Ville: Well Erik, it’s been another year where COVID-19 and associated restrictions have cast a shadow over the globe but I suppose it’s fair to say in terms of business and consumer activity things have recovered pretty well in the Nordics?
Erik: Yes, undoubtedly the first part of 2021 was challenging for many sectors of the Nordic economy but we have actually seen a stronger than expected rebound right across our home markets. All of our indicators are showing that for the time being economies are buoyant although we will have to see how things pan out as new challenges arise. We have of course seen some issues with trade and supply chains as some areas of logistics and supply have struggled to spring back into life but we seem to be getting around those. Overall, banks like Nordea have managed to stay close to their customers and been quick and proactive in offering support where needed. When we look across the Nordic financial sector, banks seem to be in very good health right now.
We have seen digitalisation, ways of doing business online and particularly e-commerce really become turbo charged over the last year and a half. In many ways it seems like digital business models are here to stay more than ever.
Digital is here to stay
Ville: We have seen digitalisation, ways of doing business online and particularly e-commerce really become turbo charged over the last year and a half. In many ways it seems like digital business models are here to stay more than ever. Do you think banks have been able to keep up with the pace of change and does the move to things such as embedded finance, industry 4.0 and Open Banking create opportunities or challenges for banks?
Erik: For the most part, banks are embracing digitalisation better than ever. In purely practical terms, they have become used to meeting their customers in virtual meetings, they have developed attractive apps and digital tools that really help consumers and businesses alike and they are actively partnering with exciting fintechs to speed up the innovation process. Of course, there are many challenges for banks in the new digital space. Being a heavily regulated institution is a critical advantage that makes sure banks continue to be the trusted partner of choice but it also means that banks are sometimes not as fast and nimble or has the available resources required in bringing new digital products to the market at speed. This is something they are trying to overcome through partnerships and innovation initiatives. Nordea’s Open Banking API marketplace is already showing the benefits of a collaborative approach with a wide community of developers as an increasing amount of Premium API services are beginning to come online.
Nordea and also other banks are exploring pilots around machines-as-a-service related to industry 4.0 already but in a wider context there are whole subscription pay per use economies happening across almost all industries on both the B2C and B2B sides.
Subscription economy is happening now
Ville: As we both know industry 4.0 and machines linked via the Internet of Things are creating an abundance of data. This has enabled the subscription economy to really take off and all around us we are seeing equipment-as-a-service business models starting to replace the traditional buy and own ways of doing business. This seems to be one area where banks should be considering how to stay relevant.
Erik: I think the whole subscription kind of economy is very interesting and its happening right now. This is no longer something we have tagged as ‘in the future’. Nordea and also other banks are exploring pilots around machines-as-a-service related to industry 4.0 already but in a wider context there are whole subscription pay per use economies happening across almost all industries on both the B2C and B2B sides. I find that quite interesting.
Ville: Yes, absolutely. We’ve recently been hard at work with selected partners to enter into pilot projects together with our customers that will allow us to explore where we can play a part in the interplay between the production, leasing and servicing of machines. Already we can see that the subscription economy has become a 19 billion Euro market in the Nordics and 220 billion Euro market across the EU. (Source: Mechanical Engineering Industry Association (VDMA) Study 2019; Study Cognizant 2018; Study Bitkom 2018).
Erik: What’s really fascinating to me is the sheer width of the subscription services on offer. It’s not only with machine and equipment manufacturing companies, it’s a phenomenon we are seeing everywhere. Its Spotify, Netflix, etc, it is with so many different service and production companies. Even Banking as a service is here to stay. There is definitely a seismic shift going on.
Ville: Basically anything you can measure can now be consumed on a pay per use basis. That’s because of course now we have so many more sensors and a ubiquitous connectivity with 5G and so forth. With all of this telematics information now it’s easier to sell everything as a service. Just like when traditional data centres moved into the cloud and bandwidth became available on an on-demand basis, that opened up an entire industry. Starting an internet company these days is quite different from what it was 10 years ago.
In the subscription business models, we are positioning ourselves as the trusted party that provides the safe environment for these different parties to come together and agree on the conditions of the subscription and to charge and pay for it.
Finding areas to add value
Erik: Yes business models and business life are changing rapidly here too. Banks will obviously need to change and they are changing. They need to take this seriously because otherwise they may find they are given too much of backseat role and only end up providing compliant infrastructure and nothing else. Keeping the customer interface or finding the areas to offer value adding services through embedded finance will be key.
Ville: In the subscription business models, we are positioning ourselves as the trusted party that provides the safe environment for these different parties to come together and agree on the conditions of the subscription and to charge and pay for it. How do you make an agreement? How do you make a legally binding contract for the usage of any type of service or asset? Then on the side of that, because we get exposure to the actual contract, these digital relationships and the way they are interacting with each other in real time, we’re able to create new types of risk assessment on top of it and create financing opportunities for the ownership part of the original machine. The ability to have a digital contract allows us to assess the risk of anything now in a much more accurate way and provide the liquidity and the transactional services to make those flows happen. So there’s kind of three areas for banks to explore here; there’s the trusted party element in the middle, then adjacent to that are the transactional payment capabilities and then risk assessment and financing on top of that.
Trust, security and a rock solid foundation are a fantastic base to have. Banks certainly have the ability to continue to drive innovation, what they need to focus on is finding a way of being agile and responsive enough to respond to new demands in the market.
Erik: That’s really interesting and it will be fascinating to see whether trust on its own is going to be enough for banks in the future. If banks struggle to provide more value than trust, whilst trust is of course crucial, will it make banks relevant enough?
Ville: Banks have been playing the role of society’s trusted pair of hands for hundreds of years and they have also been traditionally institutions that drive innovation. That doesn’t necessarily need to change. Banks have the financial and technical expertise, the customer base, the networks and partners to stay at the forefront of innovation. What they need to do is to be able to organise their resources in a way that enables sufficient capacity to be devoted to exploring and impacting new business models.
Erik: Yes, I agree. Trust, security and a rock solid foundation are a fantastic base to have. Banks certainly have the ability to continue to drive innovation, what they need to focus on is finding a way of being agile and responsive enough to respond to new demands in the market. Around 90% of the time, banks are generally using their resources on operations and making sure they meet the latest regulatory requirements. If we think about all of the capacity they actually have, they are very strong. I think banks very much understand the challenges ahead in 2022. Rapidly changing playing fields are no simple things for banks to navigate but they understand the developments more than most and take them very seriously. I believe banks not only have a role to play in future business models but there are many opportunities for forging new ways of supporting our customers. A very exciting future indeed!
For more information about machines-as-a-service and other topics discussed in this article, please write to Ville at ville.Sointu [at] nordea.com (ville[dot]Sointu[at]nordea[dot]com).