Why is the Norwegian fintech sector struggling?

This post was originally published in Shifter (in Norwegian), translated by ChatGPT.

Norwegian fintech is following the downward trend of the sector globally, as indicated by a survey conducted by the Ontogeny Group on behalf of Finansforbundet. Simultaneously, as revenue growth levels off and access to capital for the sector dries up, the accumulated deficits are increasing. This set of challenges will undoubtedly lead to more companies in the sector throwing in the towel in the times to come.

This is despite the fact that banks (which fintech was supposed to challenge) are making more money than ever before.

The report highlights macro trends as possible explanatory variables for the downward trend, but there is more than just tougher economic times behind the steep decline. Similar to the global fintech sector, it has been revealed that delivering financial services without being a financial institution is not as straightforward as initially thought.

During the emergence of the fintech sector, a number of new regulations have come into play. While regulations like PSD2 aimed to reduce barriers to entry and level the playing field for financial services competition, other regulatory changes impose stricter requirements for customer identification and consumer protection in the presentation and distribution of financial products and services.

At the same time, PSD2 didn’t bring about the seismic shift in consumer behavior that many hoped for. The allowance for national interpretations of technical standards led to unnecessary friction related to banks’ technical interfaces and resulted in services like initiating recurring payments via third parties being interpreted as not falling under the regulatory framework. The biggest impact of PSD2 didn’t favor the fintech sector; instead, it acted as a catalyst for incumbent banks to revamp their online and mobile banking platforms to proactively raise barriers of entry for potential non-bank competitors.

Many fintech companies have had a sudden awakening, finding themselves subjected to the same requirements as full-fledged banks to operate under what were meant to be lighter licenses and concessions, such as payment service providers, fund distributors, or loan agents.

Since fintech companies aren’t full-fledged banks, they don’t have access to the money-printing capabilities that banks have during times of rising interest rates and the spread between deposit and lending rates. Instead, they must rely on off-balance sheet income sources like various fees, subscription models, and kickback agreements. The challenge is that these are fragile revenue models that tend to engage in a race to the bottom as soon as one player decides to lower prices or eliminate fees entirely, similar to how Skandiabanken did in the Norwegian market. Furthermore, these revenues are vulnerable to regulatory changes, such as the tightening of commission sizes for fund distribution under MiFID II or the IFR regulation that placed limits on interchange income from credit card transactions.

As a result, margins are squeezed, and the only path to profitability is achieving scale and critical mass. This is particularly challenging in a small country like Norway, where the domestic market size is limited.

Many have attempted to overcome this by rapidly expanding into new geographies, but they’ve quickly realized that fintech has limited global scalability and relies on local adaptations to address not only local interpretations of financial regulations but also varying user behaviors and cultural differences. Even Vipps, with grand plans to digitize payment services across Europe and seemingly limitless resources, has yet to demonstrate a successful international expansion.

There are certainly honorable exceptions, with the report highlighting Fixrate and Fundingpartner as notable examples that have both found ways to participate in a business model where interest rate margins drive profitability without transitioning to full-scale banks.

Others have tried to pivot from the end-user market to becoming technology and platform providers for banks. Whether this will be a winning strategy for the remaining fintech companies pursuing this survival strategy remains to be seen. However, it’s a market with a limited pool of potential customers, and decision-making processes are often lengthy and unpredictable.

The Norwegian fintech sector has always lived in the shadow of the global sector, and the steep drop in both valuation multiples and financing has undoubtedly impacted Norwegian investors. This negative trend began even before discussions of inflation and rising costs became topics of conversation around dinner tables. When leading fintechs like Klarna experience an 85 percent drop in valuation from their peak and Stripe is written down by 60 percent from the peak by existing investors, this undeniably influences the risk appetite of potential fintech investors.

It’s also important to note that the fintech phenomenon and sector were born out of dissatisfaction and mistrust of the financial sector and banks in the aftermath of the 2008 financial crisis. In Norway, the banking sector has been able to thrive due to a high level of trust among the population, which is evident in the relatively low rate of customer mobility. Although a survey by Accenture indicates that this trust is declining, a customer mobility rate of only 7 percent that switches banks annually and the limited penetration of challenger banks like Revolut and Lunar in the Norwegian market suggest that the broader market in Norway remains loyal to their bank and is reluctant to adopt new digital financial services from smaller and lesser-known players.

As the report shows, despite signs of optimism last year, things have gone from bad to worse for the fintech sector, and all indications suggest that it will become even tougher in the times ahead. While this brief assessment primarily targets the Norwegian fintech sector, the majority of the underlying obstacles are universally applicable to the fintech sector as a whole.

For existing and aspiring fintech entrepreneurs, it will be more important than ever to have a solid grasp of their business model and a near-obsessive focus on the problem they are solving for whom, and whether there are individuals willing to pay for it.