Secret Of Nordic Countries’ Digital Payments Systems
It’s widely recognized that the future of banking is dependent on innovation with key focus on digital platforms that offer diverse products to meet the changing needs of customers. This is evident in the recent increase in the usage of digital payment platforms, especially during the era of COVID-19. Regardless of the recent surge in the usage of digital payment services, some regions still lag. But one region stands tall, the Nordic.
The Nordic countries have been at the vanguard of innovation in digital, mobile, and instant payments for decades. These countries have combined a vibrant competitive landscape of banks, payments specialists, and start-up challengers with a long tradition of cooperation and collaboration. This dynamic has facilitated step-change advances and improvements along the payments value chain from infrastructure services to customer offerings in countries such as Denmark, Finland, and Sweden.
Innovation in the banking sectors of these countries has reached advanced levels. As such, any other country outside the region trying to leverage digitation in the current era may want to pick some lessons from these countries. But then, such a country must be ready to dig deep into the genesis of payment systems in the Nordics.
Claus Bunkenborg, one of the leaders from the region’s payments industry, averred that among the reasons for their success is the fact that Scandinavian markets are small, so governments have been able to support the banks in collaborating over debit cards, bank IDs, and payments infrastructure for the past 40 years. That paved the way for an early digital transformation of society that allowed banks to drive innovation.
Additionally, Bunkenborg indicated that their success as innovators is because they trust their governments more than many countries do, and are also more willing to share information. This combination of trust and collaboration created a strong foundation for today’s industry.
To add to that, Peter Klein, another digital payments expert from the region, stated that the collaboration happening is not only across the Nordic region, but also domestically with governments and stakeholders. Klein indicated that people understand it’s better to come together, although they are good at stimulating competition in the region.
On the other hand, Lars Sjögren, also a digital payment expert from the Nordic region, believes the longstanding history of conflict in the region plays a significant role in their success. There have been a lot of wars waged between Sweden and Denmark over the years. However, Sjögren said more peace treaties have been signed between Nordic countries than anywhere else, and that the region had monetary unions as early as 1873. These peace agreements now make it possible for these countries to collaborate in driving the digital banking sector.
We’ve never competed with one another for global domination in a particular sector, because each country follows its own path: Sweden as an industrial nation, Denmark as a trader, Norway with its oil. So we’ve learned how to compromise, and being small, we realize we’re stronger together.
Flags Of Nordic Countries
Nordics As Leaders In Mobile Payments
Nordics are so far ahead in the adoption of mobile payments, and this, Bunkenborg said, is “because we built on this legacy of joining forces”. For instance, Bunkenborg pointed out that although MobilePay is owned by Danske Bank, it was not launched as a solution for Danske Bank customers only; it’s a partnership between all the banks. He explained that both Danes and Finns can use it no matter where they bank, and that fueled its rapid adoption. Bunkenborg added that MobilePay aimed to be accessible to everyone unlike other mobile-payment solutions around the world that require customers to have a particular bank or card or telecoms provider.
Our other advantage was that we focused on solving a genuine pain point: peer-to-peer payments. In-store payments weren’t a pain point for Nordic customers; we trust the cards in our wallets that we’ve used for decades. But we don’t carry cash, so focusing on P2P had an instant “wow” effect on a wide user group, not just nerds. And it grew exponentially and gained traction in other use cases, such as e-commerce and even in-store payments.
Sjögren added that one of the reasons MobilePay took off was its simple sign-on process. All you need is to download the free app, take a minute to sign up, and then you can send money as easily as you can send an SMS. Currently, MobilePay has close to six million users across Denmark and Finland.
For Peter Klein, he loved the way P27 is becoming a benchmark for a regional approach to moving money across borders. Nevertheless, he believes what the region needs is the “plumbing” that connects everything together: a solid infrastructure driven by rules and governance structures on which to build a more dynamic payment model. Klein believes old models like correspondent banking, have served their purposes for many years but are no longer fit for purpose when it comes to delivering on the demand for faster global payments.
