This article was first published in FinansWatch.
PA Consulting’s financial services experts, Thomas Bjørnstad and Frode Lervik, are quoted in an article discussing the findings from a newly launched report.
The Norwegian and Nordic banking markets are undergoing a major transformation. PA Consulting stresses that the banks must have a clear position on new developments, strategic issues and set out a plan for the road ahead to 2030.
The Nordic region is one of the world's most advanced markets for retail payments. Technological development will - accelerated by covid-19 - transform the industry dramatically in the period to 2030, which will result in a level of change in the industry we have never seen before.
“Previously, finance was an interconnected industry and the players operated a coordinated payment system within a protected arena but in recent years much has changed.” Thomas Bjørnstad partner at PA Consulting Group told FinansWatch.
Bjørnstad highlights some recent important developments. These include the merger between Danish PBS Holding and Norwegian Nordito (the parent company of BBS and Teller) to create Nets - which is now facing a merger with Italian Nexi, much more regulation from the EU, Big Tech and the arrival of fintech companies, as well as banks gaining different interests through Nordic consolidation and the new importance of the retail trade.
Senior consultant and payment expert Frode Lervik, says “Nets' sale of Mastercard's account-to-account business is an important milestone in the developments. Nets has developed a real-time settlement system between the banks, and Mastercard will probably use that technology globally. This means Norwegian banks have to deal with the fact that it is now professional American owners who are managing the business instead of a PE fund.”
Another important development is the P27 initiative. This aims to build a pan-Nordic payment system for Nordic currencies and euros - and still has ambitions to take a position in Norway as well and Norwegian banks are following the project closely but not currently involved as owners.
Four future scenarios
PA sets out four scenarios with two different development paths, one which moves from mainly local payment systems to dominant global systems. The other sees distinct brands in the payment chain but payment systems that are integrated into seamless customer journeys. The scenarios are not meant to be exact predictions but to stimulate discussion about long-term trends.
Bjørnstad says “Norwegian banks, and also banks in other Nordic countries, are moving towards a scenario called All Change which is characterised by dominant global companies. They use their technology, analysis and consumer insight to extract value from customer data instead of transactions.”
Within this big tech companies choose one of two approaches. In the China model, they own and operate their own mechanisms using proprietary payment systems. The alternative is the US model which builds close cooperation with established payment systems.
“In both cases, the imprint of Nordic companies is largely erased. Local regulators work through senior regulators to monitor these payment superpowers. Local banks are either reduced to providers of generic support services or they disappear completely,” says Bjørnstad.
Today, Norwegian banks are in the Incumbent Innovation scenario. This position is characterised by the dominance of local banks, card systems and payment networks.
“What is important here is that local banks control BankAxept and they have successfully developed BankID and Vipps so Norway's journey towards the All Change scenario will probably include elements from the New Allies scenario. This is where local retailers are working to develop innovative payment models and use these to strengthen existing customer relationships. The roll-out of Aera's services in Coop and Norgesgruppen is an example of this,” says Lervik.
However, the Nets sale to Mastercard is a signal of a shift towards the globalised Nordics scenario, which will be further strengthened if BankAxept were to end up being sold. Lervik adds “Norwegian banks level of involvement in P27 in the next few years will also affect the direction of new developments.”
To navigate this landscape, banks need to address five key questions:
Join P27 or not? Although the project is only in the development phase, it has the potential to replace existing infrastructure and services.
How to respond to Mastercard? Originally chosen as a supplier to P27 in competition with Nets, the account-to-account transaction means Mastercard has suddenly gone from being a challenger to operating existing infrastructure and services.
Invest in physical or virtual infrastructure? Banks must make a key decision about the future of retail payments. Should they invest in physical cards and associated infrastructure or opt for mobile payment and virtual cards?
Put your own wallets against global suppliers? In the Nordic market, there are strong, local mobile wallets - Vipps in Norway, Mobile Pay in Denmark and Swish in Sweden. But are they strong enough to compete with global players like Apple Pay and Google Pay?
Retain and continue to invest in your own national card schemes, collaborate with others or sell them?
“There are so many dimensions in the development of the market that we cannot give one piece of advice to everyone. In addition, the actors have different interests. Some are most concerned with the Norwegian domestic market, while others think across the Nordic region. Some will lift their sights even more and think European. What do you do for end users? Do you choose to cultivate your own competitive advantages, or focus on broader collaboration? There are many questions,” Bjørnstad concludes.