Fintech Nordic Summary How FinTech is shaping Financial Services

Fintech Nordic SummaryHow FinTech is shaping Financial Services

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69%believe that consumer banking is most likely to experience the greatest degree of disruption byFinTech

Nordic FinTech ReportMarch 2016 7 out of 10

indicate that the margin squeeze is the greatest threat

2 PwC Nordic FinTech Report

Foreword Contents

Which area within the financial sector is likely to be the most disrupted by FinTech? 02

Risk of being lost to standalone FinTech companies 05

Threats related to the rise of FinTech 07

Opportunities related to the rise of FinTech 08

In which areas do you see the most important impact on your business from FinTech? 11

The most popular channels among customers 13

2 PwC Global FinTech Report

When was the last time you visited a record store or a travel agency? When was the last time you rented a DVD? The Internet has changed many industries from the bottom up and in this regard the Nordic countries are some of the most advanced. At the intersection of finance and technology you find FinTech which has been accelerating the pace of change at a remarkable rate, and which is reshaping the industry’s status quo. The Nordic financial market is often viewed as one of the most prominent when it comes to using the Internet and the digital revolution has certainly transformed the way customers access financial products and services. Technology-driven applications in nearly every segment of the financial

sector are now a reality and FinTech is gaining significant momentum, causing disruption to the traditional value chain. In fact, the funding of FinTech start-ups more than doubled in 2015, reaching USD 12.2 billion, up from USD 5.6 billion in 2014. Cutting-edge FinTech companies and new market activities are redrawing the competitive landscape, blurring the lines defining the players in the financial sector, and this is just the beginning.

Helena Kaiser De Carolis FS Leader Sweden


Which area within the financial sector is likely to be the most disrupted by FinTech?

According to our survey, the financial industry identifies retail banking services as comprising the area experiencing the greatest risk of disruption within the next five years. Approximately 70 percent of the respondents stated that consumer banking is most likely to face major changes as a result of the operations of FinTech companies. This view is predominant on both the global and Nordic levels, and the respondents’ comments do not vary significantly. The past fifteen years of retail banking have shown a strong willingness to implement change, and many predict that this trend will continue, and at an even greater pace. Included as some of the main drivers are, of course, various efficiency gains but other driving factors, such as technological advances, also need to be taken into account. New technology has made it possible for smaller contenders to enter the retail market with relatively low thresholds and costs. Online consumer lending, online-based stock trading, peer to peer lending and crowdfunding are examples of new operations coming to the fore during the past fifteen years where some of these companies have gained serious market shares in areas in which the banks were previously the sole actors.

Our report clearly shows that the further you are from the consumer market, there is less of a chance to be distrupted by due to FinTech. Consumer services are relatively simple,

easy to package and are not surrounded by the same massive number of regulations as with services targeted at such operations as investment banking, insurance and asset management. With fewer regulations, development is considerably faster among consumer product companies.

Within payments and transactions, we see that the replies from respondents in the Nordic countries vary slightly compared with the replies of the global respondents. Globally, our report shows that market participants are more inclined to predict major changes during the next five years. This might be attributable to the fact that in recent years payment and transfer services in the Nordic countries have already undergone substantial changes. Not only has the industry, itself, succeeded in making major technological progress but, at the same time, companies such as Klarna, iZettle and WyWallet have begun to compete with traditional operators on a serious level. This is a phase that many markets outside the Nordic region still have ahead of them.

Wealth management is in third-place and is also identified as an area risking the possibility of major future disruption. There is a large global market for these types of services and, particularly in North America, we have seen the entry of so-called “robo advisors”. These new market participants have made a real impact and in recent years they have attracted considerable assets under management.

69%believe that consumer banking is most likely to experience the greatest degree of disruption by FinTech


Figure 1: Which area within the financial sector is likely to be the most disrupted* by FinTech the next 5 years?

55%

31%

9% 9%

27%

35%

12%

17%19% 19%

38%

0% 0%

27%

31%

8%

15%12%

15%12%

35%

15%

22%

73%

69%

Reinsurance

Global Nordics

Fund Transfers & Payments

6%

SME Banking

Fund Operators

BrokerageServices

Investment & Wealth

Management

Life Insurance

Insurance Intermediary

Property & Casualty Insurance

InvestmentBanking

Market Operators

& Exchanges

Commercial Banking

Consumer Banking

2%0

20

40

60

80

Disruption FS sector retreated


22%in the Nordic region state either that they do not know whether any area within their business will be lost to

FinTech, or they do not believe that any area will be lost to FinTech, over the next five years.


