PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES

Spring Edition 2017 2 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 3

Contents

The world of banking is changing 3 Interview with Marcus Agius, Chairman of the board at PA Consulting Group

How FinTech will impact the Nordic financial 8 services industry Interview with Thomas Krogh Jensen, CEO at FinTech

Financial services in 2017 - is winter coming? 10 The countdown to 2018 is ticking away - a timer that many belive could be a start to the era of Open Banking

GDPR overview in the Nordics 14 Brings major changes to the current EU Data Protection legislation

Quarterly performance development 16 Latest trends in the Nordics

Value map for financial institutions 19 The world of banking is changing Nordic Q4 2016 financial highlights 20 Interview with Marcus Agius, Chairman of PA Consulting Group and former Chairman of , the British Bankers Association and Factsheet 28 Deputy Chairman of Lazard Ltd.

The world of banking is changing. It is impacted by economic conditions in countries and regions, by technological trends, new competition and changing preferences and behaviour of their customers, among other factors.

PA: What is your view of the situation in the The Scandinavian countries are among these. banking industry around the world today? Is it The second group consists of developed countries different from five years ago? Ten years ago? where banks are technologically lagging. It is most Agius: The global financial crisis started in 2007, intriguing that we find the United States in this ten years ago. Banking has gone through more category. Although the US is the home of world- Contact us change in these ten years than it has in any leading technology, its banks are rather antiquated, equivalent period in the past. Regulation has played and well behind the curve in technological advances.

Knut Erlend Vik Thomas Bjørnstad an important role in that change, and it is likely The third group contains developing countries Member of PA's Management group Member of PA's Management group to continue to do so. Going forward, we will see where banking is technologically advanced. An regulation and technology combine in new ways. [email protected] [email protected] example here is Kenya. Without going through We can split the global banking scene into four traditional intermediate steps, they have leap +47 913 61 525 +47 917 91 052 groups of countries: frogged into an impressive banking setup based on First, we have the developed and technologically mobile phones. advanced countries. The banks in these countries are Finally, there are the developing countries where building significant technological advantage, exploiting technology is lagging. We find both India and China Fintech through dynamic customer involvement. here, with banking systems still evolving. 4 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 5

a bank and its customers is a very personal thing and PA: In past financial crises, we have seen that those it has to reflect local traditions, local habits, local banks who are very strong in their local knowledge spending patterns and all the rest of it. Having said have had smaller losses than those who have that, globalization is not going to go away, despite become very integrated, very centralized and very some cries for protectionism right now. In trade international. Do you think that is something of the terms, the world is getting smaller and smaller. For past, or could you see the same in the future? trade to continue there will be a need for global Agius: Your question touches on one of the key banks which operate across country borders and elements of banking, which is bankers, and the across currencies. need to have people who know that banking is all PA: So you don’t believe we will see a phase of about risk. Every time a loan is made, the banker protectionism that will slow this down? doesn’t know whether the loan is going to be repaid. He has to make an assessment, based on the Agius: I don’t think that protectionism is going to customer, their credit history, the asset cover etc., stop globalization, but it may affect the pace of and that requires judgement skills. I will give you a change. It has become part of our everyday life. We precise example: When the financial crisis hit the go to Marks and Spencer now to buy a rose, but UK, it wasn’t just caused by problems with exotic the rose is not grown in Kent but in Kenya. This is financial instruments or sub-prime mortgages. what globalization is about. For your smartphone, Some of the banks that were worst hit, were hit the supply chain is really very complex and reaches because of an overextension of poor credit and right around the globe. This is not going to stop. poor lending to the real estate industry. Property Globalization will continue and bankers will need to was overvalued, leverage was too high, and when be active in every stage of the process. the market crashed, it crashed. There were one or PA: Getting back to my first question, you said that two banks who had been caught out in a similar the answer to that was all of the above. Banks are way in similar cycles in the past. They weren’t so We should watch them carefully. Their governments PA: Some say that it might not be just the global, they are regional, they are national, and they exposed, and so did relatively well. The situation have committed to making big changes, and I challengers who will benefit from PSD2 and open are local. But if you think about the competitive was analogous in other geographies where banks think this is ultimately going to lead to the fast banking. It may increase competition among the big scene going forward, do you think there is some part came out relatively well. Canada is a good example, development of new banking services in this group. banks, who will change and develop and compete that may need to become more internationalized and Scandinavia another. And the reason for that wasn’t effectively for each other’s customers? PA: Many have claimed that we are entering a new some parts that may need to remain local? that they were immune to these risks. It was just era: The old banks are becoming dinosaurs, unable Agius: This is a very valid view. Large banks are not that there had been crises in those countries in the Agius: I suspect we will see a further consolidation to keep up with the changes, innovation and the about to cave in to new entrants but they will need past, and they had learned their lessons. When the right at the very top. But there will continue to be evolution of Fintech. New players in the industry and to consider whether the smart thing to do is to be a overheating took place they saw it for what it was a handful of very large global banks, who have the from other industries will take over. On the other pioneer or whether it is better to wait and see which whereas others didn’t. scale, the asset base and the skills to operate that hand, many observe that current challengers have technologies may succeed before they act. There is way. But I don’t see any reason why, at a more local PA: You have previously stated that “Just because grown slower than expected, and the “dinosaurs” no doubt that the pace of change is so great, that level, you can’t have challenger banks or existing the City is strong at the moment doesn’t mean that seem to innovate. What is your view? Will the failure for some banks and some new technologies smaller banks operating perfectly well. it has a perpetual right to remain so.” How do you industry change dramatically, and if it does, will it be will occur. A bank or an existing company could think Brexit may impact the banking industry? driven by current major players or by the challengers easily spend a lot of money trying to push a new or new entrants? device or a new technique, only to find out that they Agius: Brexit is work in progress and I can’t sit have been left behind by someone with a newer or a here and say that I know exactly what is going to Agius: I think there will be different answers to "A bank or an existing better idea. The second point is that many banks are happen. What is clear, is that the banking industry that question in different countries. Many find it big, rich and powerful organizations. They take this will be affected. According to the Prime Minister’s surprising that the new challengers have not yet company could easily threat very seriously. I don’t know of any banks who speech, we are going to leave the single market and been more successful and that the classic stickiness are complacent. They are spending a lot of money on therefore, the access which UK based banks have of existing customers has prevailed. This is spend a lot of money their own research, and they have access to a wide had into the rest of the EU will change. principally because banking is all about money and range of solutions. I think it is difficult to call right trying to push a How that is going to be done remains to be seen. there is nothing more important to an individual now, how this is going to play out. than their personal wealth. People may comfortably new device or a new The tension relates to what comes out of the use a new online holiday booking system, and buy PA: For many years now, business and trade negotiations. From a British point of view, the a washing machine or other products online. But have become more and more global. Banks have technique, only to find out importance of the City and the contribution it trusting their bank account to someone new is a followed this trend, and many previously more local makes to the employment and to tax revenue is much bigger step. banks have become more centralised, and more that they have been left unquestioned. It is a vital industry and it must be international or global in their scope of business. Do protected as well as possible. By the same token, Having said that, there will be further change. you regard banking today as a global, continental, the City of London doesn’t just operate as the Regulators are pushing for it and PSD2 may behind by someone with national or regional business? capital market for Great Britain, it operates as a accelerate these changes significantly. There is a capital market for continental Europe. strong desire in parts of government to see change a newer or a better idea." Agius: Without trying to be cute, I think the answer and increased competition in banking, and to see is all of the above. I believe the relationship between the challengers strengthening. 6 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 7

