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NextGen Nordics 2023: What does successful, scalable innovation look like?

Finextra Research

Finextra Research

Writer, Finextra

NextGen Nordics 2023 kicked off with a panel on the challenges and opportunities in the road for harmonisation across transaction banking services.

Finextra’s head of research Gary Wright was joined by Anders Olofsson, head of PaaS/SaaS, Tietoevry Payments; Ted Scheiman, head of Nordics and Baltics, Swift; Beju Shah, head of Nordic Centre, BIS Innovation Hub, Bank for International Settlements; and Lars Sjögren, independent payments expert and former CEO of P27.

This session came soon after the news last week that P27 has withdrawn its second clearing licence application from Finansinspektionen, the Swedish Financial Supervisory Authority.

Wright began by asking Scheiman where we are in regard to ISO20022, another initiative where harmonisation will need to be achieved by the end of 2023. Scheiman commented: "harmonisation is not only about ISO200022, it is also about harmonisation between different payment systems, and that also includes market infrastructures."

Discussing the Nordic region specifically, he stated: “I don't think we can look at the Nordics as an isolated kind of like digital island, we need to think about the cross border aspect as well. So those systems also need to harmonise. I think one of the first things that is happening now is ‘one leg out’, which basically enables your leg for cross border transactions to settle domestically.”

Olofsson added: "I think that these industry wide projects are extremely complex. The elephant in the room is P27 and that is also extremely complex [...] these systems are extremely difficult when the industry is getting together to transform and trying to do unify and especially around performance. There are so many interested parties, we got 5000 European banks alone that need to come on to a unified standard. We cannot neglect the complexity.”

Shah offered that his “experience has been that the complexity is underestimated. Here, working in SEPA and understanding the challenges that institutions face in terms of adopting, rolling out, and that change needs to be focused on. But, there has to be greater coordination across the public private sector to do that.”

Sjögren argued: “We need to recognise that there is a fundamental need to change the way things are today. We are operating on legacy infrastructures, the banks have payment systems dated from the 1960s. The formats that we are using today are incompatible, the infrastructures are fragmented. So I think that we just need to remember why it is that we are trying to change these things. And I think it's really important that we should not give up on that. We need to continue to experiment.”

Olofssen contributed to this sentiment: “What is still lacking, honestly, is that I haven’t seen a unified visionary narrative of what we would like to become of a payments ecosystem from here.” He continued: “we've seen over the last 20 years that optionality as increased. And whilst we thought 10 years ago that we would have fewer options, but a standardised way of doing payments. I think that that is also somewhat the market dynamics where customers and fintechs and innovators are coming up with new and better ways to do business than we historically have done.”

Sjögren further stated: “I think it’s about moving the ecosystem. I think this is about agreeing on what standard are we going to follow. I think it's also about embracing the G20 roadmap. As an industry we need to decide and follow through.”

In concluding Olofssen commented, “My first observation from the P27 hiccup was that finally this may be a catalyst for an opportunity to really adopt instant payments.”

Retail CBDCs could jeopardise commercial banks’ deposit base

Exploring CBDCs and the future of technology in the Nordics and across Europe, Paige McNamee, senior reporter at Finextra discussed the painpoints central bank digital currencies could help to alleviate and what level of cybersecurity, AML and KYC is required.

Jussi Snellman, senior manager, P27 Nordic Payments, provided an overview of the state of play of CBDCs in the Nordics and explained that these digital instruments combine two existing elements – central-bank issued public money such as notes and coins, and digital central bank money such as reserve deposits. “This combination was not available until now. Depending on the design [of the currency], there could be wildly different instruments all labelled CBDCs. Therefore, we cannot talk about the benefits and the downsides without knowing what kind of CBDC we are talking about,” Snellman said.

Nordic central banks have been exploring CBDCs since 2017 and although pilots and experiments have been completed, most countries have concluded that “at this point, there is not sufficient social need for a launch of a CBDC,” Snellman added.

However, the panel agreed that technology and political trends may drive people to reconsider, especially as the ECB is on a different track with the digital euro.

Krister Billing, market infrastructures and regulatory affairs, corporate banking, SEB, added that 80% of central banks are exploring CBDCs in one form or another. While trends suggest we are moving towards a cashless society, Billing mentioned that a “great deal of clarity from the government and a balanced conclusion across the potential areas of opportunity would be needed. However, there is no urgent societal need for CBDCs.”

Jonas Palm, Nordic product manager cash management, BNP Paribas, also said that it must be considered that there are “different needs and uses for CBDCs.” He referenced that the addition of digital currency will be cumbersome, however, in areas such as Asia and South America, where they are “enabling the digital journey,” there is “more potential for digital currencies in developing countries.”

