Can the Nordics sustain as the second largest Fintech Ecosystem in Europe?

The Nordics have always been innovation driven economies, probably better than most other regions in the world. The Global Innovation Index 2017 published by INSEAD ranks Sweden at number two in the world, and the rest of the Nordics within the top 13.

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Most of these economies have had the right ingredients to sustain their positions at the top of the innovation ranks. The R&D to GDP ratio for the region is the highest in the world, with Sweden. Finland and Denmark ranking 4, 5 and 6 in the world (as per World bank data). Non-Fintech firms included, Sweden is the second largest Unicorn-breeding ground in the world.

Where these economies have historically been found lacking is the scale. And often firms that conquer the local market haven’t been able to replicate the success in other parts of the world.

With Fintech, the Nordics have always been at the forefront with Stockholm providing the ammunition. While they have consistently managed to beat the UK at the innovation rankings, UK has led the way in Europe for Fintech, thanks to its Financial Services ecosystem.

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Some of the big names and big events in the region have been in Stockholm, Oslo and Copenhagen. KPMG set up a fintech innovation platform in Sweden. The Stockholm Fintech Hub launched earlier this year and is independent and not-for-profit.

Norway’s biggest bank, DNB  recently joined forces with a local incubator, StartupLabs, to launch the “DNB NXT Accelerator”, which incentivizes entrepreneurs to come up with solutions that the bank can use.

Copenhagen is a Fintech hotspot with its annual Money 20/20 conference, which gathers the world’s leading investors and entrepreneurs. It also has the “First Fintech Hub in the Nordics” that acts as a co-working space and is a partnership between the Financial Services Union Denmark, the City of Copenhagen and the Danish Bankers Association.

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With the ecosystem play heating up, the usual suspects of Fintech in the region namely Klarna, iZettle, Meniga etc., have seen major traction in 2017. Klarna recently reported impressive revenue growth, and announced a plunge into digital banking. They also closed major deals with VISA and Stripe with a plan to expand aggressively in the US.

iZettle, that provides a simple payment solution to small businesses is currently growing at about 1000 B2B clients per day. Apart from their presence in the Nordics, they have been quite successful in expanding into the UK, and have recently appointed a bank for their IPO (expected next year).

Meniga from Iceland is a PFM Ecosystem that makes digital banking amazing and transforms raw transactional data into valuable data. They serve over 40 Million customers across 18 countries in 4 continents. They recently raised €21 million to accelerate global expansion.

Similar stories from Trustly with €3.2 Billion in transactions last year and Tink securing $10 Million in funding last year for expansion, mean Nordic Fintechs are on a roll.

They (Nordic firms) have historically been great at pioneering technology and innovation. This time with Fintech, they have been able to create a local ecosystem, already have a handful of fiery fairy tales to inspire, and more importantly have demonstrated global expansion and execution capabilities.


Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

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How digital cash is being used in Finland to help refugees

The best part of writing on consumer finance, is that there could be more drama to it than the other sectors within Financial Services. As I discuss socially impactful financial services with people, I frequently encounter the view that you can either have social impact or you can make a profit. It is viewed as a hard choice and a trade-off. I firmly believe that technology can be both socially impactful and profitable. The refugee crisis is bringing the kind of problems that we normally associate with the developing world, to our neighbourhoods in Europe and the rest of the developed world. However, a few Nordic startups are working with their governments to onboard the refugees into their society.

We talked to a company in Finland called MONI that is using pre-paid cards to help refugees get onto the ramp to being a productive member of society in their host country. Before getting to the details of MONI’s work, I would like to touch upon a research done by Tufts University on digital and financial inclusion.

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Research on Cashless Economies:

No discussion on cashless economies is complete without discussing the Nordics and their progress in this space. They have clearly defined the blueprint for going cashless by creating the ecosystem to do so. Based on the research conducted by Tufts University, there are two main drivers to identify countries that would benefit the most from going cashless:

  • Digital evolution and
  • Cost of Cash

The Digital evolution Index provides an overview of how mature the financial services infrastructure is and also more importantly the level of digital inclusion. This is because, financial inclusion becomes a lot easier if policy makers and industry leaders first focused on digital inclusion. Africa is a great example where mobile payments growth followed penetration of mobile services. The Nordics are the leaders in this space, where digital evolution has been exploited well by policy makers to drive cashless initiatives.