“...since the companies we think “…the city of London doesn’t just operate about can go into as the capital market for Great Britain, it driverless cars, they operates as a capital market for could certainly go continental Europe. ” into banking. It is perfectly possible, and it is really a question of It is THE prime capital market in the time zone, and PA: So it is not unlikely that we could see regulation provides capital for all European countries. Access or laws being passed that will influence the balance how the people to that is going to continue to be an absolute between London as the financial centre of Europe requirement for people who operate outside the UK, and maybe Frankfurt or some other place. who run these but within EU. So there is a common desire to see Agius: A lot of the regions will want to try the City of London continue to prosper. Inevitably, encourage such a shift and try to make it attractive companies see their there will be some impact, and jobs will go, because whether through personal tax or low property they will need to accommodate changes, but the costs or whatever. I think that the reason why a opportunities as central question is whether this is going to lead marketplace exists is because this is a place where to a collapse of the City of London. I doubt that, people know that they find other people with the they exist.” if only because the installed base, the ecosphere ability to do whatever trade it is that they want. which is the City of London, is so complex and so And for that you have to have a certain critical well established that it is too difficult to reproduce. mass. And the threshold of critical mass is huge. It is a little bit like trying to cut down the rainforest The City of London has it and other centres don’t. It and recreate it somewhere else. Theoretically, it is is a huge barrier to cross over. possible but it is actually very, very difficult to do. which will require less. I don’t know, but my sense is Agius: I think it is hard to imagine otherwise. PA: Banking is a highly regulated industry, and major But I don’t think there should ever be grounds for that the pendulum will probably swing a little bit back The only thing that could possible change this regulatory initiatives impact the industry all the time. complacency and I say that because I have seen a from where it has got to. would be if someone such as Google, Facebook or What do you think may be the key regulatory areas whoever, decided to really go for it. That’s about couple of regulatory revolutions in my time. While PA: Regulators often state that their objective is over the next years, what’s likely to come? the only thing I can think of which would be able to they are quite different from each other and quite to increase competition in the Financial Services challenge banks on the scale that they exist at the different from Brexit, it is interesting to study their Agius: I think a lot depends on what Mr. Trump does. Industry, as you said when we talked about moment. Maybe they will. If you think about it, part impact. One would of course be the Big Bang He is making noises about relative deregulation of PSD2. But often, people feel that regulation has of the success of banking is knowing your customer in the City of London in 1987, where there was the financial services sector in America. I don’t know the opposite effect. New regulation complicates and no one knows their customers better than these deregulation and increased competition. In the early whether that’s going to be the case. But if he does, compliance, and require resources and, it requires huge social media corporations. stages the City of London was like a battlefield, with then I think it is likely that other financial centres will an organisation of some size to comply, and banks who failed to adapt and could not compete follow suit. The regulation which has followed on from it makes life more difficult for the challengers. PA: And if you guess, will the big current banks suffering mightily. Ultimately, the City prospered, but the last financial crisis has been massive - for perfectly Therefore it reduces competition rather than the become stronger? Or will there be a Google or an the short term cost was enormous. understandable reasons because the financial crisis other way around. What is your view? Amazon or an Apple, or whatever, who will carve out was so huge and the damage it did was so great. The second example I have in mind is the aftermath a strong position in the financial services industry? But there is no question that its impact has been an Agius: I think the point you make is an excellent one, of the Enron scandal. The US authorities introduced enormous increase in the cost of running banking and it is part of the reason why the challenger banks Agius: I couldn’t say. But since the companies we the Sarbanes-Oxley Act to prevent further abuses by operations in terms of compliance, and a huge haven’t made more progress than they have so far. It think about can go into driverless cars, they could making sure that regulation was far more rigorous number of heads are involved in that. Coupled with is an extraordinarily complex business to run a bank, certainly go into banking. It is perfectly possible, and far reaching. This impacted, but didn’t destroy the increased capital requirements, it means that it a bank of any size. I agree that regulation tends to and it is really a question of how the people who Wall Street, but it did lead to a dramatic and, never is actually very difficult for banks to make a sensible act as a brake on the pace of change. run these companies see their opportunities as since reversed, change in the relative size of the return on their shareholders equity. While shareholders they exist. They are not short of opportunities. City of London and Wall Street. Business moved to PA: Taking it all into consideration, do you believe may tolerate that for a short time, eventually they The banking industry is huge but maybe they will London, which wouldn’t have moved if it hadn’t been that the major banks of the world, such as City, won’t, and something has to give. Maybe we will end decide that the return isn’t going to be for the regulation. So these big changes are seldom , HSBC, Santander and others will be up with fewer banks charging higher fees or maybe we attractive enough. terminal but they are relatively impactful. the major forces in the industry ten years from now? will end up with different ways of handling regulation, 8 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 9

