Banking | Francis Hellawell |
16 November 2022

THE FUTURE OF BANKING IN THE NORDICS – BEING DIGITAL AND PERSONAL

Data, customer experience, sustainability and ESG were omnipresent themes at MoneyLIVE Nordic Banking 2022. Just as noticeable though was not hearing from the heritage players about their challenges. But although banks may own the balance sheet and the regulation keeping, they don’t necessarily deal with the end customer, they enable the end service provider. Which brings us to the overall theme that emerged - collaboration.

NEWS FROM THE DIGITAL FRONT LINE

The Nordic FinTech/Neobank market is as alive and kicking as everywhere else. DreamPlan helps users save for their dreams, Bill Kill, out of the box billing and payments platform, MakeImpact, sustainable investing platform, Doconomy, finance and environmental impact combo, and Neobank cloud native, Northmill, targeting the underserved small business sector. All solve a customer need with agility.

Northmill identified that AI hasn’t delivered good human interactions. Chat bots don’t provide a good customer experience and do nothing to help build the necessary trust. Their motto ‘Digital but Personal’ is a good one as we’ve seen too many go too digital, accelerated by Covid with much High Street presence lost.

But what of the heritage bankers take? It was quiet. Although one approach used by northern European financial services group, SEB, is their standalone innovation brand SEBx. This keeping the innovation brand at arm’s length helps ensure it isn’t crushed by the sheer weight of the heritage banking model. Digital banking in the Nordics is possibly a couple of years behind the world leaders, so it will be interesting to see how the digital natives weave themselves into the financial services landscape. But we see a consolidation coming, because large banks have the advantage of economy of scale and liquidity.

DATA AND THE CUSTOMER EXPERIENCE

Digital natives ask the data questions from day one. But it’s a lot easier to start from a blank sheet of paper. Banks have been nervous and reluctant to deal with the data at their disposal - there is so much of it it’s hard to know where to start. Then there’s the underlying negatives and complexities of some customers not liking banks using it, and data ownership rights.

What is meant by wanting to be customer focused? To be excellent you need to know your customers and which groups you’re targeting, what’s important to them and how you’ll deliver. As an example of understanding extremes, a bank might spend two months analysing data, whereas Google use real time data to nudge customers along.

Gareth Miller, Delivery Partner, Banking & FinTech, Endava, points out, “Heritage banks are set up to be regulation focused, financial focused, risk focused. To be customer focused they have to reengineer.” Innovators, in turn, may not remain as innovative and flexible though when they get big enough to pop up on the regulators’ radar.

HOW TO CREATE A SAFE AND TRUSTWORTHY AI

How do you ensure a chat bot doesn’t become racist? What are the unintended consequences of AI when making robotized decisions or providing advice? In a world where discriminate has a lower-case ‘d’ when does the robot realise that ethically it can’t do something? It might be a statistically demonstrated fact that some areas have more crime, but postcode red lining is strictly not allowed in banking.

Pierre Kovacs, Senior Vice President, Banking & Capital Markets, Endava, comments, “We must adopt a risk-based approach with AI. The EU is regulating now. Operational guidelines must be embedded in the AI lifecycle.”

PRIVACY VS TRANSPARENCY

The Euro CBDC (Central Bank Digital Currency) question highlighted the precipitous balancing act between privacy and transparency. Privacy is a fundamental right, but transparency is needed for AML/CFT (Anti-money Laundering/Combating the Financing of Terrorism).

As Pierre Kovacs says, “It brings with it concerns for financial stability. The Digital Euro is designed as a means of payment, not storage of value. But with this there’s a limit on individual holding, on conversion, and the technical challenge around EU payment standardisation.”

CRYPTO MATURITY MODEL

The 2022 Global Cryptocurrency Adoption Index - Chainanalysis shows low adoption in Nordics because the current fiat system works well.

Comments Pierre Kovacs, “Unlike fiat currency, crypto transactions are on a public ledger where all the transaction information is public. Money flow is transparent, but identities aren’t always.”

As another layer to this you have Austrian Crypto Unicorn Bitpanda that provides a retail investment solution where you can invest 24/7 and hold fractional shares in all asset classes.

RISK MANAGEMENT

The strong presence of the KYC Fraud, AML and fraud detection providers reminds us that even though you can give a loan to almost anyone as long as they’re not a criminal, there’s no profit if they don’t pay you back. But neither can you spend days checking as you won’t convert many customers.

There’s a difference between risk avoidance and risk management. Proper banking is about risk management and factoring in bad debt. If you just lend to everyone at the point of sale as quickly as possible, you’ll have repayment issues. But can you credit check someone in internet shopping timescales? Being realistic that’s currently about 15-20 minutes, is that acceptable? If you do it in 2-3 minutes, where’s your risk management?

It’s clear that embedded finance is easier in some value chains than others. With new central heating boilers/solar panels you know where people live, it’s not such an aggressive set up. It’s a good model. But if you’re lending against the latest MacBook, you can’t take two or three days deciding. It comes back to the same thing – data security and risk – in essence risk management.

DIGITALISATION AND SUSTAINABILITY

Digital banking is designed digitally native whereas, some might argue, that digitalisation is putting lipstick on a pig. But how has that moved the digitalised forward and what’s next?

There’s also confusion about sustainability. With crypto currency, if it’s all humming away on cloud servers and you’re perpetuating copies how green is that? And ESG is not just about reporting but should drive business decisions. It’s often pushed by stakeholders rather than regulation. Allocation of capital is a way to pressure firms, as is including an ESG questionnaire in RFI/RFP (Request for Information/Request for Proposal) but there’s a need for a standard framework and taxonomy and a definition of ‘being sustainable.’

What can banks do to create new business models that offer behind-the-scenes Banking as a Service (BaaS)? The financial services needed in loans and money transactions, insurance, savings, and investments.

As Gareth Miller points out, “If you’ve got lots of small players offering brilliant solutions using open banking delivered as a seamless package what’s the relevance of the universal banking model? It’s not the big shark competitors you need to worry about anymore, it’s being nibbled by the piranhas.” And regulators are making it easier for consumers to go with smaller providers if they’re providing the desired services.

Traditionally it was all about ‘share of wallet’. Which goes back to understanding your customers. If they want AB and C and you can’t deliver it, they’ll find someone who can. BNPL (Buy Now Pay Later) embedded loan providers, like Swedish FinTech Klarna, provide the classic example. As Gareth Miller says, “Generation X might well be stuck in big bank inertia but the generations coming through won’t be. They’ll be on the open banking bridge. You can’t rely on backward data; you must look forward and that’s very difficult.”

Which brings us back to Northmill’s killer motto ‘digital but personal’. It’s not bits and bytes, it’s how you make something digital personalised and relevant to meeting the customer needs. That’s the challenge.

Francis Hellawell

Principal Consultant, Banking & Fintech

Francis is a digital agilist and business architect within the Financial Services industry with 30+ years’ experience working for major financial services institutions. An articulate banking consultant with deep knowledge of the operational and regulatory requirements, he specialises in strategy, analysis, design and implementation of services and processes within the banking arena. Outside of work, Francis is a Rugby Union referee, owns a classic mini which he keeps on the road as a daily driver, and enjoys adventures with his teenage sons Alex and George and their Dachshund Arthur.

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