Nicolas Kozakiewicz, chief innovation officer, Worldline, who is also part of the ECB CBDC market advisory group, provided a fresh perspective. He said that it is of paramount importance that “all central banks have moved at the same time.” This can either be a huge opportunity or a big threat: “if all animals are going one way, there must be a reason. After all, the banking industry is orchestrated.”

Kozakiewicz explained that in Europe, the ECB are at the highest level, national central banks sit underneath and the commercial banks under them. What this means is that “central banks do not talk directly with the user, they are talking via commercial banks. CBDCs are a threat to them, but in my opinion, it is not.

“CBDCs can show commercial banks where to go because they provide payments and loans – it is a virtuous circle. But what would happen if payments got out of the hands of commercial banks?” Banking has been a protected, fenced environment and in the past, only some could provide payments services. Kozakiewicz stated: “now everyone can because of blockchain.”

Further to this, Brazil and India have seen exponential innovation. The same goes for PayPal, Apple, Amazon, and even Twitter. These companies are now more valued than banks, they have more users and better payment means. “CBDCs are a way for central banks to tell commercial banks to wake up.”

Billing added: “Banks should be concerned. Retail CBDCs could jeopardise the deposit base of banks, which is fundamental to running a bank. This is potentially because under our usual model, banks would be intermediary or distributor of CBDCs.” However, they are not required – Billing said that one of the motivators from central banks is to support and foster innovation and competition, and doing it in a mindful way.

While Kozakiewicz agreed that innovation is increasing, “people don’t want diesel engines anymore.” However, Palm disagreed and did not see the competitive advantage for banks to get involved with CBDCs.

“CBDCs are not the big game changer because it’s a ledger, distributed or not, it is how the current system works. There needs to be more focus on constantly being aware and one point of control. Central banks want to control this, but the main goal is financial stability, and we must always look at risk. Banks will always be able to loan out money, the financial system won’t lose out.” Message from central banks to say, upgrade to competition will be bringing to keep pace.

Emilio Rocchi, director of market planning for fraud and identity, LexisNexis Risk Solutions, spoke on this and said that the level of trust, security, AML and KYC that is being used at the moment “would not be enough. A robust security framework, tokenisation, strong encryption is required.” Rocchi also mentioned that there is a blurred line between fraud, compliance and monitoring – the pattern might look fraudulent, but enriched data needs to be leveraged to ensure that it isn’t.”

Fintech firms and banks are now frenemies

Returning to the stage, Gary Wright, head of research at Finextra, stated that in 2023, we must address the unpredictability, high cost, low speed, lack of information and transparency issues associated with current networks to bolster international trade and financial inclusion.

Fintech can help resolve issues related to financial exclusion and make strides where the traditional financial services industry has fallen short. Wright introduced the subject and handed to Filip Versluys, business development director for B2B Connect Europe, Visa, who explored how payments, particularly cross-border payments, are still impacted by challenges, because of requirements across different jurisdictions and the quality and quantity of data.

Versluys highlighted that painpoints need to be resolved with collaboration between public and private entities and this will lend itself to improved cost and speed, as well as ensure payments are instant and access to money is efficient. Further, “with richer data and technology, we will start seeing the benefits of capabilities offered by technology.”

Mats Persson Bergius, head of lending, Lunar, added that “customer expectations are shifting and shifting rapidly. The service I expect as a treasury department or as an individual is faster speed and instant payments. The work and the cost need to come down.”

Robert Pehrson, head of product management, SEB, offered a different view and said ISO20022 is the “basic foundation for enabling change, but customers are struggling to adjust to that.” He went on to explore how with the digitalisation of societies, the core problem is that there are different national agendas that permeate, and different authorities and central banks. Collaboration is needed ultimately.

After summarising the painpoints, Bergius questioned the value of an incumbent bank and mentioned that giving challenger banks and neobanks access to rails could result in an incremental increase of risk, but could also open innovation, which, however, could also threaten the provision of the bank’s own services.

In Pehrson’s view, an efficient foundation for innovation must be built. Central banks must make it easier for smaller organisations to allow customers to open accounts, but “players must do what they’re best at. It is super important to enable reach, low cost, and simple solutions. However, it is not that simple. Bergius, who is also the chairman of the Swedish Fintech Association, stated that there are significant challenges for fintech players. “Despite licensing, there is a struggle to gain access to infrastructure.”

He also said that there is extensive AML risk for banks to take on new players because “the cost of doing business with a player like that is too high, and it is ‘not worth it’ for a bank to handle a player like that in their customer base.