functionality offered on mobile platforms, such as about how to use technology and will be more investments services and crowd funding solutions. specific on what they really want to achieve. Various models are available going forwards; we will see PA: For some time, we have been told that Fintech banks that could source innovation from accelerators will disrupt the financial services industry. However, and incubators, but also keep capability within the IT has been important for the industry for decades, banks, particularly within the core. But all of this and banks and insurers have always been adopting will be based on - and rooted in - a clear business new IT solutions. What is different with the Fintech objective and strategy. we see today?

TKJ: The speed of change is much higher today compared to the earlier adaption within the industry. The access to technology is much more open, and "The speed of change investment requirement is much lower due to reduced cost of technology. Lower barriers across industries to is much higher today adapt technology also gives tech and app developers access to a much larger markets. Thus, they are able compared to the to capitalize on the investments much faster. earlier adaption within PA: Will investments continue on a broad scope and scale, or are there any particular parts of the value chain you expect to be radically changed or disrupted? the industry."

TKJ: I expect to continue to see most development PA: All banks and financial services companies today How Fintech will impact the Nordic financial on the front end and customer side and I think we discuss and explore opportunities and threats related will see completely new user experiences. Solutions services industry to open banking, banking as a platform and related that will work across technologies and industries, regulations such as PSD2 etc. Will banks still be Interview with Thomas Krogh Jensen, CEO at Copenhagen FinTech and help banks to move into new businesses. banks in the future? Everything will be on mobile platforms – however, we have to take into consideration that there are still TKJ: Yes, the banks are going to remain, but the generational gaps. We have seen that Fintech so far Knut Erlend Vik from PA met with Thomas Krogh Jensen, CEO ecosystem will be different. The whole value chain has been focusing on banking, first on the payments will be changed. This will be the start of a wave and of Copenhagen FinTech to discuss the disruption to the financial value chain and now on the lending side. Going current limitations within PSD2 will be solved over services industry. forward, I expect to see stronger focus on insurance time. However, some Fintech companies maybe and pensions and investment are coming next. overestimating the impact. They also need to The Nordic financial services landscape is PA: And how will Fintechs contribute to the understand that the banks can take on various roles changing as a result of regulations, new development of the financial services industry PA: What are the most interesting solutions and under the PSD2 regime and utilize the information technologies, emerging new business models, going forward? developments we have seen lately? between them. As a Fintech hub, we want the and ever changing customer expectations. TKJ: That is clear; Fintech allows for innovation and regulatory side to adapt to the situation and allow CEOs of large Nordic banks went to the World TKJ: There are several examples and it’s difficult to experiments. We will see a myriad of new ideas and for a “regulatory sandbox” as we have seen in the Economic Forum in Davos, not only to discuss select just a few, but Hive Online is an interesting solutions seeking to become sustainable businesses. UK where ideas can be tested. The industry also macroeconomics and world trade, but also to example. It’s targeted towards SMEs and is basically We will also see a shift from a focus on developing needs to see the benefit of sharing and to want to meet and discuss with technology providers how a trust platform utilizing the blockchain technology, products and features to more holistic customer share information. technology will affect them and to understand where handling of the administrative tasks and experiences and services. We will of course see new how the banks can stay relevant and competitive compliance could be automated, integrating all PA: How will the Nordic Fintechs be able stay in the future. aspects such as accounting, VAT, tax and other competitive in a truly global market– and as such Copenhagen Fintech is an innovative compliance requirements related to the “order PA: From your perspective, what will the financial continue to support the Nordic financial services with to cash processes”. It will make the every-day services industry look like in the next five years? growth organisation based on the vision of world class solutions? administrative life for leaders and owners of SMEs creating a Danish growth adventure within TKJ: There are many potential future scenarios. much better and seeks to solve core questions such TKJ: I’m sure Nordic Fintechs have a strong future. So far, payments has been the driving force in fintech. We want to create a Danish Fintech as “can I trust my counterpart?”, and “will I get my We are already quite digitized in the Nordics and developing new customer experiences, with Mobile ecosystem of the highest Nordic standard. cash when it is due?” our customers are digitally savvy. We have a very Pay and Vipps as two obvious examples. Recent To accomplish this, a central initiative is strong infrastructure, a strong pool of well-educated developments have focused on transactions and PA: Start-ups, accelerators and incubators. We have that the association has established and and talented people and it’s easy to do business customer interactions. We now see that the whole seen a lot of them growing over the last years. What here. This makes the Nordics a very good test bed value chain of the financial services is in play. runs a co-working space called Copenhagen will the more permanent state of the start-up camps and launch base for global solutions. And one more There will still be banks, but we will see new ways FinTech Lab. Additionally, Copenhagen and incubators be, when the buzz is gone? thing; we are collaborating across the Nordics – that of cooperation and partnerships across the whole FinTech runs the innovation network for the is unique and gives us an advantage we both need ecosystem. We will move towards more open TKJ: We are moving into a more mature state – finance IT sector. and will exploit going forward. platforms and “banking as a service”. where investors and businesses are more conscious 10 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 11

Fintechs, we have witnessed a truly giant leap from and loss statements that are not up to shareholder simple app development to a more mature focus expectations. A difficult to prove indirect revenue on exploiting fundamental regulatory opportunities due to lowered customer acquisition costs can only and developing core technology that underpins defend the level of sunk capital for so long, and at strategic competitive advantages. some point the investment must start to generate direct profit. As the expected price war between 2017 looks to be a year of even more notable banks drained all possibilities of generating a profit developments. A banking revolution appears to be from P2P transactions in 2015, the subsequent coming, and there is reason to believe it could be strategy for the wallets became ‘enrol users, pivot more profound than many would like to believe. The later’. The user bases they have achieved now have reasoning behind this assertion is illustrated through to, like any other Silicon Valley start-up, start making a breakdown of the forces that are in motion. a profit. How can this be done? Most likely through

