Keeping Ahead of the Fintech Curve

“Every individual in the financial sector and every community is committed to creating something that brings us forward. Otherwise, we will be stalled.”

Everyone around the table agrees.

To those gathered around the table at the Copenhagen stock exchange, Rune Mai, co-founder of Spiir and Nordic API Gateway, elaborates further on the associated responsibility:

“Incumbents are closed communities behind a tough shell. Mostly, they have no idea of what is happening in the outside world. Fintech startups and scaleups are more fluid with their surroundings, and they might even partner up with a competitor if it creates a win-win scenario. Imagine a bank doing this just four years back? No way. The traditional approach from the banking world is not accelerating any positive trends.”

Of course, there was a time – in the near past – when regulations were aimed at protecting banks. However, the European Union’s payment directive, PSD2, now underlines the brutal fact that the politicians in Brussels are seeking increased competition in Europe’s monopolised financial market. Dubbed ‘disruption on-delay’ by many in the finance industry, the payment directive is a response to the evolution of customer demands and it makes the entire financial sector an open ecosystem. Banks are now forced to open their data vaults and allow third parties – including fintech startups – to access their user data.

“You can no longer talk about fintech as a vertical. It’s horizontal. It’s a focal point for facilitating data in different domains across markets. Take blockchainBlockchain er en decentraliseret digital teknologi, der bruges til at gemme data i et netværk af computere på en sikker og uforanderlig måde. Blockchain sikr More. This technology is about creating an ecosystem and how you add value to that system. It’s a financial technology applicable to many industries. One of the things you get in return is transparency, and that is what drives an ecosystem – the commercial relationships we engage in and the data we feed into that relationship. The industry and the data sources have been far too one-sided for far too long,” Gert Sylvest, co-founder of the first Danish fintech unicornUnicorn er et udtryk, der bruges til at beskrive en startup-virksomhed, der har nået en værdiansættelse på 1 milliard dollars eller mere. More Tradeshift, responds.

Alongside four fintech entrepreneurs, Mai and Sylvest are gathered to discuss the biggest trends in the Danish and global fintech industry and the challenges that must be addressed to maintain the great momentum Danish fintechs are benefitting from.

Each of the fintech founders around the table have managed to establish a financial service in under 10 years – all with a fair amount of success, to say the least. In total, they represent 1.6 billion Euro in valuation and are responsible for creating more than 500 fintech jobs throughout Denmark – or 25 per cent of all fintech jobs in fintech startups in the country.

Solving a problem in Bangladesh is as good as solving one in Rødovre

The global startup, Chainalysis launched in Copenhagen in 2014 and is now headquartered in New York City, employing 100 full-time staff members. Among other successes, the company has helped the United States’ Federal Bureau of Investigation to trap drug lords by removing anonymity in cryptocurrency. They are now poised to help banks secure themselves against money laundering through crypto. Michael Grønager, chief executive officer and co-founder of Chainalysis, shares his memories when he wrote the first code for the company while seated on his couch in Denmark. He also knew, early on, that he wanted to grow beyond a Danish and Nordic market. But he needed a global strategy to do this.

“Startups have to address a global problem from the very beginning. The approach and mindset must be to solve specific problems that are scalable and to build services on top of it. This is unique compared to the way banks and financial institutions act and think, as they often focus on maintaining a target group and monetising it… We want to create financial inclusion across the world. Creating value for everyone and giving people a better life is very much a part of our raison d’être,” Grønager explains.

This impact is felt particularly in the insurance industry, where established players are having a hard time globalising their services because their products are tied to geography and demography.

“Insurance is a safety net and an extension of the welfare state. The border between support coming from the state and insurance can be blurry. The young generation who are passing on traditional insurance as is the case in Europe now, are exposing themselves to risks that they think the states protects them against. I also think the young generation are rejection traditional insurance because the product and user interfaces don’t fit them at all, since they have never been an attractive target group to insurance incumbents. Taken together, this was an indication, that we could make a difference,” Sophie Bohr Grønbæk says, as co-founder of UNDO, a private insurance company for young people in Denmark. Unlike other Danish insurance companies.

“New global niche players rise to the stage, and they come up with new products, such as climate change insurances targeted at specific customers around the world. You should not ignore the global market, as there are some very general problems around the world. If you start investigating then you can launch a global strategy from the start,” says Grønbæk.

On a related note, there is a surge in demand for digital services — no matter where users are geographically located. Still, it is a double-edged sword.

“On the one hand, large players can navigate a global market, commit large budgets to niche products, and make a great business even with a narrow focus. Moreover, on the other side of the table, agile scaleups spot consumer trends and demands for a deeper service. This is where technology plays a big role, because it essentially is completely different from what a bank has been providing its customers for over 20 years,” Jeppe Rindom, the co-founder of the Danish company Pleo, advises. The company financially empowers employees in every business in the world by giving them access to a company’s funds, responsibly and risk free.

Mai adds that companies have become more concerned and more aware of the global market because the world has become more standardised. He explains:

“Some financial incumbents can identify a global need for their services. However, many of them still employ a local focus. To them, a customer is just a customer, and they struggle to go beyond that. They do not try to supply what a customer needs; instead, they try and sell any type of product from the shelf regardless of the customer’s actual needs.”

“You have to set your users and consumers free and realise that solving a problem in Bangladesh is just as important as solving it anywhere else”

Amplifying this point, Grønager suggests that “you have to set your users and consumers free and realise that solving a problem in Bangladesh is just as important as solving it anywhere else.”

