Stockholm is singled out as the world’s hottest spot for startup companies in the financial and banking sector–Fintech. Now experts are warning big banks for not being sufficiently innovative.
“Sure, certain banks are technology mature, but I do not know if that should be called innovation. What has your bank done for you in recent years that is innovative?”
Erik Wetter, director of the incubator Business Lab at Stockholm School of Economics, where the successful Swedish payment startup Klarna started, is asking the rhetorical question.
He states that Stockholm has become perhaps the world’s hottest spot for fintech–young tech companies in the area of banking and finance. With innovative services and smart technology, they see opportunities to challenge traditional banks.
“One of the largest US banks can make four releases a year in their system that handles a trillion dollars per year. We make four releases per day. It says something about the speed with which we are testing products and how users feel, think and behave–in a completely different manner than the banks can do, says Erik Engellau-Nilsson, marketing manager for Klarna.
Motivation in fintech startups should be increased by the fact that banks belong to an unusually profitable industry. Or, as former Swedish Prime Minister Fredrik Reinfeldt put it at the seminar Bankdagen 2015 in Stockholm recently:
”The banks make fantastic profits and it is only to be congratulated. But if you’re making big profits, there’s a risk of being challenged. Such large profit margins are difficult to defend over time.”
Erik Wetter thinks that, as in other oligopolistic industries such as aviation, it will be difficult for incumbent banks to meet the challenge from startups. He is backed by Robin Teigland, researcher at the Stockholm School of Economics, who believes that banks will be consolidated or may well fail in the long term.
The question is what banks are doing, and what they should be doing.
Erik Wetter notes that IT giants such as Google and Apple are basing their innovation on acquisition of innovative companies, while banks do not seem to take that opportunity. As an example, the new Swedish venture capital company NFT Ventures, focusing on Fintech, does not have a bank as lead investor, but the Swedish media company Bonnier. And the major Swedish bank SEB’s most successful venture capital investment is said to be the musical Mamma Mia, but they did not invest in the successful fintech startups Klarna or Izettle.
”That is symptomatic,” says Erik Wetter.
Robin Teigland, however, does not think that banks should buy innovation.
”It’s an old mindset that you have to own. It is better to collaborate,” she says.
She thinks that banks should experiment more, internally and externally. For example she suggests internal projects with crowdfunding, where employees get a certain amount of money to invest in various projects.
”How many bank employees have tried crowdfunding, or peer-to-peer lending? And how many have tried Bitcoin? If you do not understand how things work, how will you be able to decide?” she asks.
Both the banks themselves and startup companies believe that user experience has become particularly important. The Finnish consulting firm Tieto that organized the Bankdagen 2015, notes in a report that seven out of ten banks see digital customer experience as the key to efficient operations. Yet only twelve percent of the companies are using data from different sources to individualize services.
”Consumers are often one step ahead of the banks on this. If you need a loan, it may be perceived as less risky and easier to go to a peer-to-peer service, and you do not have to worry about credit approval. And those who need funding for an idea can go to Kickstarter instead of a bank branch,” Katarina Segerståhl, director of strategic design at Tieto, notes.
“This means that banks need to approach consumers even more and create new services along with them,” she adds.
In the end, the question of understanding the customers might be about culture. That is what Elísabet Grétarsdóttir believes, who a few years ago was recruited from the gaming industry to become marketing manager for the Icelandic Arion Bank, which was formed from the collapse of Kaupthing Bank.
She points out that banking culture has been shaped over hundreds of years, and that it is hierarchical and risk-averse–and rightly so since financial systems are an important backbone of society.
But today this culture is blocking innovation, Elísabet Grétarsdóttir says, and she believes that many in the banking industry do not see this.
“They live and dream this culture, and when something in your environment is a part of you, you stop to see it,” she says.
As an example, she takes the dress code in the banking world.
“Dress codes were important 50 or 60 years ago, when people thought that suits inspired confidence and trust. Today, consumers’ values have changed and they don’t see trust in an outfit. Instead, they build trust when they feel that someone really cares about their well-being. That’s how brands need to operate, and this is where financial institutions have a hard time connecting with consumers. They have different value systems, says Elisabet Grétarsdóttir, who just left the Arion Bank for a job at the EA owned Swedish gaming company Dice.
Maybe her new career indicates where the knowledge that the banks need is to be found today.
”We do not know where banking services will be offered in ten years from now–if it is from an organization, a local player or perhaps in a global online game, says Robin Teigland.
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Here’s what fintech companies focus on
1. Information–better information through efficient apps and data analysis.
Example: Comparisons, overviews, negotiation services and more.
2. Capital Sources–access to new sources of capital.
Examples: Crowdfunding–both as donation and investment to equity. Peer-to-peer lending–services that facilitate loans between people and/or organisations in different target groups.
3. Transactions–services that create new ways to manage transactions.
Example: New payment services, billing services, use of mobile phones as payment terminals.
4. Global Services–services that offer the same simplicity and security internationally as many users expect only in their own country.
Example: Private sales, return of goods, delivery guarantee, credit risk.
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16 Swedish fintech startups
Klarna – payment services for e-commerce.
Mondido – payment services for e-commerce.
Izettle – turns mobiles and tablets into a payment card terminal and cash register.
Trustly – allows e-stores in several countries to offer direct payment from banks.
Sitoo – common cash register and inventory system in the cloud for e-store and physical store.
Betalo – pay your bills with payment cards.
Toborrow – digital marketplace for business loans (peer-to-peer loans).
Kortio – service for the comparison of payment cards.
Funded By Me – crowdfunding, both as donation and investment.
Lånbyte – negotiating mortgage rate for consumers.
Lendo – find the loan with the lowest interest rate.
Bolånegruppen – negotiates mortgages for groups of people.
Tessin – crowdfunding for properties.
Leasify – optimization of leases and contracts.
Share Travel – allows users to share information on how they invest.
Tink – giving consumers overview of their private economy.
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This post was originally published in Digital Teknik, in Swedish.