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In 2014, the Nordics were second only to the UK and Ireland as the most significant region for financial technology (fintech) investment in Europe, $623m and $345m respectively. Computer Weekly takes a look at the drivers behind the Nordic fintech boost and the barriers it has still to overcome.
“All Nordic countries are at a high level of digitalisation,” said Anette Broløs, director of Copenhagen Fintech Innovation and Research (CFIR).
“There is good digital infrastructure and great collaboration between the private and public sectors, which means there is fertile ground to develop fintech,” she added.
According to The Nordic Web, in 2015 fintech startups attracted more capital than any other vertical in the Nordics for the first time, leaving traditionally strong sectors such as enterprise software as a service (SaaS) and gaming behind – and Swedish capital Stockholm is leading the way.
Out of 51 fintech investments in the Nordics in the past two years, 32 were made in Sweden, Finland received eight, Denmark got five and Norway had four investments.
Stockholm is also home to two of the region’s most prominent fintech startups: Klarna and iZettle.
Klarna aims to simplify online transactions with an e-commerce payment service that enables purchases using just an email address. iZettle turns mobile devices into card payment terminals, making it easy for small business or even street vendors to accept card payments.
The two have raised $244.04m and $291.33m in funding respectively.
The art of collaboration
However, it is not only young, innovative companies that drive fintech growth in the Nordics. The region boasts a high level of digital readiness and a population open to using the latest technologies.
All Nordic countries have been quick to embrace digital banking and electronic payments, placing them among the most cashless societies in the world.
Much of the credit for this goes to established Nordic banks. Breaking from their stuffy tradition, these institutions have fostered the development of financial services IT for decades.
“Banks have turned to automation to cut costs as the price of labour [in the Nordics] is high. IT and the internet started to come through much earlier here than in many other countries,” said Robin Teigland, professor at the Center for Strategy and Competitiveness at the Stockholm School of Economics.
“Online banking and internet banks have been here for more than 20 years, there is a lot of competence.”
Now these same companies are facing a rapidly changing market where customer-focused digital challengers are shaking up traditional business models. While some corporations have been slow to react, others have opened their doors to the newcomers and started their own startup accelerators and programmes.
“The banks will need to change. They are the ones that will use the new services, because they won’t have the time and energy to develop everything by themselves,” said Johan Lundberg, CEO of fintech focused venture capital firm NFT Ventures. “A bank cannot be on top of 400 or 500 products, they need to buy and outsource systems from others.”
In addition, incumbent banks have tapped into the region’s long tradition of partnership and collaboration in the financial industry.
A recent success story is the mobile payment system Swish, which was co-developed by six large banks and launched in 2012. The app is used by 3.7 million Swedes (close to 40% of the population) for mobile money transfers and payments.
In Denmark, a similar service by Danske Bank, MobilePay, has been adopted by 2.9 million of the country’s 5.6 million residents (customers of any bank can use the service), and it recently expanded to Norway and Finland.
Despite the digital strengths of the Nordics, it is not all smooth for startups looking to enter the fintech market. The northern countries still have limited access to risk capital (Sweden aside), not enough talent available for growth companies and – most notably – regulatory challenges.
Not only are Nordic financial services highly regulated, but the regulation was mostly created from the perspective of traditional business models. New services have difficulties finding a box they fit into in the current regulatory framework. Regulators are also slow to adapt to digital opportunities in fintech, such as big data, blockchain technology and cryptocurrencies.
Lundberg said fintech newcomers are not against regulation, but more flexibility is needed to drive innovation.
“I believe we will have the same base regulation, but there needs to be different categories of it,” said Lundberg. “A small startup cannot be regulated the same way as something such as [multinational bank] Nordea, that doesn’t make any sense. The way the regulation works is preventing companies from establishing themselves and improving competition in the market.”
While regulatory changes take time, startups are finding ways to work around them. Danish mobile banking developer Lunar Way adopted a partnership model where it teams up with established local players, such as the Copenhagen Co-operative Bank, to comply with different regulations across the Nordic countries.
Similarly to the digital challenger bank Atom in the UK, Lunar Way offers banking services only through a mobile app. But whereas Atom has its own banking licence, Lunar Way uses its partner banks’ licences and their core banking infrastructure.
“We are trying to attract the younger audiences, 18 to 25 year olds,” Lunar Way founder Ken Villum Klause said. “Incumbent banks have lost touch with these groups and that is something we can bring to the table with a new product and new technology, while the partner bank offers their solvency and credit.”
Lundberg recognises the problems Lunar Way faces. “It would be sad if the government and different businesses do not realise [the pitfalls of regulation] and start using the potential of the whole region to become a strong supplier of next generation fintech services. We are very well positioned.”
But whether Nordic regulation changes or not, Teigland said traditional banking will exist in parallel with fintech services for many years to come.
“There are two kinds of system. You have the system of established banks, where you lose a customer every time somebody dies. Then you have the startups which are capturing the millennial generation by tapping into how they think about money and use technology.”
“It’s not about technology or having great ideas, but doing the right things at the right time,” said Teigland.