INFRASTRUCTURE & REGUALTION MARKETS

• The Blockchain • Prediction markets • Wisdom of crowds • Regulation • Social trading • Digital identity & privacy • Automated advice • Operational Infrastructure FINANCIAL • High-frequency trading MONEY & PAYMENTS TECHNOLOGY MARKETPLACES

• P2P transfers £ • SME enablement • Digital currencies • Capital raising • Mobile banking • Sharing economy Financial services in 2017 – is winter coming? • The internet of things • Financial inclusion Similarly to Napster sparking a revolution in new functionalities with viable business models. The countdown to 2018 is ticking away – a timer that many believe the media industry in the last two decades, the PSD2 opens up a world of possibilities for these financial services sector is today riddled with forces could be a start to the era of Open Banking. wallets. They are in the right place at the right time, equalling, or superseding, peer-to-peer sharing and banks who are left out of the loop should be Authors: Knut Martin Hauge and Nicky Overgaard Pedersen in their potential disruptive strength. Plausible seriously worried. We have made a prototype that and relevant near term consequences of the converts the directive into a user interface, and combined forces of these drivers can be deduced the results are staggering. Soon you will be able – consequences that should ignite intense strategic While much of the financial world was last year sparked a massive interest about its implications. to shop banks’ products and interest rates through discussions in the senior suites of your workplace. focused on Trump and Canary Wharf’s imminent Awareness about the strategic implications from these wallets more easily than how you search for a departure from the EU, quiet power struggles and the GDPR and content like citizens’ ‘right to data In 2017, it is likely we will see: good deal on Kelkoo, Pricerunner or Prisjakt. arms races played out backstage in European and portability’ received attention. • Nordic mobile wallets becoming much more than Discussions about PSD2 turning into effort Nordic financial services where incumbents and new The discussion about Bitcoin matured into the P2P payments devoted to understand the concept of entrants assessed the chessboard of the value chain topics of blockchain and distributed ledgers. Young Open Banking in financial services. In 2017, firms will continue to talent, both technical and strategic, has seemingly • Discussions about PSD2 turning into effort devoted to evaluate their positioning, next moves and their become increasingly drawn to the industry as new understand the concept of Open Banking Open banking could very well become the hype competitors’ probable response. In this article, we technology and realistic cases for change surfaces. phrase of 2017 as people get tired of hearing • OEM wallets launching in the Nordics consider the changes to financial services in 2016 Both for established companies and aspiring about PSD2 and start realising its implications. and the likely developments of 2017. • Facebook piloting or beta testing next generation While PSD2 is a directive, Open Banking describes money management interfaces the ecosystem, communication technology and 2016 turned out to be an exciting year for our PSD2: The revised Payment Services Directive interfaces that will arise because of it. To be fair, we industry, quite likely unparalleled in terms of regulates how third parties can initiate • Increasing M&A activity and forming of payments and directly access information from have all probably heard the phrase and understood new business development and the level of strategic partnerships customer accounts. the concept of open application programme innovative thought. • A resurrecting focus on digital identity interfaces (APIs), but it seems unlikely that we have RTS: The Regulatory Technical Standard defines A maturing managerial mindset and world view fully grasped its implications in a tangible manner. many of the uncertain articles in PSD2, such • Increasing understanding of alternative blockchain enabled a willingness to realistically entertain But this does not mean it does not hold a profound as the account information that third parties use cases trends, innovations and business model can access, how it can be accessed and the substance, and UK seems to be in the forefront developments that in 2015 probably would have authentication requirements. of defining its content through the Open Banking been dismissed as fads or, at most, intriguing GDPR: The General Data Protection Regulation Nordic mobile wallets becoming more than Working Group set up at the request of HM Treasury. peculiarities. The focus on PSD2 was off to a P2P payments is a reform of the EU data protection rules that The strategic imperatives for opening up to third slow start during the year, but the content of the provides EU citizens greater control of their data Banks have invested heavily in rolling out party services providers through such APIs is not RTS draft from the European Banking Authority and strengthens data protection requirements. applications that probably have resulted in profit just something that is happening within banking. 12 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 13