Risk of business being lost to standalone FinTech companies

1

To a certain extent, traditional financial players have acted without sufficient insight and knowledge regarding this area, and this becomes obvious when approximately one-fifth of the respondents in the Nordic region (22 percent) reply either that they do not know whether any portion of their business will be lost to FinTech over the next five years or that they do not see any portion being lost to FinTech. Globally, an even greater number of respondents (one third) respond in this manner. The complete and final story remains to be seen, but the financial grave yards around the world are full of “Kodak moments”.

Still, a fairly large percentage of the industry has sufficient insight to acknowledge the direction in which the wind is blowing. Both global and Nordic respondents indicate (37 percent globally and 44 percent in the Nordic countries) that they risk losing 1-20 percent of their business to independent FinTech companies over the next five years.

And the impact of FinTech in the Nordic region becomes even more evident when one considers that 19 percent replied that they risk losing between 41-61 percent of their business over the next five years. This is more than twice as high as in the global comparison and shows that various areas within the traditional financial industry take FinTech seriously, and also evidences that the strength of the drive behind these developments should not be underestimated.

Figure 2: What percentage of your business is at risk of being lost to standalone FinTech companies within 5 years?

1%-20% 21%-40% 41%-60%

61%-80% 81%-100% Don’t know

Percent age of business lost

Global Nordics

37%

44%

18% 15%2%

19%

15%

17%

7%

15%

8%2%

No risk



Threats related to the rise of FinTech

Financial players, both globally and in the Nordic region, have experienced margin pressure in recent years due to new FinTech players. Almost 7 out of 10 indicate that the margin squeeze is the number one threat. Lost market shares come in second, and these two threats appear to be perceived to be the same on both the global and Nordic levels.

Regarding the perception of information security/privacy and customer mobility, we see some differences in the replies. Globally, the respondents are significantly more likely to see threats in these areas compared with the Nordic respondents. One possible explanation could be that the Nordic market has a robust regulatory system and infrastructure addressing these kinds of issues. At the same time, the industry has succeeded in developing solutions

2

69%7 out of 10 indicate that the margin squeeze is the biggest threat

in these areas that have been proven to live up to the tough demands of both customers and legislators/authorities, which might dampen the concern for various types of security deficiencies/breaches.

The Nordic financial market can, in many aspects, be seen to comprise an oligopoly compared with the significantly more fragmented global market. Certainly, traditional operators in the Nordic region have lost market shares in recent decades but, on the other hand, one thing is very clear in the region, and that is the fact that these same players have been clever at seeing to it that the market is, in spite of the FinTech trend, slow to change. Global respondents, compared with their Nordic equivalents, forecast, to a greater extent, the increasingly expanded customer mobility as a potential threat arising from the progress of Fintech companies.


Opportunities related to the rise of FinTech3

In terms of future opportunities from FinTech, we see that global players generally are more optimistic than Nordic counterparts. Cost reduction is the most common opportunity due to FinTech, followed by differentiation and the ability to retain customers. The latter factor is somewhat contradictory as one of the major questions is whether the newcomers will make it even more difficult for established companies to maintain their current customer base. One should not rule out the possibility that the established players actually can become more competitive, provided they use the new technology in the right manner. Among the Nordic actors, almost 4 out of 10 believe FinTech can contribute to higher revenues. Although there are concerns about further margin pressure because of new technology, many have already realized that there is money to be made with the help of FinTech. Cost reduction is the most

frequently identified opportunity

“Global players, generally, are more optimistic than their Nordic counterparts”


Figure 2: In your opinion, what are the opportunities and threats related to the rise of FinTech within your industry?

9% 9%

0%

Increase of customer

churn

Global Nordics

Information security /

privacy threat

6%

Loss of market share

Pressure on margins

Other Don’t know Additional revenues

Cost reduction

Differentiation Improved retention

of customers

Other Don’t know

53%

38%

56%

35%

59%

54%

67%69%

4%

12%

0%3%

56%

38%

73%

58%

62%

46%

4%4%

50%

57%

3%0%0

20

40

60

80

Threats retreatedOpportunities retreated


In which areas do you see the most important impact on your business from FinTech?

