Hundreds of reports, news articles, startup tickers and interest groups from Singapore, across London to Boston are talking about the “FinTech Ecosystem”. Why has a vegetational concept originated from botanical literature become the place to be for companies seeking innovation? What makes up this cradle of life and who resides there? Is there a way to cultivate this El Dorado? And how is it that low failure and risk tolerance prove to be a barrier for new FinTechs in Switzerland?
– Article from Julian Osborne
The Classical Ecosystem
Arthur Tansley, a botanist researching systems of organic communities was the first to put the word to paper in 1935. Tansley’s definition does not only include biological arrangement but – in his words – “the more fundamental conception is, as it seems to me, the whole system (in the sense of physics), including not only the organism-complex, but also the whole complex of physical factors forming what we call the environment of the biome – the habitat factors in the widest sense.” Tansley adds both the living community and the physical (or digital, respectively virtual) foundation in which the dynamics take place into his definition.
Searches for Ecosystem
By applying Tansley’s definition to the FinTech Ecosystem (or more broadly the Financial Services Ecosystem), it describes the sum of individuals and companies that are operating in the sector as well as the underlying structure in, respectively on which the entities interact. This definition is exceedingly inclusive yet essential to understanding the vast number of actors and factors, as well as their interrelatedness that together constitutes the FinTech Ecosystem.
The Habitat Factors And The Organism-Complex
What characterizes the habitat factors of FinTechs? In general, the research on innovation ecosystems has only recently gained more interest, and as such there are few commonly used frameworks. A model suggested by Peter Vogel is the Entrepreneurial Ecosystem that can be adapted to capture the essential building blocks of the FinTech Ecosystem . As such the habitat factors which FinTechs find themselves confronted with, can be separated into two main categories:
(1) Non-entrepreneurial context elements such as infrastructure, governments/regulations, markets, country level of innovation and R&D as well as the geographic location
(2) Entrepreneurial environmental elements that consist of financing, entrepreneurial education, culture, networks, startup support and exposure of entrepreneurs
The FinTech Entrepreneurial Ecosystem
The Entrepreneurial Ecosystem by Peter Vogel distinguishes between entrepreneurial environment and non-entrepreneurial context elements, in which the actors interact.
With an explicit model summarizing the habitat factors of the ecosystem, the next step is to move on to the organism-complex. At the heart of the system resides the FinTech entrepreneur or startup. The conceptual framework by Vogel allows to systematically define most other actors by considering the individuals and entities for all the entrepreneurial and non-entrepreneurial determinants. For example, the element “governments & regulations” consist of policymakers and regulators; or the overall level of “R&D & Innovation” is shaped by schools and universities, as well as private companies respectively their research spending.
Covering all determinants in such a fashion allows capturing all essential players. In additioin, we can also see an entirely new species emerging: ecosystem builders, ecosystem developers, ecosystem sales associates and ecosystem program managers. These new actors affect the other players but also the structure itself, as the system finds itself in perpetual motion.
Change and Innovation: The Dynamics of an Ecosystem
Although Tansley’s definition misses some elements common in modern descriptions of ecosystems, such as scale or openness, he already describes dynamics occurring within a system. Tansley writes about successions, which he recognizes as phases that a system goes through when it moves and changes. Internal dynamics or external interruptions are the cause of these shifts. An example is the current disruption to the financial service system as part of a broader trend in digitization and exerted by new technology and service arrangements in the form of FinTech startups.
However, the authority on systemic innovation is without a doubt Joseph Schumpeter, who coined the term “creative destruction.” Schumpeter also draws analogies to biology in his works as illustrated in his definition of creative destruction: “the process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.”
The use of biological terms and analogies in the literature on innovation has not seen any decline in late writings but instead has further deepened. For example, the relation of bio-community to its physical surrounding and the following creation process is also the core topic of the book “The Rainforest: The secret to building the next silicon valley” by Victor Hwang and Greg Horowitt. The authors suggest that Silicon Valley is an innovation ecosystem, by drawing parallels to a rainforest .
“A rainforest is an environment with special characteristics – the air, the nutrients in the soil, the temperature, for example – that encourage the creation of new species of animal and plants that are greater than the sum of their elements. A rainforest takes lifeless inorganic matter and creates systems of thriving organic matter.“
Greg Horowitt and Victor W. Hwang
When the value of the generated output is disproportionately more significant than the original input materials and organism-complex interactions, this is called systemic innovation. This feature of a thriving ecosystem makes it a highly attractive space to be for startups, but also all other players, including incumbent companies and of course governments. According to Hwang and Horowitt, central authorities have the unique power to nurture the system and shape its composition, without directly telling actors what to or not to do. As such, in the framework by Vogel, policymakers are not only part of the non-entrepreneurial determinant “governments & regulations”, but they can also actively set incentives to stimulate the other elements.