All industries are subject to disintermediation by not going to enter the Nordic market for some ourselves the question: why would they not do it? We The truth is that a user’s identity is one of the most technology, and all industries are experiencing a time. The reasoning was based partly on the all understand the unfathomable opportunity that lies valuable possessions a company has, and the General shift from value being generated by digital enabled difficulties their business models would face due to dormant in using their 1.8 billion monthly active users Data Protection Regulation (GDPR) wants to regulate services surrounding the products rather than the the interchange differences between the Nordics to create a financial eco system that spans the world. A this. Additionally, BankID and NemID are domestic core products themselves. An increasing amount of and other target markets. triad of argumentation usually surfaces when discussing solutions and have poor functionality internationally, business models revolve around APIs, eg Expedia. this matter with conservatives. Facebook will either not although the directive eIDAS could lead to digital The prediction has so far proven to be true, and com generates 90% of their revenue from APIs. succeed or stop their endeavours due to: identity usage across Europe. We live in a world today is the time to refine the statement. Apple Pay where the traditional one-factor username/password In essence, Open Banking revolves around how banks and other ‘OEM Pays’ have had plenty of time to • The insufficient profits to be made from a money log-on dominates internationally, but as we are share their data and distribute their products and adapt their business model so it better suits non-US management interface rapidly approaching an internet of value it becomes services to customers through third parties in a resilient ecosystems and revenue streams. At the same time, • End-users not trusting Facebook to manage necessary to develop new ways of identifying and and secure way, and in effect giving their customers a the Nordics is a highly attractive market due to a their finances managing end-user identities inside an ecosystem, greater degree of freedom to choose, mix and match high number of card transactions per capita, high ERP/CRM-system or on the internet. their financial services from different distributors. smartphone penetration and population propensity • Facebook being good at nickel and dimes (or, in this case, bits and bytes) – not private or Increasing understanding of alternative blockchain Strategic enablers for Open Banking Pivotal questions regarding the business model design business banking use cases Although they are valid arguments, it is not difficult In 2016 we heard about the continued success Value chain integration • What is our future role in the financial (data) value chain? to disarm every single one. But let us yet again pose of several bitcoin applications, e.g. Goldman another simple question: If Facebook presented you Sachs backed Circle that clocked in a nifty $400 • How do we maximise value generation to both shareholders, with the opportunity to manage your finances in the million valuation in its series D funding round. business partners and customers? same user friendly and interoperable manner that While Circle focuses on refining the P2P bitcoin • What does ‘superior value’ look like? you are used to within the Facebook ecosystem, payment experience by improving the customer would you switch? interface and reducing currency volatility risk, • How do we put a monetary value on our data and APIs? we also witnessed the rise of the Distributed Autonomous Organization (DAO) based on the Interoperability • How should we organise and govern ourselves around Ethereum blockchain that raised nearly $200 million exploration and exploitation of Fintechs in the ecosystem? "The truth is that a through crowdfunding. The DAO introduced a • With whom do we form a partnership? user’s identity is one use case for smart contracts to the world, which is a digital contract that can execute commands • Do we exploit the new partnership as a loosely coupled add- of the most valuable based on metadata none of the contracting parties on or a complete merger into our existing organisation and can influence. In this way, completely safe and technical infrastructure? possessions a company trustworthy contracts are constructed, rendering • Who should develop and govern our Open APIs to maintain a cost- has, and the General Data much of the conflict judicial system obsolete. Other effective, secure and scalable interface with our business partners? maturing applications based on distributed ledgers Protection Regulation present similar promising use cases, and 2017 will Digital attractiveness • How do we attract and retain the right talent and business probably enlighten us with more details. partners to prevail in the digital domain? wants to regulate this" To sum up, we are plagued by what might seem • How do we become more attractive to Fintechs than our like overhyped terminologies these days, and Our answer is that many would – in a heartbeat. competitors do? while some could fade away, several are likely to Increasing M&A activity and forming of contain unavoidable truth. An agile organisation • Are we set out to become a software company with everything strategic partnerships that manages to rapidly respond to these changes that follows? – changes that are rumoured to be accelerating at Due to PSD2, Open Banking, and the ever-increasing • Do we expose our products through Open APIs in a way that an exponential rate – seem to gain a competitive data and infrastructural complexity within banking fosters exchange and co-creation of value, by being easy to advantage that is increasing in its strength year- products, it seems unavoidable that we will see interact with and easy to share and transact through? on-year. The banks, credit institutions, schemes, new strategic partnerships and/or M&A activity in payment service providers, acquirers and many the financial services sector. Economy of scale and other players who do not really have a clearly collaboration is vital to withstand threats from Google, In the transformation towards becoming an Open to adopt new solutions, meaning their ROI could defined name in the financial value chain, are today Android, Facebook and Amazon. Swish, MobilePay Bank, incumbents should focus on building a strong justify a product launch in 2017. playing a game of chess for position that is fuelled and RetailPayment have already kicked this off through answer and strategic rationale to several pivotal by severe ecosystem changes. Players who are Facebook piloting or beta testing next generation the collaborations they represent. The Nordics have questions regarding the design of their business model. able to deploy lateral thinking to break out of their money management interfaces historically been a very collaborative environment traditional reaction pattern and product lifecycle OEM wallets launching in the Nordics within financial services, and there seems to be no Facebook’s recent e-money license in Ireland and state-of-mind are highly likely to be the successful obvious reason why this will not continue in 2017. In October 2014, we wrote an article in Dagens recruitment suggests something is going on, but players of 2017 and beyond. However, it could be more partitioned than previously. Næringsliv stating that Apple Pay was probably instead of speculating over rumours let us rather ask A resurrecting focus on digital identity US debit and credit card Norway debit and credit card transactions per capita transactions per capita In the Nordics, we have been blessed with the digital identities called BankID and NemID. While they have 2012: 262 2015: 321 CAGR: 7% 2012: 318 2015: 383 CAGR: 6.4% ensured trust in digital financial services, they are lagging behind as Identity Platforms catches on. Source: Federal Reserve, Norges Bank, SSB, PA analysis 14 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 15

(commercial organisations), Faeroe Islands, Guernsey, data usage means that organisations should start Israel, Isle of Man, Jersey, New Zealand, Switzerland work early to define their specific consent model and Uruguay. as this will have far-reaching ramifications on the systems and processes they use to capture data. Therefore, global regulators are already The consent model must ensure control over their demonstrating their keenness to maintain data remains with the individual – one of the main consistency with the EU to encourage and facilitate aims of the GDPR. cross-border trade and operations. In short, companies should proceed with their GDPR planning Another important change is the need for proactive either because they process EU citizen data or governance of third parties who process information. because non EEA-states are likely to implement laws The increased use of outsourced vendors and that are essentially identical to the GDPR. suppliers means organisations must take care to identify where and how information is processed, GDPR priorities transmitted and stored, and have clarity over the designated data controllers and data processors. We have identified the top three priority areas for any organisation. Each of these areas will change the way An opportunity GDPR overview in the Nordics organisations ensure protection of personal data: Organisations have a choice. They can treat it The EU General Data Protection Regulation (GDPR) brings in major • Requirements around unambiguous consent, simply as another compliance issue – or they changes to the current EU Data Protection legislation by fundamentally data portability and the right to erasure mean can take a more business- and customer-centric organisations fundamentally need to rethink approach that will allow them to explore how they changing the way organisations manage personal data. how they manage and retain data, and have a can manage personal data to help make more complete understanding of the information flow informed decisions and create a better experience Author: Mark Pearce ecosystem for their customers and other stakeholders.

