Nordic FinTechs outperform incumbent banks in Sweden: Moody’s

By Puja Sharma

FinTech companies in the Nordic region have made greater inroads against incumbent banks in Sweden than in Denmark, Norway, or Finland, said Moody’s Investors Service in the published report.

This is partly because Nordic digital challengers have tended to focus on Sweden, the region’s largest economy. FinTech operators have also been held back to a greater degree in Denmark, Norway, and Finland by country-specific obstacles such as market regulation and structure.

“During the past 25 years, FinTechs challenged incumbent Swedish banks within most business lines. The established players have largely protected their dominant position in the lending market, as they were quick to launch similar services and remained competitive on pricing. However, within savings and payments, challengers have carved out a more significant market position because they have been able to offer superior services at a more competitive price.”

Fintechs carve out a presence in Sweden amid slow Nordic advance

FinTech operators have also been held back to a greater degree in Denmark, Norway, and Finland by country-specific obstacles such as market regulation and structure. In all four Nordic countries, the advance of the fintech sector has also been relatively slow because incumbent banks have successfully adapted to the digital era and remained relevant to their customers. Fintechs are well entrenched in Sweden.

Fintechs have during the past 25 years challenged incumbent Swedish banks within most business lines. SBAB and Skandiabanken emerged as alternative lenders in the mid-1990s and now hold around 11% of the mortgage market. In response, established lenders were able to largely protect their mortgage market position, by quickly launching similar services, and remaining competitive on pricing, although new entrants continue to grow at an outsized pace.

Within savings and payment markets, challengers such as Nordnet, Avanza, Klarna, and Trustly have carved out more significant market shares by offering superior services at a more competitive price. Slower progress in Norway. Digital challengers are less well established in Norway than in Sweden, in part because capital requirements are higher for small banks. Local savings banks using digital tools to compete at a national level are the main source of digitally driven competition against new entrants and incumbents alike.

Wide take up of free bank accounts and low-cost debit cards are further obstacles. In Finland, the dominance of OP Financial Group, a mutually owned lender with low return on capital targets, ensures that banks’ average net interest margins are among the weakest in Europe. There are currently no significant challengers to the traditional Finnish banking groups in the key mortgage and savings markets. These structural features are unlikely to change significantly in the near future with the dominance of incumbent banks and mortgage lenders to continue.

FinTechs are well established in Sweden

SBAB emerged as alternative lenders unencumbered by costly branch networks, moreover 100% government-owned, and initially achieved good growth through a combination of aggressive pricing and comparatively lenient lending criteria.

It was the first Swedish bank to offer interest-only loans and to accept loan-to-value (LTV) ratios of up to 95%. However, subsequent regulations requiring loan amortization and down payments of at least 15% forced it to change its approach. SBAB’s business model has subsequently varied over the years, but its main focus has always been on residential mortgages.

The bank has been consistently competitive on price, initially because it had access to cheap funding as a government-owned entity, and later because of its high-cost efficiency and heavy reliance on covered bond2 funding. The bank has steadily but slowly grown its market share, and now accounts for about 9% of all mortgages in Sweden, with a clear concentration on the larger cities. Skandiabanken has been less consistent in its growth ambitions and currently holds about 2% of the mortgage market.

Slower progress in Norway

Digital challengers are currently less established in Norway than in Sweden, mostly because large incumbents so far have protected their market positions by acquiring the most prominent new fintech entrants. The market is also highly competitive and difficult to enter, as illustrated by Swedish lender Swedbank’s unsuccessful attempt to do so, which began in 2002. It consists of a handful of large national players, led by DNB, and a group of small but highly cost-efficient local savings banks that are increasingly using digital tools to compete at the national level.

One driver for the acquisitions is that smaller Norwegian banks face proportionally higher capital requirements, which support the return on equity of the larger banks and allow large acquirers to benefit from capital arbitrage. However, this regulatory setting creates potential opportunities for challengers that adopt a nontraditional lending model attracting a lower capital requirement. Intense competition and moderate margins are additional obstacles.