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The other factor that would optimise benefits when a country went cashless is the current cost of cash. Cost of cash is generally high where the banks have to take a lot of efforts in keeping ATMs stocked up and where the cost of access to cash is high due to the country being large like Russia, Australia or the US. Another factor that increases the cost of cash is the lack of effective governance around tax. For example, in India, the shadow economy was about 20% of GDP before the cashless drive kicked in late last year and that was about $500 Billion approximately. No wonder the cashless drive kicked in even though digital inclusion wasn’t as good.

The Refugee Crisis

One key point that we can infer from the research above is that, when the digital evolution/readiness is higher, the cost of cash can be proactively kept under a threshold, even in crisis. One of the largest crisis of our generation is that of the Syrian refugees. About 11 million people have fled homes and about 400,000 have lost their lives. There is help with funds pouring in from various parts of the world, and technology firms creating new ways for NGOs to collect donations. However, one of the key challenges for refugees is inclusion into the society they have moved into. One ray of hope in this space is the relentless efforts of the Nordic start-ups that have supported their governments in providing the refugees digital and financial inclusion.

It is important to understand the challenges that the refugees and the supporting governments faced. Most refugees don’t have identification that delays immigration and visa processes. However many of them are skilled enough to add value and are keen to work. Without work, some form of normal life, educating kids, and integrating into the society by contributing to it also becomes hard. Also, from the government’s perspective distribution of monthly allowances to refugees have been inefficient, insecure and expensive, thus making Cost of Cash pretty high. There couldn’t be a better situation where digital innovation could have helped the situation. I had an opportunity to interview MONI, a fintech startup who have been working with the refugees.

The MONI Story

MONI, a Finnish startup based out of Helsinki, focusing on digital payments have pioneered the cause of helping refugees by providing them and the Finnish government the ability to move to a cashless infrastructure. (Thanks to the team at MONI for accommodating an interview at short notice). Moni with good support from the Finnish Immigration Service have been able to distribute MONI prepaid cards to the refugees, thereby providing them means to manage their own accounts when they get their jobs and salaries. This wouldn’t have been possible with traditional banks where the KYC processes couldn’t have passed for refugees without identification.

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MONI’s accounts are customizable and their features can be easily switched on and off. This is particularly important as both the Finnish Immigration service and Financial Supervisors impose strict controls on accounts used by the refugees. MONI have also gone one step further and provided its user interface in Arabic, Farsi and Somali. This has now resulted in a super-efficient financial onboarding process for the refugees. During my interview with MONI, they also mentioned that refugees and the unbanked would be their key customers. They believe that by helping refugees into the financial ecosystem, they would not only be able to sell other products to them, but also create a huge customer base that are loyal to the MONI brand.

MONI are not alone in their efforts to help the refugees, and have support from other tech startups for the social integration of the refugees. In one of his interviews, Antti Pennanen CEO of MONI had mentioned that the people within the Finnish Immigration Service have been very entrepreneurial with a “lets do this” attitude, and have a genuine interest to integrate the refugees into the society. That goes to show how public-private sector partnerships can work like a charm when both parties are driven to create impact. MONI’s partnership with the Finnish Immigration Service is an excellent case study for countries that are aspiring for better financial inclusion after having cracked the digital inclusion challenge. If only we could have more MONI!

Klarna is Primary Fintech Innovation from Nordics

Primary innovation is doing something that has never been done before.

Most primary innovation is ridiculous and fails without anybody noticing.

Very, very rarely, primary innovation changes the world and the company that creates the innovation becomes a Unicorn.

Secondary innovation wins by giving a twist to that primary innovation. The two simple twists are:

  • Apply the primary innovation to a different country aka “concept arbitrage”. A lot of European and Asian Fintech falls into this category. This is more viable in Fintech because “bits don’t stop at borders, but money has to show its passport” (meaning that regulation is a barrier to entry).
  • Apply the primary innovation to a different domain aka the xx of yy (e.g. the “Uber or AiBnB of..). A lot of “subprime VC” goes to fund this type of secondary innovation.

Secondary innovation is a perfectly sensible way to make money. It is just not as interesting as primary innovation. It is hard to imagine creating a Unicorn with secondary innovation (but very easy to get headline valuations over $1 billion for secondary innovation).

The number of primary innovations is really limited. Maybe there are 10 in Fintech. Historically, almost all primary innovation has come from Silicon Valley.