• Data governance, privacy within systems and Successful GDPR implementation demands that organisational culture will need to happen by organisations have a complete understanding of It applies globally to organisations that manage EU Global coverage design, rather than as an after-thought. Essentially, the personal data flow aligned with the overarching citizen data and introduces requirements around GDPR applies to any organisation that trades with the organisations need to take a more proactive business processes and underlying systems. If unambiguous consent, portability of data and EU or with EU citizens, or handles EU citizen data. approach towards management of personal data, this is closely coupled with their data governance the right to erasure. The maximum penalties for a Under the present Data Protection Directive, there is subsequent monitoring and reporting programme, organisations can generate valuable breach are increasing from hundreds of thousands the principle of adequacy across the 28 (current) EU insights – for example, into customer behaviour and to millions of euros or krone. Organisations can countries and three EEA member countries (Norway, • Liability extension to third-party data processors how to improve customer experience. incur fines of up to 4% of global gross turnover or Iceland and Liechtenstein). The EU Commission has will enable organisations to have clearly defined €20 million, whichever is greater. In the world of also recognised 11 non-EU countries that provide accountabilities and agreements Practical solutions data privacy – GDPR is a game changer. adequate protection – Andorra, Argentina, Canada There are a number of practical steps an Getting started organisation can take to start their GDPR planning The key changes Organisations need to understand the scale of the and preparation – from reviewing their current challenge. When new regulations are imposed, many consent model to locating where personal data is WIDER assume that compliance can be achieved with changes current held, from conducting internal awareness GEOGRAPHIC to a few administrative processes and technical and training to reviewing all third-party contracts. SCOPE STRENGTHENING HIGHER FINES upgrades. In reality, the GDPR will pose greater INDIVIDUALS challenges around the management of data that We have a tried and tested approach to the GDPR, RIGHTS companies hold, and some of the required systemic which includes: changes will be very time-consuming and resource- intensive. It is therefore critical that action starts now. • Conducting a detailed gap assessment against THIRD PARTY BREACH GDPR requirements INFORMATION NOTIFICATION WHAT WILL The management of data, how it is managed and GOVERNANCE CHANGE? what happens if things go wrong, all have a wide- • Defining and shaping an appropriate remediation reaching set of new requirements. Organisations programme as per the findings of the gap will need to explore the implications of the assessment strengthening of individual rights, such as the right LIABILITY UNAMBIGUOUS to be forgotten and the need to carry out privacy • Identifying opportunities within your organisation EXTENSION CONSENT impact assessments. There is also a requirement to use data to improve decision-making and PRIVACY BY for organisations to report any breaches to the customer experience DESIGN/DEFAULT regulator within 72 hours – this is a significant step up from the previous (and non-specific) expectation With just over a year until the May 2018 GDPR of a ‘reasonable’ time for notification. implementation deadline, it is important to act now to ensure you are compliant and to maximise The new requirement for unambiguous consent for opportunities to effectively use customer data. 16 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 17

Quarterly performance development Quarterly performance development

Denmark Norway • By the end of February 2017 the mobile payments they need, nothing more, at their fingertips”. In • DNB’s peer-to-peer payment solution Vipps has on recruiting 600 key people to accompany the solution Swipp will shut down, and the remaining future, Lunar Way expects to scale up its business, yet to make a positive contribution to the bank’s expected activity growth. Norwegian newspaper 70 banks behind Swipp including , Nykredit, by partnering with even more local banks in top line despite investment of approximately Finansavisen recently estimated Evry’s MCAP as , , Bank and Scandinavia and subsequently across Europe. 600 million NOK. VIPPS reports over 160 000 ranging between 16-17 billion NOK. Arbejdernes Landsbank will transfer to MobilePay transactions and on average 55 million NOK are • Skandia, the Swedish provider of pension and • Consumer credit loans have experienced massive that is provided by . MobilePay will transferred through the app daily. The service health solutions, has joined forces with Saxo growth in Norway, reaching more than 83 billion offer cost-efficient account-to-account payments, is still free for private users, however Trond Bank, the Danish bank specializing in online NOK of outstanding debt in the second half of and other banks in , Norway and Finland Bentestuen from DNB states that the costs will be trading and investment. The joint venture will 2016. Bank Norwegian has been one of the major have been invited to join the new partnership recouped through other commercial payment fees bring Saxo Bank’s banking capabilities together winners with growth of 370 percent since June model. Swipp was launched as a result of Danske by the end of 2017. with Skandia’s expertise in pension and health 2014. The bank is now worth 14.2 billion NOK, Bank leaving a joint venture to pursue their solutions. Both companies have a strong market • CEO of DNB, Rune Bjerke, expects a 50 per cent which is more than 4 billion NOK higher than ambition of implementing their own solution presence offering services to small to medium reduction in the number of employees in five Norwegian Air Shuttle’s valuation. (MobilePay). In 2016, Swipp processed 5 million sized enterprises. The new collaboration will years. Developments in technology and robots transactions compared MobilePay’s 180 million. • The Norwegian Government has proposed sector enable Skandia and Saxo Bank to offer a full taking on traditional customer service tasks were specific taxation of the financial services industry • Nykredit, the largest mortgage provider in service coverage to their enterprise customers and the main reasons behind his prediction, delivered in its 2017 budget. The reason for the proposal is Denmark, has taken a minority stake investment to their employees. at a public sector conference in January 2017. that the financial services sector is exempt from in the digital financial service provider Lunar Way, The large incumbent banks are increasingly • Tryg, the second largest general insurer in the VAT. A committee will scrutinize the proposal and replaced Københavns Andelskasse as Lunar being challenged by digital players and Fintech Nordic region, has teamed up with Rainmaking and provide a recommendation during 2018. The Way’s banking partner. Københavns Andelskasse disruptors, and will need to invest more in Loft, one of Europe’s leading facilitators of implication for financial services companies will entered a new partnership with another Fintech technology and innovation, as well reduce the entrepreneurship, to create a co-working space for be a corporate tax of 25% (compared to 24% in Northfolders. Lunar Way’s business model is costs of local customer service. tech startups in the middle of Tryg’s headquarters other industries), as well an additional tax of 5% centered on a MasterCard debit card, a mobile app, just outside Copenhagen. The aim is to encourage • IT company Evry is seeking to be re-listed, but on salaries. and partnerships with established banks with bank the entrepreneurs to work on areas relevant to Tryg is yet to decide on which stock exchange; Oslo, licenses. While the incumbents excel in classical e.g. health and payments solutions. By inviting up to Stockholm, Copenhagen and London are potential banking skills and regulatory compliance, Lunar 300 entrepreneurs they hope to discover and exploit hosts. CEO Björn Ivroth states that their stock of Way offers a superior mobile user experience the new ideas that will help them to maintain their work is at a record high, and that they are working targeted at millennials “giving them just what position as a strong and leading player. 18 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 19

