Innovation – Finance – Technology


Strategic choices in a new world of banking


Fintech has gained momentum in the banking industry and changes in the competitive landscape are already becoming observable. As the majority of players are increasing emphasis on the user experience, the competition is likely to increase. Who are the potential players, and how will this affect customer mobility and profitability in the market.

What are the most profound impacts of fintech on core offerings?

The mantra for many years when it comes to fintech has been the potential for banks to suffer a death of a thousand cuts, as specialized challengers deliver similar services to the banks more efficient and or through a superior user experience. Examples of this are all around with players like Klarna establishing a beachhead through payments to offer credit as an integrated part of the customer journey for online shoppers. The underlying solution may not be revolutionary, but by not thinking as a bank, Klarna offers the end-user an incredibly simple solution and is now leveraging this opportunity to go after banks on a global scale. For incumbents, this may act as a foreshadowing for the future distribution of some of the most profitable credit products.

While Klarna excels through simplification, there is no lack of contenders to challenge remittances and cross-border payments. The complexity of incumbent services makes this inefficient and expensive for end-users. By re-thinking the business model for a digital age, players like Transferwise, Currencycloud and many more are challenging incumbents by offering the same service at faster speeds as well as lower costs. Recent reports from Transferwise show 3,9 billion USD in monthly transaction volumes.

So far, many of the most prevalent examples are from the payment space, as this is most visible to the end customers, but this should not give a false sense of security for other revenue streams. Savings and investments are being challenged by self-service platforms and robo-advisors, such as Robinhood and Moneyfarm. These players follow the rules of the platform economy by providing services at close to zero margins and betting on scale through exponential user growth. While Robinhood is yet to report any profits, they show a user growth of 200 000 new users per day following the launch of Robinhood Crypto. Moneyfarm, on the other hand, focus on AUM, and could show an increase in AUM of 50% over nine months earlier this year.

Artificial intelligence challenge traditional asset management by leveraging vast amounts of data to support investment strategies previously only available to wealthy individuals and institutional investors to affluent and retail customers, thus challenging the margins in the highly profitable asset management industry. Robo-advisory is a fraction of the market compared to overall assets under management, but the industry is preparing for a much more competitive future. There is also a disconnect between the rising economic power of women and the fact that women are still a disproportionately small portion of the world’s savers and investors.

The rise of everyday banking services that integrate savings as a part of daily spending behavior lowers the barrier to start saving money will also have a profound impact on future customer behavior. Their high frequency, tech-savvy approach demands and uses a variety of self-service channels and services, including personal finance management (PFM) tools and financial alerts. According to Javelin research, this demographic named ‘Moneyhawks’ are the most profitable customer’s banks don’t know they have.

Even though much of the change is focused on the front end, it will ultimately affect the whole value chain. Low interest rates and global trends are correlating increasingly with fund performance and explain over half the average stock returns, favoring low cost ETFs over active asset managers. As active managers are struggling to outperform the market, Vanguard is lowering account fees to as little as 30 bps, compared to 100+ bps from a typical managed fund

Not even mortgages are safe, with a new breed of fintech challengers aiming directly at the mortgage market. In the Netherlands, challengers like Munt and Dynamic Capital have managed to obtain close to 20 percent of all new mortgages and has gained a market share of approximately 10 percent of the total mortgage market.

These types of challengers have also emerged in other European countries such as Ireland and the UK, where an increasing share of the mortgage market is served by foreign institutional capital backed non-bank lenders.

Closer to home, a trio of Swedish startups are attacking the mortgage market head-on with Stabello which is backed by Avanza, Hypoteket from Schibsted, and Enkla which launched earlier this year, which aims to manage 100 billion SEK within 18 months after launch. As a reference, they received 2 billion SEK during their first 24 hours of operation. Enkla promises to offer mortgages at a 0.95% fixed mortgage rate for three years. The average mortgage rate from major banks in Sweden is 1,6% according to Di Digital. The central question is whether this approach to mortgages remain sustainable when interest rates rise.

How will PSD2 play a part in this?

While the banks for a long time has seen regulations as a factor that raised the barriers of entry of the industry, PSD2 represents a seismic shift I term of regulations.  Historically, regulations have revolved around ensuring financial stability, combatting money laundering and prevenient financial crime, the purpose of PSD2 is to stimulate innovation and increased competition. This is achieved by allowing third parties, so-called TPPs extract and accumulate customers account data, including transaction history and account balance and initiate payments from incumbent banks through standardized APIs.