Innovation Promotion In Switzerland
In Switzerland, the federal government has been promoting science-based research for several decades. The first legislative bill dates back to 1969, but the more recent 1984 Federal Act on the Promotion of Research and Innovation (RIPA) defined the goal, scope and actors included in the innovation promotion. Innovation policy has emerged as an amalgam of science and technology policy and industrial policy, currently lacking a holistic picture or order. Recently the Swiss government has increased its focus on startups with supporting measures such as the construction of innovation parks with the specific goal of raising the number of newly found enterprises, including FinTechs. While these efforts make Switzerland lead the rankings for the seventh consecutive year as being the most innovative country (Global Innovation Index), it remains on one of the mid-lower ranking spots compared to its peers when it comes to entrepreneurial activity (Global Entrepreneurship Monitor).
The difference in ratings raises the question: Do Swiss government policies match the requirements of FinTech start-ups and entrepreneurs? Or put it another way, what kind of strategies are necessary to stimulate the FinTech Ecosystem and raise entrepreneurial activity? An ongoing survey lasting until the end of October is trying to identify precisely this question. The questionnaire holistically addresses the non-entrepreneur-specific general context and the entrepreneurship-specific environmental settings outlined in the previous framework suggested by Vogel.
The survey still runs until the 31st of October. Take 15 minutes to provide feedback on where Switzerland needs to improve its FinTech Ecosystem – Link to survey.
For each of the ecosystem components, the participants were asked to identify if there is 1) a barrier to the startups and 2) if there was a need for a policy to address potential issues of ecosystem component. From the responses that were collected up to the beginning of October 2017, the three most significant barriers to startups and their creation were the low tolerance of failure and risk, the high cost of living, as well as the obstacle from immigration and labor laws.
The FinTech Entrepreneurial Ecosystem
The table shows the results from survey responses collected until the beginning of October. Participants were asked to identify if there is 1) a barrier to the startups and 2) if there was a need for a policy to address potential issues of ecosystem component.
There was almost a perfect match between perceived barriers to running a business in Switzerland and the observed need for policies addressing these obstacles. The three most demanded strategies to help entrepreneurs ask to focus on the low tolerance of failure and risk, the noted lack of public loans and grants, as well as the high cost of living.
Increasing Innovation And Entrepreneurial Activity By Cultivating The Ecosystem
Just as in biology, where living beings are set inside a physical system, FinTechs operate within an environment that can be defined by the term ecosystem: the sum of individuals and companies acting in the financial service sector as well as the concrete and fundamental structure on which the players interact. The analogy to a naturally occurring rainforest, as suggested in the article, further illustrates the diversity of species and structures. The output that these fruitful systems generate can be disproportionately more significant than the original input materials. This value creation makes it an attractive place to be for all players involved. As such, there is a substantial incentive for governments to cultivate said systems. The Swiss state, for example, has been remarkably successful at increasing overall R&D and innovation levels. However, this is only one ecosystem determinant, which on its own, will not automatically translate into an increase in the number of startups. As the framework by Vogel illustrates, there are many more elements necessary to spur entrepreneurial innovation. In Switzerland the low tolerance of failure and risk, the high cost of living, as well as the obstacle from immigration and labor laws are perceived to be significant obstacles for FinTech startups. For this to change, policymakers must keep a holistic view and develop strategies that support all the individual ecosystem components.
 Arthur Tansley, The Use and Abuse of Vegetational Concepts and Terms, Ecology, Vol. 16, No. 3. (Jul. 1935). Page 299
 Vogel, Peter. 2013. “The Employment Outlook for Youth: Building.” Conference Proceedings of the G20. Available at SSRN: http://ssrn.com/abstract=2357856.
 Joseph Schumpeter, Capitalism, Socialism, And Democracy, This edition published in the Taylor & Francis e-Library, 2003. Page 83
 Victor W. Hwang (Author), Greg Horowitt (Contributor), 2012. The Rainforest: The Secret to Building the Next Silicon Valley Paperback. Page 25
Data and Methodology:
The data for the first chart was obtained directly from a query on Google. The numbers represent search interest relative to the highest point on the chart for the given period. A value of 100 is the peak popularity.
The data collection for the preliminary survey results ran from September 1st to October 6th. The questionnaire consists of 34 questions. Any personal information that could identify the respondents was removed or changed before sharing files with other researchers or results are made public.
This document is part of the Master Thesis “Policy Incentives for Innovation” written by Julian Osborne over the spring and fall semester 2017 at the University of Zurich and supervised by Fabrizio Gilardi. The material provided has been created with the highest care. For the accuracy, completeness, reliability, usability, and timeliness of the content, the author cannot guarantee. The respective user is therefore generally obliged to check or to have professionally checked the suitability of all material for its intended use. For additional inquiries, please contact: firstname.lastname@example.org