Quarterly performance development

Value map for financial institutions

Sweden Value map for financial corporations

• From January 2, 2017, Nordea became a Swedish • Another incident in the fund industry highlights bank after the completion of the cross‑border the need for high quality independent advisory 2.50 merger between Nordea Bank AB (publ.) and services for retail clients. This time Falcon Funds, a its subsidiary banks in Denmark, Finland and Malta-based asset manager, is being investigated Norway. CEO of Nordea Bank AB, Casper von by the Swedish Economic Crime Authority (SECA) Koskull, says that this is a significant step forward after allegations that it has defrauded 22,000 2.00 in Nordea’s business transformation, as a more Swedish pension investors of hundreds of millions straightforward legal structure better reflects the of Swedish krona. Nordic way they operate today. • Stockholm has fallen 7 places in The Global 1.50 • Annika Falkengren is stepping down as CEO of Financial Centres Index and is now placed 44th P/B Nordea SEB Sample average Q4 2016: 1.34 SEB to join Swiss private bank Lombard Odier on the world ranking. Chief economist at the as managing partner. She successfully navigated Stockholm Chamber of Commerce, Andreas Spar Nord Bank Sample average Q4 2015: 1.19 SEB through the global financial crisis with a clear Hatzigeorgiou, expressed concern about the Danske Bank 1.00 strategy on which she and the whole SEB team fall, as the financial market is a driving force Jyske Bank have delivered. Speculation about Falkengren’s for innovation and creating new jobs. As a DNB successor has started - Joachim Alpen, Christoffer consequence, Stockholm Chamber of Commerce, Malmer and Johan Torgeby are strong candidates Nasdaq Stockholm and Stockholm Business Storebrand 0.50 from within the bank. Region have started the ”Stockholm International Financial Initiative” (SIFI) with the objective of • Stockholm's startup scene is set to receive a boost making the city one of Europe’s top five financial as Sweden’s first FinTech hub is launched. While centres by 2020. The main cause of the fall in the the Swedish capital attracts close to a fifth of the ranking is believed to be the discussion about a overall FinTech investments in Europe, Stockholm 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 wage tax. has until now lacked a specialist hub in the field. Total assets in mEUR 2015:Q4 2016:Q4 20 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 21

Nordic Q4 2016 financial highlights

CONSOLIDATED BANKING % 31.4% 4.8Jyske Bank highest ROE before Handelsbanken highest core taxes in Q4 2016 615,659 capital ratio in Q4 2016* bEUR Nordea highest total assets in Q4 2016* % % SparNord Bank highest 4.3% 33Jyske Bank lowest cost/ net interests/total assets Jyske Bank highest asset income ratio in Q4 2016 in Q4 2016 growth in Q4 2016* 0. *consolidated 5 LIFE AND PENSIONS CASUALTY/NON-LIFE

If has the highest premium income in Q4 2016 8.0% 1,103 Länsförsäkringar has the highest Danica Pension has mEUR investment return in Q4 2016 the highest premium % Nordea has the income in Q4 2016 highest ROE before 5. taxes in Q4 2016 883 mEUR 11.3% 4 Topdanmark has the highest ROE before taxes in Q4 2016 22 PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES PA PERSPECTIVES ON NORDIC FINANCIAL SERVICES 23

Factsheet

Size Profitability Efficiency Valuation Solidity Premium income (mEUR) Investment return11 ROE before taxes12 Operating cost/total assets13 Life and pensions Total Assets Asset Relative Consolidated ROE after tax3 Cost/income4 P/B5 P/E6 Core capital ratio 16Q4 16Q3 15Q4 16Q4 16Q3 15Q4 16Q4 16Q3 15Q4 16Q4 16Q3 15Q4 (bEUR) growth1 size2 Nordea 158 148 165 N/A N/A 1.2 % 5.4 % 5.6 % 6.5 % 0.32% 0.30% 0.32% 16Q4 15Q4 16Q4 16Q4 16Q4 16Q3 16Q4 16Q3 16Q4 16Q3 16Q4 16Q3 16Q4 15Q4

SEB 165 149 141 N/A N/A N/A N/A N/A N/A 0.43% 0.42% 0.49% Handelsbanken 269,269 271,171 -9.7 % 14.5 % 2.5 % 3.4 % 45.6 % 41.2 % 1.8 1.7 17.9 12.5 31.4 % 27.2 %

Danica Pension 1,103 1,303 1,013 N/A N/A 0.1 % 4.4 % N/A 3.5 % N/A N/A 0.29% Nordea 615,659 646,868 -6.3 % 24.7 % 4.2 % 2.9 % 47.6 % 48.0 % 1.6 1.2 9.7 10.1 18.4 % 16.5 %

DNB Livforsikring N/A 380 462 N/A 3.1 % 5.1 % N/A 1.6 % -1.8 % N/A 0.42% 0.37% SEB 268,558 268,357 -8.1 % 11.9 % 3.0 % 3.1 % 49.1 % 49.6 % 1.4 1.3 11.8 10.3 21.2 % 21.3 %

