You can watch the recording of the discussion here (begins at 6:00 mins). Below are some of the highlights of the conversation:
Defining a future role
Johan: Something we’ve heard a lot about recently is embedded finance and embedded payments. In fairly simple and concrete terms, what is that all about?
Erik: Embedded finance is about integrating banking and financial services into business models, value chains and processes run by companies. One good example is a travel smart card, where you don’t pay as such, you just travel and then you are charged. By Now Pay Later (BNPL) is another example where the bank is behind the scenes providing financing to a merchant but the payment interface itself has disappeared from the banks. I’m positive that we will see a lot of this happening going forward and banks will need to reflect upon what their role will be in the future. Where could and when should banks maintain the customer interface and where do they need to accept that they play a different role?
Johan: If bank services will be something happening behind the scenes somewhere, for sure a critical function and something that needs to be carried out to be executed, but nonetheless something that the user doesn’t really think of as the bank being there to do something, how do banks stay relevant in that kind of outlook?
Erik: First of all, I think it’s a matter of the time span. We have seen many developments that are happening fast but on the other hand some things can take longer than we expect they usually will. So I think the ordinary role of the bank will stay relevant for quite some years to come. Here, I’m talking about the whole trust element when it comes to data, lending, compliance and those sorts of things. They need to be here for quite some time.
Then I also think that back to defining the bank’s role. It’s very much up to banks as well because in recent years, the role of different actors in the value chain have started to become more blurred. Before it was a much clearer case of ‘you do this’, ‘banks do this’, et cetera. Now with technology and regulations, players have started to move across the value chain. This movement is not only limited to non-banks, banks can also move into new roles. I think either a bank needs to decide to become more of a backseat player or they step into roles that they perhaps haven’t been in before. That approach will differ very much between banks obviously depending on what their strategy is going to be.
Now with technology and regulations, players have started to move across the value chain. This movement is not only limited to non-banks, banks can also move into new roles.
A partnership approach
Johan: There can be different choices for different banks depending on the level of ambition and the kind of role they seek. If banks do choose the more backroom option of becoming a kind of state-of-the-art executer or if they want to have a role closer to the customer interface, what is it that banks will need compared with where we are starting today to define a more meaningful, viable role in either of those two?
Erik: First of all if you want to be a backseat player, for me, it means that you are a scale player. Meaning that the starting point must be that you have enough scale to walk that path. I believe it’s always a war for talent – you need to have skilled enough people. I think you need to understand your position with regards to sustainability and banks have a significant role to play here when it comes to lending and investments, et cetera. It’s also about understanding the value of data. Data to me is so important because from a bank perspective, if we understand how to make use of data, we can give better advice, we will understand the customers better and we will also be able to predict risk better. If we can predict risk better, we can try to decrease it and therefore provide cheaper capital. Also, I think it’s very much up to the imagination on how we want to engage in the new ecosystem, so to speak.
Johan: And banks might not have to, or need to even want to do everything themselves. I guess there should be collaboration between banks and customers going forward as well. How do you see that?
Erik: I think if we go back a few years, all banks I know of across the world have been very engaged in setting up innovation hubs and engaging with fintechs. I think that will continue but I have also spoken to a number of banks that have realised that they are not necessarily always the best fits with small fintechs. Banks don’t necessarily have the organisational set up sometimes, the competence or often the ability to be that parent figure for all of these fintechs. Banks need to be a little bit more selective but partnerships will still be vital going forward. I think banks have been a little bit slow when you compare to other industries such as car or computer manufacturers where most of the components are created or produced by someone else. Banks are still building too much themselves and they need to be faster on their feet to partner up in order to bring a package to their customers that consists of many different offerings from suppliers into that.
Data to me is so important because from a bank perspective, if we understand how to make use of data, we can give better advice, we will understand the customers better and we will also be able to predict risk better. If we can predict risk better, we can try to decrease it and therefore provide cheaper capital.
Ready to meet customer needs
Johan: Thinking back over the past year, what areas have you been focusing on in Transaction Banking at Nordea? What would be the key things at the top of your mind?
Erik: There are a few things that perhaps can be described as a little bit more conservative. We are continuing to focus on being very, very strong on compliance – our license to operate and being this trusted intermediary. Then we are also of course very engaged in seeing too that we can supply our consumer customers with the payment options that they expect from us. That means enabling and supporting a wide variety of payment options. Then it’s also about making use of Open Banking and APIs. To start to deliver what we refer to as premium APIs on top of the regulatory APIs to supply our corporate customers with a more seamless experience. APIs have been around for a long time but they are crucial going forward to enable the embedding of banking services into all kinds of value chains. We can fit into different value chains in different places. Hence we need to think API first.
Johan: I guess there are lots of things that could be challenges and a lot of things that need to be resolved. What would be the key challenges that you face in what you’re focusing on right now within Transaction Banking?
Erik: There are many things that we need to do and I think that the pace of development is so fast now. We are trying to think about ourselves as a 3D printer. So instead of trying to predict what the customer will be asking next year, we’re trying to build an organisation that understands the customer need and can then move really fast at satisfying that need. I know it sounds a little bit fluffy but I think that is the way to think. How can we be fast on our feet to meet customer expectations and what requirements does that put on the organisation, our processes and our talent? That is the kind of path we are taking in order to be as agile as possible.
Johan: Looking at our region, is there anything that’s happening here in the Nordics in this area?
Erik: First of all, I think there are a number of areas around the world that are innovating in this space but I think as a collective, the Nordics are at the forefront. We have the highest penetration of mobile wallets in the world, we are expecting instant payments to become the norm and we are also now creating the world’s first real-time, multi-currency, multi-country payment infrastructure through project P27. We are in general very engaged and positive to new technology. So I think the Nordics will continue to be in the forefront and that is very inspiring.