The issue recently became topical when the tripartite group of BankAxept, BankID and Vipps prepared themselves to fight the international giants by securing user-friendly, cheap and secure payment services in the same company. The decision by Vipps to move money via BankAxept instead of the global card companies does not simply save them money on the transaction fees, the fees also remain in Norway, for further value creation within the Norwegian finance sector.
“We’ll partner with everyone who does payments.”
We challenged Magnus Handeland, head of strategy and technology advice at Knowit Experience in Oslo and Fredrik Elgaaen, senior digital business developer for Knowit Experience in Bergen for their thoughts on what is happening.
How would you describe the Norwegian finance market in the light of PSD2?
The Norwegian market is characterised by a greater degree of collaboration than the rest of Europe. One example of this is the BankAxept system, which was created in order to transfer money directly between Norwegian bank accounts, without having to go via the expensive global card companies (Visa/Mastercard, etc.). Similarly, Norwegian banks have worked together to establish a joint mechanism for logging on and digital signatures. Such collaborative projects have made the Norwegian finance sector very efficient, says Eigaaen. As a result, the giants will face different challenges in Norway compared with many other countries in Europe.
How does PSD2 alter the Norwegian banking and finance market?
“Companies which live off transactions and credit services will come under pressure when PSD2 makes it easier to offer financial services across national borders,” believes Handeland. This is the driving force behind two key battles which will determine the future of the Norwegian finance sector: The battle for transactions and the battle for credit products.
It is a paradox that consumers are transaction-focussed, while the banks are credit-focused. Consumers think more about transactions on an everyday basis, while credit products are not as far forward in their minds. For the banks, the opposite is true, as it is the credit products which generate the most income. The challenge for the banks now is that those who win the battle for the transactions also gain a strong advantage in the battle for the credit services.
What characterises the battle for transactions?
Consumers want good digital services which enable them to carry out their daily tasks in the simplest possible way. The GAFA companies are good at creating digital services, and some of these players will gain a strong foothold in Europe in a few years. And with a common set of European regulations, the road to Norway is short, believes Handeland.
And who is leading the battle for Norwegian transactions?
“The Norwegian players are ahead, but they will have to work hard to retain their lead”, believes Elagaaen. The joint venture between Vipps, Bank Axept and BankID is a positive development. It opens up opportunities to exploit unique Norwegian conditions which can give a competitive advantage. A secure and user-friendly payment service which uses BankAxept instead of the international card networks (Visa/Mastercard) can stand up to the giants.
How does the battle for credit services differ from that for transactions?
“Credit is one of the most homogeneous products around, and we’re moving towards a world where today’s players are increasingly having to choose whether they want to differentiate themselves on price or customer experience”, says Handeland. It will be difficult to succeed with both.
And what is the outlook for those who adopt a price-based strategy in order to differentiate their credit services?
“With a price-based strategy, one often attempts to build a platform which other players can build services on top of. Players who choose to follow this path enter a landscape which is controlled by very different forces than is the case at present. Open banking and PSD2 result in lower switching costs for customers and make it easier to offer banking services across national borders, which in turn will probably lead to international pressure on ever lower margins. Economies of scale will be a major factor here, so the big players will dominate. There will probably also be room for niche players who could, for example, be best at “Norwegian conditions”, but a pure commodity-based game with international competition would probably be a tough path to follow for most Norwegian players in any case,” believes Handeland.
What about those who opt to focus on customer experience?
“Some players will focus on creating good customer experiences on top of the platforms of those who opt for price-based strategy. And those who succeed in doing this will be able to keep a firm hold on their customers. They will also end up in a position where they can press the platform providers on price. In this battle, those who offer the best customer experiences with the lowest “Customer Acquisition Cost” (CAC) will be the winners in the long term. In this regard, the banks may come under strong competition from GAFA or other non-banking companies which have already incurred costs establishing a dialogue and building up trust with their customers. These companies will easily be able to offer credit services in their dialogue with their customers, and they will have lower added costs/CAC compared with the banks. Here, the market may become very fragmented,” says Handeland.
So who will win the battle for credit services?
“I don’t think GAFA itself will offer credit in the Norwegian market immediately. Not because they can’t, but because they want to focus on what they do best - creating good user experiences for consumers,” says Elgaaen. They still have a major upside opportunity because those who win the transaction game will take over a large customer base and will be able to resell credit services from third party providers in return for a nice cut.
I think the best experience is the one which covers most aspects within transactions. A seamless service which you can use for all your transfers to friends, for paying online and in stores and for paying bills. The GAFA companies’ services are a little fragmented at present. Google is offering Google Wallet for transfers between friends, whilst Android pay focuses on mobile payments. Apple Pay has both, but friends you send money to must also have an Apple product. Facebook is currently peer-to-peer transfers via Messenger.
I wouldn’t rule out the possibility of Vipps being the winner in the future in relation to both transactions and credit,” says Elgaaen.
“The opportunity for GAFA lies in the fact that those who win the transaction game
will take over a large customer base and will be able to sell
credit services from third party providers afterwards.”
There is a lot of talk about blockchain technology at present. What effect will that have?
Digitalisation ultimately revolves around cutting transaction costs, eliminating intermediaries, creating new arenas for interaction, personalising customer dialogues, and creating smarter links between offers and demand. The banks are intermediaries, either between the parties in a transaction or between those who have money and those who want credit. The banks are therefore exposed as regards blockchain. Consensus technology and crytocurrency have the potential to “disrupt” markets for both transactions and credit.
Many people will claim that it will be a long time before blockchain becomes mainstream; what are your thoughts on that, Magnus?
“I also think it will be a while before blockchain technology matures, but we are probably talking about years, rather than decades. I know many people are sceptical, but my experience is that they are assessing the technology based on the utility value of the very first blockchain services. This is not representative of the potential that lies in the technology. An appropriate analogy is the very first cars. Major quality problems, insufficient infrastructure (petrol stations and repair workshops) and not least a lack of regulation meant that the horse and cart was considerably more practical than the first cars. Nevertheless, history shows that the car emerged the winner, because it fundamentally transformed the way in which we travel. It is therefore inappropriate to assess new technology based on the very first implementations. Similarly, blockchain technology has the potential to change the way we engender trust, and thereby influence our attitude towards agreements, trade and ownership,” says Handeland.
Read more about blockchain here.