 95% market share, according to Prince. In 2012, he co-founded Digicash, a mobile payment solution, in partnership with retail banks.
“Digicash has very high traction in Luxembourg,” says Prince. “This is one of the very few countries in Europe where mobile payment is used by most of the population. More than 40% of the entire population of Luxembourg is actively using our app – for remote payments such as invoices payments, in-shop payments and for money transfers between users.”
Jonathan Prince, entrepreneur
While Digicash and a few other B2C solutions have met with success in Luxembourg, the size of the population does not offer a big opportunity for anything consumer based. In some cases, the country can serve as a proving ground, a springboard into larger markets – such as France, Germany and Italy. But there is far more opportunity in B2B solutions, targeting the relatively dense population of businesses in the country.
In 2017, Prince helped launch a B2B company, Finologee, which offers regtech software. “We are a platform operator,” he says. “We are ourselves regulated, and we have a PFS [Professionals of the Financial Sector] license, which is very specific to Luxembourg. A PFS license gives framework that makes it easier for banks and insurance companies to outsource to us. We operate as an IT provider to them.
“We serve different verticals, using different product lines around payments and KYC, and regulatory reporting. More than 50 financial institutions rely on us for some of their processes, including 35 banks that we help with conformance to PSD2 regulation. For KYC, insurance companies and banks use our products and platforms to onboard new customers or to update information on existing customers.”
From early adopter to net exporter of FinTech
“As a country, our initial focus has been on attracting technology providers and being a customer of fintech,” says Zubairi at LHoFT. “The simple rational is that Luxembourg doesn’t have a lot of people to start companies. We have a small population of 600,000 people. We also have 200,000 people commuting in every day from France, Germany and Belgium. Even with this daily influx of people from outside the country, there just aren’t a lot of human resources.”
Nevertheless, the country’s strategy has paid off in some areas. The first phase in Luxembourg’s approach to fintech was to look for good technology providers from abroad to show them there is a business opportunity and to show them that Luxembourg is a great place to do business. The influx of new technology has inspired people who were already in Luxembourg to join the fintech revolution and set up their own businesses.
“The two big developing areas in Luxembourg are blockchain and regtech, because [the latter] aligns perfectly with the industry here,” says Zubairi. “We are Europe’s back office in many ways, and we collaborate closely with our EU friends. Because we handle of lot of regulation ourselves, it’s a natural place for people to develop software and services. Luxembourg now has around 35% of the EUs regtech economy.”
Prince add:S “RegTech also includes a lot of reporting. Financial institutions get a lot of pressure from regulators to have more control over their clients, and to report more to the regulator. Almost every month there’s a new regulation, with new obligations. So regtech is a hot area of fintech.”
Two especially hot areas in regtech are KYC and AML. For KYC, software helps companies collect and analyse information on customers, allowing financial institutions to better identify risks involved in maintaining a business relation. For the broader area of AML, financial institutions are required to monitor customer transactions and report on suspicious activity. Software helps them collect information and analyse behavior.
The human factor
“Access to decision makers is a key differentiator for Luxembourg,” says Zubairi. “You bump into the CEOs of the financial institutions – or even the prime minister – grocery shopping on the weekend. They’re all down to earth. Everybody is easily accessible. Everybody is easy to talk to. Things get done quickly because Luxembourg has the agility of a startup relative to other countries.”
Tryolabs’ CEO Ernesto Rodriguez says: “Luxembourg is an open and dynamic place to create a subsidiary and network with key decision makers. We were able to really quickly set up shop there and were able to work with clients in Europe from a place where, not only the location that was super convenient, but also the advantages of the network that being there created. The LHoFT opened the door for us to other companies in fintech, and in other industries.
“We intend to stay in Luxembourg,” he adds. “We’re looking for more opportunities in finance. We’re working with a big insurance company from Germany and another one in France. The idea is to continue using our Luxembourg network to connect with other companies in Luxembourg and the rest of the EU to expand our market.”
Prince says: “Maybe one of the biggest advantages of Luxembourg is the quality of life that we can offer. That is a strong argument when you want to hire people. The quality of living here is great. You can come from a variety of backgrounds and fit in very easily. I moved here 10 years ago and can’t imagine leaving. To start a company and to run it an ongoing basis, Luxembourg is a great location.”