Klein further indicated that the payments business is becoming increasingly commoditized; margins are eroding. As a result, failure to improve the model and reduce operating costs means game over for anyone not willing to embrace the new world.
Moreover, Nordic banks are collaborating and showing good industry conduct against a rich competitive backdrop of fintechs and innovators. There seem to be a contradiction because banks are collaborating whilst also competing. But Claus Bunkenborg explained that banks and other ecosystem players are used to sharing, saying “we know we can’t survive by building things on our own” as a result, “collaboration is in our DNA”.
The government supports us in working together and sharing data. Regulators have created environments where fintechs can access tax data for critical applications, for instance. I think this openness makes us different from other countries.
Traditional Banks Face Competition From Innovative Players
The influx of fintechs and other innovative players in the banking industry means that traditional banks need to change their tactics to remain competitive. As a traditional bank, how should you think about fintechs and other innovative players? Should you be wary of them?
Peter Klein believes the answer is simple; “welcome them”. Klein explained that many of the fintechs collaborate with traditional banking services and rely on partnerships because some of them want to build stronger partnerships while still competing in other areas. To him, that’s going to continue even though the rules of engagement are changing.
Our starting point in Sweden is a well-educated and tech-savvy population who like to try new things, so our barriers to innovation are low, Lars Sjögren said. According to him, the Swedish banking sector is fairly consolidated with four players, but it has profit pools that are easy to attack if you have the digital means to do it. That’s another driver of fintech innovation in the Nordics: when banks decide to leave certain areas.
With all the innovation from Nordic banks and infrastructure providers, customers remain the judges. This is because such innovation must be embraced by the customers, and for that to happen, customers must see the usefulness of the innovation in addressing some of their banking challenges. So, the question is: As a customer, what should I get excited about with all the innovation from Nordic banks and infrastructure providers?
Claus Bunkenborg believes as a customer, you’re getting access to innovative solutions much more quickly than you would in other markets of a similar size, and those solutions are more standardized and more widely accepted. From a merchant’s point of view, Bunkenborg said accepting a new form of payment carries less risk because it’s supported by the whole community. He explained that when you combine digital readiness with collaboration between banks, you take a lot of cost out of the system and provide society with convenience and a lot of other benefits.
Main Trends Affecting The Industry
With regards to the main trends affecting the banking industry and what players must address, Claus Bunkenborg cited the instant payments, mostly driven by P27 as one and the growth in online as another.
For Peter Klein, he believes that one thing payment players need to address is financial crime. Klein explained that during the pandemic, attacks on financial institutions have risen by some 40 percent. Also, he stated that identity theft is also increasing and to him, that’s pretty scary. And then the second trend is investment in emerging technologies, citing blockchain/CBDC3 as an example.
There are very exciting times ahead, although it’s important to appreciate that not all problems can be fixed with a sledgehammer solution. We need to collaborate more closely to help maximize the benefits of these new technologies and realize the potential they offer us as an industry.
Furthermore, Lars Sjögren, thinks instant is the new frontier. He noted that after P2P, the corporate side will be next. He was of the view that once we have real-time cross-border infrastructure, we’ll see great use cases and a universe of cash-management solutions.
Another area to look at could be regulatory supervision and oversight, which varies even among the Nordics. Sjögren stated that Banks have a single license, but if you’re a payments provider, different countries have different rules. He indicated that perhaps the FSB4 road map for cross-border payments will solve the problem over the next ten years, but it’s more urgent than that. To him, if regulators don’t make things easier for institutions that work in a solid way, bottom up, then unregulated competitors will move in.
But to help payment players go the right direction, Peter Klein advised them to learn from P27 and replicate it across the globe since there is a well-connected global high-speed payments infrastructure. In a nutshell, Klein noted that digital payment is on the right track as the Nordic countries are leading the way. It is clear that cooperation and healthy competition were the secrets for the success of digital payment systems in the Nordic countries. This means that regions that still lag need to intensify corporation to drive the digital payment systems, through the establishment of monetary unions, where necessary.