Occasionally what appears to be secondary innovation – the small twist – is actually the game-changing innovation. For example, Angel List Syndicates could look like a small twist to the equity crowdfunding concept. I think Angel List Syndicates is actually the innovation that changes the whole asset management business.

I think Klarna is one of those few primary innovations. The fact that this primary innovation comes from Europe is significant.

The Klarna story has some “straws in the wind” that indicate something big such as:

  • The investors are top tier. Sequoia Capital has the best track record of spotting primary innovation early and Michael Moritz (who led Sequoia Capital in it’s current incarnation) chose Klarna as the only European Board to join. General Atlantic (who came in after Sequoia Capital) only buy when the financial metrics are strong. So while I don’t have access to Klarna’s financials, I assume they are strong.

So much for the straws, what about the wind?

In my book Mindshare to Marketshare (shameless promotion here), I describe turning “secret sauce” into “unfair advantage”.

Secret sauce is the primary innovation. It has to be solving a big problem/filling a real need (aka “value proposition”). In Klarna’s case, that is:

Less time/hassle buying on a mobile phone (consumer)

Less mobile shopping cart abandonment (merchant).

What Klarna offers is actually very old fashioned – buy now, we will collect money after you have the goods. It is what you do in the physical world (pay the barista only after you have your coffee). Doing that digitally means managing fraud and deadbeats (which is really what the Credit Card industry does). Klarna’s secret sauce was simply to track the user via their confirmed national identity. This is easy in a small homogenous country like Sweden. It turns out it also works in Germany (thus the Sofort experience) and I know it works in Switzerland where I live.

America is not fundamentally different, even though “homogenous” is not a normal descriptor. Social Security works as ID. ID theft is a big issue; it will be interesting to see how Klarna navigates that issue.

It is easy to conclude that the Rest (every other than Europe, America, Japan) is different. Klarna has its hands full in Europe and America for now, but they will soon have to tackle Asia. This where the Unique Identification Authority of India is significant.

Could this be the first European primary innovation that launches concept arbitrage in America? Affirm looks like a candidate. I don’t think concept arbitrage will work in this market because Klarna already has top tier American investors.

So, does this make Stockholm the Fintech Capital of the World? No, but Nordic Fintech is also well represented in Saxo Bank.

This will be my last post for this week. Happy Holidays.

This European Fintech Unicorn Is Low Profile and Bootstrapped

Saxo Bank is low profile unless you have been deep into currency trading, but check out these numbers:

2011 Revenue: US$594m (3,526.9m DKK at 5.94)
2011 Profit: US$104m (617.8m DKK at 5.94)

Apply a similar revenue multiple that is applied to a hot VC funded company and you get to north of that $1 billion market cap unicorn milestone quite easily. Actually a measly 2x revenue multiple gets you there.

It has Bank in the name, but Saxo Bank is closer to a Fintech startup, with four differences:

1. Age. Founded in 1992. That is young by the standards of banks that like to talk about being founded before the 20th century. However, it is prehistoric by the standards of Accelerators, Angels and VCs.

2. Bootstrapped. They did not take outside capital until 2005 and since then have made a number of acquisitions to add both functional capability and geographic reach.

3. The technology came later. Founded in 1992, Bank License in 2001, new platform built in 2005 (outsourced to a Russian vendor).

4. Location: Copenhagen, which is not one of the obvious Fintech Capitals.

One other feature that is unusual but which I suspect we will see more of, is that Saxo Bank is a:

  • Consumer brand. It was their advertising in Geneva airport that caught my eye.

And,

  • White Label service to other Banks. This seems to be their strategy for the huge and challenging American market.

It is also in America that they will meet established companies of a similar age and determination, such as eTrade and Charles Schwab. This might explain why they opted for a white label approach to the American market.

What impresses me about Saxo Bank is that they offer Joe Q Public the types of tools that have tended to be reserved for Hedge Funds.

Specifically, Saxo Bank enables you to trade:

1. Across asset classes. Saxo started in FX, but you can also trade equities and bonds. That enables innovation such as letting you use your equities portfolio as collateral to leverage up to trade FX.

2. Global. Coming from the FX market, Saxo clearly thinks global. Being based in a small market like Denmark will also make you think global.

Saxo looks like one of the players who will help democratise financial markets. Startups entering this market should be wary of Saxo Bank which has an interesting mix of size, agility and ambition.