Banking’s Bill of Health



How Nordic banks might represent the best-case, healthy future state of the U.S. banking industry

We’ve often discussed the tsunami of massive disruption moving across the financial industry as the most pressing concern that banks and credit unions must address. In fact, the bulk of the industry is already at the tipping point of disruption – a do or die moment where everything must change.  As banking’s disruption predecessor, retail is frequently used as a best test-case example for financial. After all, many of the same issues exist within retail and banking, from physical footprint to digital technology adoption. But within the financial services sector, there may be an international cousin that’s a better predictor of what banking may look like in the United States in the not-too-distant future.

Banking's Bill of Health

According to World Bank/Citi Research’s Digital Disruption: How FinTech is Forcing Banking to a Tipping Point, Greg Baxter Citi's Global Head of Digital Strategy says the U.S. is not even at “the end of the beginning” of the disruption wave posed by FinTech and consumer alternatives to the more traditional institutional banking model. He estimates that consumer movement toward fresh banking solutions in the U.S. will be 10% by 2020 and 17% by 2023. In the report, former CEO of Barclays, Antony Jenkins, says banks are experiencing their 'Uber moment' with competition from new tech drivers everywhere. In a call-to-arms, he estimates that branch banking may decline as much as 50% in the coming years.
While this perfect storm of culture, convenience, innovation and technology comes as no surprise to financial industry-watchers, banking in certain European sectors is more future-proofed compared to the U.S. In fact, World Bank/Citi estimates that U.S. banks are about five years behind European banks, which are, in turn, about a decade behind Nordic banks. That made us curious. What is it about Europe and particularly the northwestern European countries that got them so ahead and apart from the U.S.? Would the Nordic banking model be something that U.S. financial institutions could emulate and learn from? Perhaps Nordic banks provide a more accurate future state than previous cross-industry analyses.

Banking's Bill of Health

Data shows that the environments between the U.S. and principally northwestern European countries is nearly identical in terms of drivers of change. All of the countries are seeing change propelled by technology resulting in automating the predictable aspects of business, allowing a re-imagining of entire service categories, and increasing the pace of change. As a result, culture has shifted in the U.S. and Europe with consumers expecting filtered content and interaction, mass-customization, convenience and choice. Across all regions, branch banking is expected to see precipitous drops with Nordic banks expecting the highest – 50% by 2025. 
While such statistics may sound like an industry in rapid decline, Nordic banks are actually the darlings of banking across the European continent with investment and market capitalization that towers over other countries such as Italy and Germany. Their efficiency is unparalleled and their involvement across financial services, not just in banking, has solidified their enviable position. This didn’t happen in a vacuum. Their rise as a phoenix from the flames came about largely because of their response to a decidedly negative set of circumstances. In short, an economic crisis in Denmark, Finland, Norway and Sweden in the early 1990s resulted in the banking industry reorganizing, regrouping and remaking itself.

While Nordic banks responded to a market crash by resuscitating their banking industry, one doesn’t have to – and hopefully won’t – experience a crash in order to create a dynamic and responsive banking experience. What these banks developed following the market crash was a flexible and efficient ecosystem that allowed banks to iterate and adapt as they were faced with new challenges. Understanding and mitigating risk, adopting a lending model that gets the right customer the right loan, and embracing the regulatory environment while expanding reach into other areas of business has been the key to success of the Nordic banking model. These are the things that U.S. banks can and should do. 

Looking at specific examples such as Digital banking insight from three leading Norwegian banks can provide needed perspective and fresh thinking on what can seem like intractable problems for U.S.-based banks. The drive away from the branch toward more of a customized experience with convenience squarely at the center found three Nordic banks responding with branch closures and opening new avenues for interaction. Even in 2014, Norway already had 68% smartphone penetration – one of the highest rates in the world. Nordic banks understood that consumers were quickly ditching the laptop, so these banks focused on developing apps and intuitive, browser-based mobile banking.
In Are the Nordic banks rigged for the future?, Idar Kreutzer, Head of the Finance Norway, was interviewed about how Nordic banks are positioned for the future. He addresses how, even in an unsettled environment, banks can and should be at the forefront of embracing change. Kreutzer says, “Banks will be key players in the financial markets going forward. But the picture is dynamic and the roles will develop, as they have in the past… The banks will play a significant part in our society’s’ eco-system in the future. The industry will benefit from facing competition and challenges, and incumbents will need to step up to these challenges and adjust to disruptions.”

He continues, “We face thoughts, considerations and success stories on disruptive companies and technologies… We typically see two responses from incumbents on disruptions. One is focusing on the regulatory and compliance requirements. Incumbents do not close their eyes to the world around them, but fight back with strong and customer-friendly solutions that are compliant with regulatory requirements, and with scalable and cost efficient operations. The alternate response is to embrace the disruption and partner up with new disruptive entrants and Fintech companies that can add additional value to existing services or to their value chain.”  U.S. banks would be wise to do both.

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