What makes this powerful is the fact that more than 90 percent of online traffic to the bank’s digital solutions originate through one of these two types of interactions. What should seem obvious for incumbents, as well as potential challengers, is the fact that if you are to maintain a wide selection of products, you better prepare to take on the role as TPP. To establish, maintain and leverage this position, several factors need to be in place. One need to offer a superior user experience to attract new users. The platform needs to provide some value-added services to maintain popularity among users and counteract retention. Lastly, making sure those users are converted to profitable customers is integral to succeed as a TPP.

Another alternative is to become highly specialized as a product provider. This position is all about cost leadership. Setting up a factory that provides mortgages at the lowest possible rates while still earning some decent profits requires both smart use of technology to ensure straight through processes as well as a cost of capital that outperform peers.

The third alternative is to become compliant with the directive, wait, and see what happens. While this is an alternative by definition that is not a choice I would recommend. It is a plausible scenario that the majority of user behavior will remain unchanged in the wake of PSD2. Innovators and early adopters will surely applaud the ability to collect all of their banking needs at one place, but the mass market may or may not follow as fast. One can ponder this for days, weeks and months, but when the stakes are as a high as losing the customer interface, having a degree of productive paranoia when drawing out one’s options is highly recommended.

So far, much of the focus has been centered on banks and fintechs, but there are other players looking at the financial sector as an attractive market expansion. As long as I have been involved with the financial industry, the threat from tech giants such as Google, Facebook, Amazon, Wechat and Alipay has been a looming threat. Even though it may seem, as these players are preoccupied with business elsewhere, banks should remain vigilant of what may come. Facebook has all the regulatory requirements to take on the role of TPP in place and only time will tell whether they aim to utilize this. Perhaps the most frightening scenario for banks around the world is one of these payers claiming the customer interface and thus the ability to act as an aggregator of financial services. In such a world, the only room left for incumbent banks is to become highly specialized product suppliers.

By now, it is clear that most major banks will attempt to position themselves as TPPs to either protect the customer interface and/or leverage the opportunity to increase market shares. With high levels of trust, established brands and customer base, banks have a significant competitive advantage in a post-PSD2-setting.

There will surely be a number of fintechs attempting to grab a couple of pieces of the pie, but many of these will suffer from lack of brand recognition as well as the need to establish trust in the market. On the other hand, fintechs are able to design services for ordinary people by not thinking like banks and could leverage simplicity and a superior user experience. It should be obvious by now that Klarna will be one of the players that have overcome the initial barriers related to trust and brand recognition. Key questions to consider when it comes to the plethora of fintechs and challenger banks is whether their appeal will sustain beyond the honeymoon phase and thus have the ability to cross the chasm and achieve mass market appeal.

Build, buy or collaborate?

Regardless of your play, both offensive and defensive moves in a new world of banking will require investments in technology. The downside of being a digital industry for several decades is that over time, vast amounts of legacy IT has been piling up all the way from the infrastructure layer to the customer interface. Knowing where to terminate legacy IT in terms of implementing something completely new over incrementally improving the old is a crucial decision. While a complete termination and renewal may seem overwhelming in terms of investment cost, the alternative is to continue to patch up antiquated IT-systems resulting in decreased stability and increased risks related to cybersecurity and at the end of the day increasing operating costs.

While this decision may be complex to start with, what comes next (if you managed to make the right decision to terminate the old and invent the future rather than attempting to improve the past) is not necessarily an easy task either. Should you build, buy or collaborate? Each choice has their pros and cons.  As a point of reference, more than one-third of overall IT-spend is outsourced at Sbanken, a purely digital bank. At the same time, we are growing our in-house devlopment capacity significantly. A rule of thumb when making these decisions should be to outsource everything that could be considered a commodity and/or scale is the most important aspect of the system/service. Services and features that provide a competitive advantage or require flexibility/agility such as unique elements to your customer interface is your secret sauce in the digital space and should be developed in-house. Specialized areas within fintech such as robo-advisory, crowd lending require specific expertise that may or may not be present in-house and should be considered as a collaboration effort.

What about the customers?

At the end of the day, the end-customers are the judge, jury, and executioners of the winners and losers in a new world of banking. In the Norwegian market, customer mobility is still quite stable and low. The possibility of letting customers manage their banking relationship across multiple vendors through open APIs may play out several ways.