4

Both on the global and Nordic level (75 and 65 percent, respectively,) a clear majority indicates that the most important impact of FinTech will be in terms of how you can “affect the ability to meet changing customer needs with new offers”. Furthermore, a relatively large proportion, 4 out of 10, believe that FinTech will also increase customer interaction and help build closer (customer) relationships.

The financial sector can be considered to be relatively heavy on technology and invests considerable resources in development. This may explain the high expectations of the new technology and how it can be used to attract new customers, retain existing customers and offer new up-to-date solutions.

An aspect differing substantially between global and Nordic respondents is how they view the opportunities FinTech provides for improved data analysis. While over half of the global respondents (51 percent) believe that Fintech will benefit existing data analysis and lead to better risk management, the corresponding Nordic response is only fifty percent of that number (27 percent). One possible explanation is that the Nordic financial market is recognized as being conservative and risk averse. Nordic companies are often at the forefront of technological advances, while, at the same time, they have a more conservative view of risk compared with their international counterparts. On a global basis, market participants appear to have, to 2 greater extent, higher expectations on improved opportunities for risk management based onFinTech solutions. Without a doubt, Nordic respondents certainly see the opportunities, however with a lower upside potential as the Nordic region already has a strong track record in terms of risk analysis.

“Meeting changing customer needs with new offerings – the most important impact of FinTech.”


Figure 3: In which areas do you see the most important impact to your business from FinTech?

Efficiently leverage ecosystem and

market resources

Global Nordics

Enavle the business with sophisticated

operational capabilities

6%

Enchance interactions and

build trusted relationships

Leverage existing data and analytics to generate deep

risk insights

Meet changing customer needs with new offering

New approaches to underwrite risk and predict losses

Other

58%

33%

42% 42% 42% 42%

38%

51%

27%

75%

65%

31%

15%

2%

8%

0

20

40

60

80

Importantareas retreated


The most popular channel among customers5

Both on a global and Nordic level, the most popular communication channel among customers is the companies’ websites. In popularity, mobile applications are, somewhat surprising, only in third place after call centers, where the latter are still popular among the older generation. On the Nordic market, responses indicate that user growth over the next five years will be, by far, the highest among mobile applications. More than 9 out of 10 market players see mobile applications as the number one channel, while company websites end up in second place. Growth in customer visits to physical offices is less than 10 percent, both globally and on the Nordic level. For market participants, branch offices are an expensive channel to maintain, while customers increasingly appreciate alternative technical solutions. In addition, these new technically advanced services have become considerably safer and more user-friendly in recent years. These channels are also often significantly cheaper and more efficient, providing an enhanced incentive for their promotion.

In a global comparison, it is clear that the financial sector in the Nordic countries has been more efficient in controlling customer flows from physical offices. On a global level, visits to physical offices are more common and almost 4 out of 10 players point out the branch offices as the most popular channel. For the Nordics, the corresponding figure is about 2 out of 10.

22%Only 2 out of 10 on a Nordic level indicate that branch offices comprise the most popular channel.

Website

67% 37%

Mobile applications

48%

Call center

Most popular channels among customers

E-mail

41%


Figure 4: What is currently the most popular channel for your clients to interact with your company?

Website, web-based platform

Global Nordics

Email

6%

Mobile application Call Center Other Post, mail

42%

38%

8%

67%64%

Branch

47%

41%

46%48%

38%

22%

33%

37%

16% 15%13%

15%

0

20

40

60

80

Preferredchannels to interact retreated


Figure 5: From which of the following channels do you expect the largest growth over the next 5 years?

Website, web-based platform

Global Nordics

0

20

40

60

80

100

EmailMobile application Call Center Other Post, mail

42%

67%84%

Branch

41%

92%

84%

29%

24%

10% 10%

2%

65%

15%

23%

15%

8%

0%

Expectation of usage retreated


Contacts

Sweden

Helena Kaiser De Carolis FS Leader Sweden +46 (0) 709 29 33 11 [email protected]

Johan Jerresand FS Fintech Leader Sweden +46 (0) 709 29 10 02 [email protected]

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Denmark

Klaus BerentsenFS Leader Denmark+45 40 53 53 [email protected]

Finland

Jan BäckströmFS FinTech Leader Finland+358 (0) 20 787 [email protected]

Documents

Fintech Nordic Summary How FinTech is shaping Financial Services