Norway’s biggest bank creates even bigger challenger


Peter Lee
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DNB set up payments application Vipps just two and half years ago and has seen its in-house disruptor grow so fast that it has now spun it out and let it merge with other fintechs.

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On Tuesday, senior management of DNB, Norway’s largest bank and one of the biggest in the Nordic region, presented to investors in London ambitious plans to lift return on equity from 10.6% for the first nine months of 2017 to 12% in 2019 and to cut an already impressive cost/income ratio of 43.8% down to under 40%.

According to the World Economic Forum, Norway has the best digital infrastructure in the world. Only 6% of payments in the country are made in cash. Mobile personal banking transactions have quadrupled since 2013 at DNB and the bank has cut branch offices from 156 in 2013 to 57 at the start of this year.

This is a management team not short on confidence and well worth listening to about the future of digital banking.

In May 2015, DNB launched a free peer-to-peer payments platform called Vipps. Two and a half years on and 61% of the Norwegian population over the age of 15 use it.

In mid-2016, DNB extended a fee-earning peer-to-business payments application of Vipps. Today, 45,000 businesses, associations and sports clubs in Norway accept payments from individual customers through Vipps and a further extension of the platform is now attacking the market for e-commerce payments and invoices.

Fastest-growing brand

Statistics Norway says the Vipps brand is now recognized by 95% of the population, making it the fastest-growing brand in the country’s history. Almost 80% of adults in the country under 30 already use it, while in the past 12 months use has grown fastest among over 50s and over 60s.

“By the end of 2018, we aim to have more users than Facebook,” Rune Garborg, chief executive of Vipps, told shocked investors, before clarifying: “I should maybe specify… I mean in Norway.”

It’s an almost heartening story of how supposedly sleepy incumbent banks – DNB is still 34% owned by the state and 8% by the DNB Savings Bank Foundation – can do what so many bank chief executives now espouse but few achieve, namely innovate so that they disrupt themselves before outsiders do it to them.

But here’s the thing. Vipps got so big so fast that DNB felt compelled to relinquish full ownership.

Rune Bjerke, DNB

Rune Bjerke, chief executive of DNB, explains: “We invited all the other savings banks in Norway to participate, because we thought there is room for only one national banking platform and if it could grow outside Norway, then we must join forces.” 

Vipps was spun out in September. DNB still owns 52% of the company, but 105 other banks now own part of it and 109 out of 128 banks in the country distribute the application. Two other main bank-backed mobile payments competitors have terminated operations.

While the disruptor was born inside one of the incumbents, Vipps, with its 2.6 million customers, is now merging with two other Norwegian fintechs: BankID, which provides identity confirmation tools for 3.5 million Norwegians, and BankAxept which handles payments at 125,000 points of sale in Norwegian stores.

The aim now is to use scale to reduce costs to users further so as to increase market share across the Nordic region, boosting revenue by winning merchants over to using Vipps for e-commerce payments from customers and for processing invoices. Fee-earning P2B transactions have increased 300% in the past 12 months and Garborg expects growth rates to be even higher in the future.

Instant payments

Vipps has just launched instant payments, which Garborg argues will be an absolute requirement in peer-to-peer payments and will start to eat into the share of Visa and MasterCard.

As soon as Vipps appears on the payments page of any Norwegian company’s website, it almost immediately accounts for 20% to 30% of payments transactions because customers find it so much easier and quicker than entering their credit card details. That kind of growth into a market-dominating provider can’t come inside the bank that developed Vipps. It needs other distributors and participants.

Rune Garborg, Vipps

“Today it’s not possible to develop infrastructure on one side and nice front-end solutions on the other,” says Garborg. “If you’re really going to move fast in product development, it has to be integrated.”

For now, there is a feeling of growing complacency among executives at the world’s banks that they have seen off the fintechs’ supposed challenge. Vipps perhaps highlights the capacity of the incumbents to innovate from within and the benefits to established banks from cooperation, but it also shows the potential of new products and services to garner substantial market share very quickly.

Decision Technology, a UK consultancy that researches customer decision-making, finds that though weak brand recognition remains a limit for fintech companies, 43% of a sample of 1,200 consumers it surveyed would happily borrow from a fintech provider rather than from one of the six well-known leading banks that now dominate the highly profitable UK personal lending market.

It found less potential vulnerability in savings products where a known brand might presumably offer some sense of security to customers, but even here banks should not be complacent, especially over younger adults.

Out of the 10,000 millennials who were surveyed recently by CoinSpectator, an aggregator of cryptocurrency news, 70% said they were unhappy with the interest rates offered on their bank savings accounts and felt they were being undervalued as customers.

In search of higher earnings on their cash, this age group – perhaps ill-advisedly – is putting a higher portion into assets such as bitcoin. Astonishingly, nearly 65% said they felt their money was safer in bitcoin – for all the hacks, wallet freezes and lurching daily volatility – than with a bank.