  1. A large portion of customers choose a non-bank marketplace player as their favorite interface for all their banking needs and shop around for single products, resulting in a fragmentation of the customer relationship.
  2. The majority of customers choose their favorite bank, and whichever banks that manage to maintain the most attractive customer interface earn the customer relationship and the opportunity to cross-sell other products.
  3. Status quo. Everyday banking is a necessity, not a desire for the average retail banking customer, and the customers prefer things the way they were. Many incumbents probably were optimistic that this was the fate of branch banking when internet banking appeared almost 20 years ago.

Placing bets on status quo has proved to be a hard-learned lesson for many incumbent industries as well as once reputable companies, often popularized by examples such as Kodak and Blockbuster. The biggest difference is that for every time an industry faces digital disruption, it happens a lot faster than what hit the ones before.

History does not necessarily repeat itself, but it rhymes. Static industries that face disruptive forces tend to see a decline in profits and commoditization of their core products due to increased competition. In the financial sector, one should be careful not to underestimate already known competitors ability to step up their innovation game and focus solely on new entrants.

While the jury is still out on who the winners will be, certain traits will be present in those who prevail. Banking is depending on trust, both and high levels of security and transparency are key ingredients to maintaining the required level of trust.

In the digital world, change is a constant factor, and speed and agility are the most valuable competitive advantages there is. Digital banking favors the fastest rather than the largest.

Finally, simplicity will be the most important common denominator of those who prevail in a new world of banking. Digital services must be contextually relevant and intuitive. If not, customers will choose to do their everyday banking elsewhere.

2 thoughts on “Strategic choices in a new world of banking

  • Hi Christoffer,

    Your article clearly shows the way to the ‘New World of Banking’.
    With my experience, and as you mention, “the most important common denominator” is SIMPLICITY.
    Of course, greater simplicity for customers should be “contextually relevant and intuitive”.
    Now, to achieve this goal, it is inevitable to profoundly redesign legacy back-office processes.
    Today, back-end processes are ‘managed by product’, which generates silos for each product requiring ETLs and DWs to consolidate customer information and analysis.
    What I propose for the ‘New World of Banking’ is to change this paradigm – which has existed ‘forever’ – by the new paradigm by which processes are managed ‘Corporately’, online, real-time, eliminating current processes ‘by product’!
    This change of paradigm, besides satisfying the objectives proposed in your article will imply in a HUGE reduction of operating costs, allowing the financial inclusion of the under / unbanked.
    I would like to show you some of the Architecture “Bank of the Future”, which I built for this purpose, based on my more than 40 years of experience in this area – a single simple platform to handle all the financial transactions. (send me an email to which I can upload ppt presentations).


    P.S. Take Deutsche Bank ‘problem’ – and it is not alone!
    The back-office area of legacy systems is where the actual problems are known and more than 80% of the budget is consumed ‘only with maintenance’ and, as Zhiwei said: “I would argue that with any bank, 80 percent of the computing is a waste of time”.
    Deutsche Bank spends roughly FOUR BILLION EUROS on technology, yearly. That may be cut by 20 (not 20%!)

  • This made for a good read. In my opinion banks can’t expect to be the sole provider of banking products and services (obviously). After PSD2 comes a reality by law and fintech get the opportunity to gain a real foothold, customers will shop around in even bigger degree than today. And let us not forget, many customers already are, and even more seems ready to jump ship or diversify according to “dagligbankundersøkelsen”.

    My bet is that customers will gravitate towards product offerings that appear simple, intuitive, personal and fun. Banking is dead boring. Thinking about interest rates, loan og savings is exhausting. Those players thus providing services that takes the dead numbing pain of trying to the smart thing will gain an advantage. Where emerging technologies and fintechs thus will have the best opportunity to make money will be in services that gives good financial advice, provides ease-of-use in switching loan and savings providers. Give me a service that trims away dead weight in my personal finance like a personal trainer helps me do for my body. I’ll pay for that.

    Even today I have my loan in one bank, my savings in another and using a third for day-to-day use. For loan and savings I’m obviously using those banks giving me the best interest. The bank I’m using for payments and everyday use happens to be Sbanken. The mobile app is intuitive and Sbanken is providing support for straksbetaling, Vipps and Apple Pay. They even used to have a nice “Min økonomi” module with an interesting twist in comparing my finances to others. They failed how ever in making the service smart, with no real advice or nudging in regards to doing the right thing with my finance (spending/saving). It will be interesting to see if Spiir can help trim my finances, or if services like YNAB at some point will utilise the opportunity PSD2 and open banking gives to help my get the most value for my money in placing loan and savings whilst keeping my spending in check.


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