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Chatbots, layoffs, closer startup ties and Payment Directive II (PSD2) – these themes coloured the Nordic finance industry in 2017 as banks accelerated their digitisation efforts.
And they cannot afford to slow down in 2018 as the number of fintechs coming in with completely new value propositions is increasing every year, according to Halvor Lande, head of digitisation at DNB, Norway’s largest bank.
“Big tech companies like Facebook, Apple and Amazon are also starting to move into this industry and challenging traditional banking products and services,” he said. “This has created an increased sense of urgency among all banks that we need to step up significantly in digital product development and business reinvention.”
Examples are not hard to find. DNB has redefined itself as a technology company with a banking licence. Its latest launch is a fully automated lending process that allows the bank’s existing customers to extend or top up their loans in a few minutes online or on a mobile app. No contact with a bank employee is required.
Meanwhile, in Finland, financial services provider OP Financial Group has ventured outside traditional finance products with a strategy shift to become a “digitally focused multi-sector services company”. This includes mobility and health services as well as tapping into the blockchain trend with Nordic banking giant Nordea to move residential real estate deals – and all the related paperwork – to a digital platform built on distributed ledger technology.
Nordea has also introduced its first artificial intelligence (AI)-powered chatbot, Nova, which is now helping the bank’s customers with simple queries, much like Swedish bank SEB’s Amelia and Swedbank’s Nina.
But despite such advances, incumbent banks have a weakness compared with their startup counterparts. Mikko Riikkinen, a fintech specialist PhD researcher at the University of Tampere, said that although Nordic banks were early adopters of online banking, they are now weighed down by their legacy IT systems.
“Banks need to let go of some of the old things they have traditionally been good at to reach the next level,” he said. “Banks are used to developing things themselves and now they have to open up their APIs [application programming interfaces].”
The banks are well aware of their legacy challenge. In October 2017, Nordea announced it would be axing 6,000 jobs worldwide, including external IT consultants, citing digital transformation as the key driver. The news followed the launch of its €1bn simplification programme three years earlier, which includes new core banking and payment systems.
In Norway, DNB – which closed 59 retail branches last year because of the growth in digital banking – is preparing to launch a new cloud platform in 2018.
“We are moving from our old-fashioned front and development architecture, which was built in the 1990s, to a completely new, modern cloud-based environment,” said Lande. “It is the foundation for all our new development going forward. As a result, we will launch new products in 2018 built on the cloud and integrated into our back-end systems through our APIs.”
Harri Nummela, vice-president of digital business at OP, outlined similar plans. While OP is experimenting with new digital business models, most of its investment still goes on digitising existing customer and internal work processes.
“If you want to build new value chains and a platform economy, the pieces attached to them will come from our current business and those have to be digital,” said Nummela. “So this is also groundwork for our future business models.”
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Nordic banks have also realised they don’t have to develop these future business models alone. In November, Nordea announced a fintech fund targeted at Nordic startups and made investments in Swedish mobile payment provider Betalo.
In Norway, DNB has put its weight behind the DNB NXT Accelerator programme run by the Norwegian Startup Lab. And in Finland, OP has started up an OP Lab innovation unit to work more closely with its startup partners.
Denmark’s Danske Bank has taken a slightly different approach with The Hub, its online platform. The bank works with local partners in each of the Nordic countries to help startups with recruitment and raising capital.
This type of collaboration will take a new turn this month, when the EU’s revised payment directive, PSD2, comes into force, requiring banks to open up their payment and customer data for third-party providers through APIs.
Nordea made an early start on these new requirements in December with the public launch of its Open Banking developer platform for account and payment APIs. Both OP and Danske have announced similar platforms, but they are yet to open.
But it is not the technical aspects of PSD2 that Nordic banks will struggle with, said Tempere University’s Riikkinen – it is the cultural change. The new regulation will throw open the doors to new services built on top of existing bank accounts. Consumers could pay bills, access transaction data and manage their budgets from a single mobile app offered by someone other than their bank.
“Banks will need to rethink their whole concept – and they aren’t ready for that yet,” said Riikkinen. “They still lack the understanding of how to play with startups and what their new role is. It will take a lot of time and resources for each bank to figure out how this will work.”
The choice banks face in future is whether to be producers of new customer-facing apps or a “utility” providing the APIs behind these services. OP’s Nummela said this separation of customer and product layers has been a hot topic in the Nordics for almost 20 years, but only now are tangible changes starting to happen.
“The hardest fights will be fought close to the customer interface,” he said. “People’s need for [financial] services won’t disappear, but if current finance players don’t change and renew themselves, they risk losing their places.”