Versluys questioned the definition of a fintech and the definition of a bank – they are most definitely blurring in 2023. He explored how a “newer breed of licence is required, but engagement across the ecosystem is needed. What a bank is, is starting to shift because of new policies.”

Bergius summarised the session and said that the best way to describe the relationship between banks and fintech firms is that they are “frenemies.” Innovation will continue, and he said that while the local banking sector has worked hard to keep pace, the Nordics as a region cannot get left behind.

In order to avoid this, what needs to be instant is business controls, not necessarily the movement of money. Versluys referenced the importance of predictability and ensuring an element of optionality when providing services to customers. Further, to minimise risk, he advised embedding fraud prevention as part of the optionality.

“Nothing is black and white,” Versluys concluded.

Cross border payments are a political weapon

At NextGen Nordics in Stockholm, Finextra’s senior reporter Paige McNamee was joined by Patrik Havander, head of B2B connect/cross border money movement Europe, Visa; Daragh Kirby, head of sales & marketing, Intercope; Katja Lehr, managing director, EMEA payments and commerce solutions, JP Morgan Chase; and Dr Hubertus von Poser, member of the management board, PPI.

McNamee posed the first question to Havander regarding how customer expectations are changing the growth of and demand for international payments. Havander stated: “The last two years of developments have been tremendous in this space, especially on the customer side. That is really, at the end of the day, what is driving the change. You see different types of business models going from analogue to digital, you see platform based companies expanding and growing rapidly across the globe, but all these developments are putting new demands on the payment system.”

Adding to this sentiment, Dr von Poser commented: “There's a need for instant cross border payments, but I think the urgency has increased for that because that kind of business is growing.”

Dr von Poser turned the discussion towards the political component of cross border payments and stated that: “It’s back on the political agenda. We have learned again that payments is a political weapon, through sanctions, but also in what the G20 is saying for migration and inclusion.”

Regarding these political expectations, Lehr commented: “I wish we would have been more forthcoming from an industry perspective in developing it and showing that it's possible. I guess it needs collaboration. It needs a lot of people coming together and agreeing on topics rather than now having the government coming in and pushing for itself. I think that's the only regret I have that you will see this from a political and government level.”

McNamee moved the conversation onto some of the challenges banks are still facing. Kirby kicked off this discussion by praising the progress that has been made in the space, but noted that there are many pressures placed on banks: “First we had SEPA now we have [Swift] GPI. You have G20 pushing this enhanced roadmap to say that the costs have to be driven down and the speeds have to be increased, this has to be more accessible, and this has to be more transparent. But in the end, who has to take that on board? It’s the banks.”

He further argued: “I think the challenges today are still there, the speed, cost, transparency, and accessibility. And I think it's a little bit hard for the banks at times because it's always on them to try and make that difference.”

In responding to the argument that technology is one of the problems facing cross border payments, Lehr stated: “I think there are quite a lot of things which you cannot solve technically. You need agreement between governments, you need collaboration, and we all have to agree on it.”

This session was followed by a conversation on the increased standardisation of data sharing through regulations such as PSD2 and how that has been advantageous for banks across the Nordic region, led by Madhvi Mavadiya, head of content at Finextra.

Christian Schwarz, director of payments Europe, Finastra, Jozef Klaassen, VP head of open banking sales - Europe, Mastercard and Christoffer Malmer, head of SEB Embedded, SEB explored how while consumers certainly now have a say in how their data is shared, fintech firms have dominated the data conversation.

Nordic countries have laid fertile ground for open banking to flourish, with big data increasingly being utilised to unlock innovative opportunities. Instant payments, automated onboarding and affordability checks are all in flight, but how will the Nordics evolve into open finance? How will the API economy create increased openness and interoperability?

Managing innovation risk with regulation and education

Rounding out the NextGen Nordics’ afternoon sessions, Anna Milne, research editor at Finextra, took to the stage for a fireside chat with Einar Eidsson, product director, for buy-now-pay-later (BNPL) provider, indó iceland.

Eidsson, formerly analytics director at Klarna, spoke extensively to Milne about the challenges of regulating the BNPL space in order to protect the end consumer.

When asked about the controls that have been brought in (or are currently being introduced) to the BNPL space by regulators, Eidsson commented that there is absolutely no reluctance toward new rules from the BNPL providers.

“I think any serious BNPL provider is going to welcome regulation […] Regulation for BNPL is only good, will strengthen the process for providers, will create trust for consumers in using a more regulated product, and will ultimately help the growth of this as a product.”

The conversation continued to the subject of BNPL growth expanding “hand-in-hand with the growth of e-commerce,” explained Eidsson, as these solutions offer a much nicer way to check out than rummaging through your wallet at to pay in store.