Storebrand 597 613 559 -0.3 % 1.5 % 0.9 % 2.6 % 1.8 % -5.6 % 0.56% 0.58% 0.67% Swedbank 220,758 231,037 -10.0 % 14.4 % 3.2 % 3.9 % 43.2 % 39.2 % 1.9 1.8 14.8 11.6 28.7 % 26.9 % KEY: • Highest or Best Performing • Lowest or Worst Performing Danske Bank 468,286 441,393 -1.8 % 16.7 % 3.4 % 3.3 % 46.9 % 45.4 % 1.3 1.3 9.7 9.7 19.1 % 18.1 %

Jyske Bank 78,866 72,840 4.3 % 2.4 % 3.9 % 2.4 % 32.9 % 56.6 % 1.0 0.9 6.5 9.8 16.5 % 16.1 % Premium income (mEUR) Investment return14 ROE before taxes15 Combined ratio Casualty/ non-life SparNord Bank 10,549 10,235 -0.6 % 0.8 % 1.9 % 4.0 % 69.4 % 48.6 % 1.3 1.0 17.2 6.5 14.0 % 14.4 % 16Q4 16Q3 15Q4 16Q4 16Q3 15Q4 16Q4 16Q3 15Q4 16Q4 16Q3 15Q4

Sydbank N/A 19,134 N/A N/A N/A 3.4 % N/A 55.9 % N/A 1.2 N/A 9.1 N/A 15.5 % If 883 851 885 0.5 % 0.4 % 0.7 % 5.4 % 5.1 % 6.1 % 85.6 % 84.6 % 87.7 %

DNB 293,408 278,519 0.1 % 13.3 % 2.6 % 2.1 % 41.2 % 40.6 % 1.0 0.9 9.7 10.4 21.3 % 16.2 % Länsförsäkringar 629 647 626 8.0 % 2.2 % 2.5 % 2.3 % 4.8 % 4.2 % 92.0 % 97.0 % 87.0 %

Storebrand 57,470 55,878 0.7 % 1.3 % 2.4 % 1.6 % 91.9 % 96.0 % 0.7 0.7 7.3 10.0 15.7 % 15.2 % Topdanmark 296 300 301 0.6 % 1.9 % 0.4 % 11.3 % 11.7 % 5.6 % 84.6 % 83.2 % 91.6 % KEY: • Highest or Best Performing • Lowest or Worst Performing Tryg 605 606 589 1.4 % 0.4 % 0.5 % 8.5 % 10.1 % 7.2 % 86.7 % 83.7 % 88.4 %

ROE Net interest/ Cost/ Bad debt/ Other income/ Gjensidige 629 702 589 1.0 % 2.7 % 1.1 % 5.8 % 6.6 % 6.3 % 87.7 % 87.5 % 84.0 % before taxes7 total assets8 income9 total assets10 total income Banking KEY: • Highest or Best Performing • Lowest or Worst Performing 16Q4 16Q3 15Q4 16Q4 16Q3 15Q4 16Q4 16Q3 15Q4 16Q4 16Q3 15Q4 16Q4 16Q3 15Q4

Handelsbanken 3.4 % 4.2 % 4.3 % 0.3 % 0.2 % 0.3 % 46% 41% 45% 0.13% 0.07% 0.08% 28% 33% 36%

Nordea 3.3 % 3.5 % 6.5 % 0.2 % 0.2 % 0.2 % 50% 49% 45% 0.10% 0.10% 0.13% 46% 48% 43%

SEB 4.0 % 4.0 % 4.4 % 0.2 % 0.2 % 0.2 % 50% 50% 48% 0.04% 0.03% 0.04% 52% 50% 54%

Swedbank 4.0 % 4.8 % 3.9 % 0.3 % 0.3 % 0.3 % 43% 39% 45% 0.11% 0.03% 0.07% 39% 41% 39%

Danske Bank 4.3 % 3.9 % -0.5 % 0.1 % 0.1 % 0.1 % 50% 50% 56% -0.01% 0.02% -0.01% 34% 36% 42%

Jyske Bank 4.8 % 3.0 % 3.6 % 0.3 % 0.3 % 0.4 % 33% 57% 31% -0.13% 0.12% 0.21% 39% 35% 37%

SparNord Bank 2.4 % 4.9 % 1.9 % 0.5 % 0.5 % 0.5 % 69% 49% 66% 0.28% 0.28% 0.40% 49% 50% 42%

Sydbank N/A 4.3 % 3.4 % N/A 0.4 % 0.4 % N/A N/A 61% N/A 0.08% 0.12% N/A 39% 43%

DNB 3.9 % 2.8 % 6.8 % 0.3 % 0.3 % 0.3 % 37% 41% 19% 0.21% 0.31% 0.25% 51% 41% 56%

KEY: • Highest or Best Performing • Lowest or Worst Performing

Definitions Figures are based on annual and quarterly reports, Asset growth = Growth in assets last year and may contain non-recurring items ROE = PAT/Average equity capital 1. Asset growth last quarter 6. Number of shares*share price at end of quarter/earnings last twelve months 11. Quarterly return on total portfolio P/B = Market value end of period/Book value end of period 2. Relative size of market capital (out of 7.a Quarterlytotal of earnings 100) before tax/equity 12. Earnings quarterly/equity P/E = Price per share end of period/PAT per share 3. Quarterly earnings/equity 8. Net interest quarterly/total assets bank 13. Operating cost quarterly*4/total assets life insurance Tier 1 Ratio = Tier 1 Capital/Risk weighted assets 4. Operating cost/total income 9. Operating cost /total income (quarterly) 14. Quarterly return on total portfolio Cost/Income = All operating costs/Total income 5. Number of shares*share price at end of quarter/book value10. Lossesof equity last quarter*4/total assets 15. Result before tax quarterly/equity in casualty Cost Ratio = All operating cost/Average assets

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