As the Covid-19 pandemic provided a long enough period for consumers to truly change their personal shopping habits, BNPL and other digital payments providers are all trying to remove as much friction as possible in order “to get to the nirvana of a one-click checkout model,” Eidsson furthered.

Milne countered that this objective is where a key part of the problem lies. By removing all of the friction or pain-points from the check-out experience, this arguably makes it easier and faster to make purchases, which may lead to vulnerable consumers spending at an unsustainable rate, damaging their financial health.

Milne posed Eidsson the question as to whether he sees BNPL products as potentially leading to significant financial distress for consumers down the line.

“It depends,” he responded, “on what kind of BNPL product is being used.”

“A huge proportion” of users pay within 30 days at no additional expense to themselves, he observed, while users who finance their purchase over a longer time period, sometimes between three and 36 months, will incur greater costs.

He argued that it isn’t in the interests of the BNPL provider for customers to overextend their credit, and they carry out creditworthiness checks to assess customers for that reason.

Furthermore, Eidsson added that while BNPL is a new and innovative product, the same issues can be associated with credit cards or consumer loans - we’re just more familiar with those products.

Web3.0 and digital assets: the physical vs. the virtual

Closing the day’s sessions with a forward-looking panel, moderator Niamh Curran, reporter for Finextra, dove into the discussion titled ‘Web3.0 and digital assets: the physical vs. the virtual’ to assess and predict just how influential these industry trends will be in the coming years.

Not one to hesitate on the technical debate, Infosys’ Manish Malhotra, vice president, financial services, proposed that web3.0 has the potential to answer the challenges of cross-border payments.

He stated that web3.0 is a great answer to the challenges of interoperability and inconsistent regulatory frameworks which had already been discussed during earlier panels.

“If you really look at the heart of it, web3.0 is a very decentralised architecture. You can connect directly peer-to-peer, you can establish a trust network between the two peers, and execute payments without the need for intermediaries.”

Malhotra pointed to the example of the Emirates NBD bank and the ICICI Bank in India which looked at how to use blockchain for inward remittances. One of the busiest networks for remittances in the world is between the UAE and India. The two banks piloted a bilateral blockchain solution which in addition to providing the direct payments, has given the banks the opportunity to innovate on top of the blockchain solution to create a trade finance platform.

“This is the advantage of web3.0, where you can do instant payments and cross border payments seamlessly, build very strong bilateral or multilateral relationships with the banks, alongside operational efficiencies.”

Hanna Khrystianovych, fintech and head of partnerships, Sigma Software Group, continued that while talking about web.30 opportunities - be it tied to the multiverse or cyberspace - there needs to be a closer level of cooperation and communication with your customers.

“Branches in cyberspace, customer service, educational programs are examples where banks can try to help them understand the complexity of some services. Tools can also be specifically designed for employees.”

This kind of technology fundamentally changes the way that we will do business with or interact with the customer. Khrystianovych continued that if we are to do this, “the first step is to have the willingness to understand what is inside and how it works.”

The second is about trying to dig deeper. Misunderstandings are problematic in this area because “you cannot understand how to deal with the technology if you do not even understand what it is about. Even for people completely focused on business, it is important to be a technology ‘geek’ and dig deep,” Khrystianovych added.

This subject of education was echoed by Sarah Häger, regional manager, Enable Banking, who recognises that there are similarities in the conversations around web3.0 being had now, as there were about Open Banking in 2017.

It’s a viewpoint of our curiosity, Häger noted, when these new innovations start to appear, and we ask ourselves: “Is this an opportunity or a threat? Is this something we can use? Yes or no. If you think you’re going to be able to use it, then you should understand it. So I think I advocate for curiosity in the sense of asking how it can actually be used? Is this the technology that will enable new innovations?”

Häger added: “We have a responsibility to really try to create that level of communication, to cut through the ‘BS’ and get to the sharp end of asking what is this about and how can we use it?”

Bringing the conversation to a conclusion, Curran turned to Ville Sointu, head of MFS solutions and strategy, Ericsson, to ask the best ways for us to overcome the trust roadblocks in the way of adopting innovative opportunities - particularly in light of FTX’s criminal actions damaging trust.

Sointu explained that given the mixed signals and deception of FTX, “we need better supervision, better transparency to be able to see into these companies. The types of regulation that FTX was pushing would not really have exposed the kind of scam that they were running. We need broader based, carefully enhanced regulation, and greater transparency of these intermediaries which are increasingly part of the ecosystem as well.”

As it’s very difficult for individuals to truly understand the technology, they ultimately find themselves putting a lot of trust in institutions to protect their assets, which means there must be very “careful supervision of how things are being marketed to the public,” added Sointu.

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