“Today banks don’t really focus on tech, but in the future, we will see banks being pressured from every angle to rethink business models through the use of technology,” Sylvest notes.

Sylvest refers to the EU’s PSD2. As the open APIs democratise money transfers, tech giants are well-positioned to take over a large share of the financial services that used to be the banks’ domain, and fintech startups are getting the smaller chunks as appetisers. There are two reasons why big giants banks are attempting to capture payments. First, to create loyalty so that shoppers will spend more of their money on the platform, and secondly because they allow payments and refunds to occur over multiple instalments.

Tradeshift is a business network working on digitising every interaction between two companies – especially within source-to-pay, including payments and financing. From their headquarters in San Francisco, Tradeshift digitises more than 500 billion USD every year.

As of May, this year, Pleo holds the record for the largest b-round in Danish fintech history. Rindom and Pleo’s co-founder, Niccolo Perra, have raised approximately 70 million Euro from foreign investors. This approach is vital for the Danish fintech to keep its momentum. According to Sylvest:

“We see indications of more global investors looking at Denmark. Startups and scaleups need capital to scale, and preferably from venture funds situated in the markets they want to penetrate. If you are situated in the Nordic countries, you will experience difficultly getting through the middle ground after you have received (and burned through) your seed- or round of money. In our case, we scaled through our customers. We targeted international groups of customers. Since very few large corporations lack an international supply chain and the degree of digitisation in this space is very low, we wanted to enter the American market at an early stage.”

Go deep and then go global

The two Aarhus-based fintech companies, Lunar Way and Spiir have a slightly different approach. Quite simply, they don’t focus on the global agenda.

“We are born in the Nordic countries and want to stay in the Nordic region. It’s our ambition to create a deep solution banking service and a marketplace approach,” claims Ken Villum Klausen, co-founder of Lunar Way.

As it turns out, building a “neobank” in the Nordic region is a complex yet interesting undertaking. Despite being the most profitable banking market in the world, the Nordic region is also the most defensive and closed.

“In Denmark there are a lot of national subtleties and clearing system authentications. If you do not want to challenge the depth but be a horizontal player, like several of our neobanking competitors, then you must focus on products instead of depth,” Klausen says.

As a case in point, Klausen, and the team behind Lunar Way, closed a big venture round in February of this past year. However, they will need more funding to penetrate the entire Nordic market. Not surprisingly, their mindset is different from the target group of consumers. According to Klausen,

“Half of the entire venture landscape doesn’t want to touch fintech. Of the other half, one third have already invested, the other third will only invest in global plays, and then you have to find the last third who are interested in a Nordic bank play. So, we have a global mindset and the packaging, but it is a Nordic play and has been every day.”

Pleo is present in four European markets, and is not showing any signs of changing anytime soon. Rindom expresses a preference to build in Denmark and scale from there:

“We are not religious about it; it’s just our preference. Fintech in Denmark and the Nordic creates opportunities for building companies that do not need to be global, because there is a large market to address and a regulatory environment that makes it extremely difficult to scale and for global competitors to enter.”

Contrary to what many readers may believe, both Tradeshift and Chainalysis see a potential talent pool in Denmark. In Grønager’s words,

“We had not planned for our tech and research center to be located in Denmark, but it turned out that it was easiest to recruit specialised labour – especially because the lifestyle we have in Denmark attracts highly skilled personnel to the country. This means we can hire the most talented individuals from large corporations who are seeking a new working environment in Denmark, but also throughout the whole of Europe it is easy to find a very well-educated workforce. In my opinion, we still must solve this fixation on a national problem and think bigger.”

The end of fintech

Nordic infrastructure is second-to-none, with such services as instant transfers and the largest mobile bank adoption worldwide. The Dankort remains widely used, and its significance to the technical infrastructure is even known in foreign markets, according to Sylvest. This takes place against the broader and singular narrative of the Danish financial sector – that we are proud of being cashless Vikings. But there are also less-flattering stories about the monopolised infrastructure.

Grønager points to the Rejsekortet as a prime example:

“In the London Underground, you can pay with NFC chip on all your credit cards. There is no need for extra integration. You have the hardware, and it works and is applied to any possible solution in the public space. Everyone who has a credit card can take the tube in London without any friction, whereas the friction you encounter in ­Denmark is extremely high. But it creates a captured audience. It’s representative of the Danish mindset. The Dankort contains a very high level of complexity and is something to be proud of, but it has also made the sector closed to other solutions.”

For Mai, fintech is a hot topic because it operates on one of the most defended data locks of all time. When the Dankort was launched, the Danish government was hesitant to launch an electronic trace of people’s lives from the data. This is a strong legacy that will soon end.

“We do not consider ­ourselves as a fintech. It is the necessary ­legacy that comes with the mission that will stick with us down the road”

In that same vein, Rindom explains:

“We do not consider ourselves as a fintech. It is the necessary legacy that comes with the mission that will stick with us down the road. It’s more about workflow, convenience, and the future of work. However, the regulatory part is the enabler to a protected and highly sophisticated infrastructure. If you strip the word of its meaning, it clashes with being a fintech or a startup because it has so much complexity attached to it.”

Interjecting, Grønager shares his view:

“I’d rather say that everything has become fintech. If you manage to solve horizontal problems then you will have the opportunity to collect data in a different way and fintech will cross industries.”

Mai offeres the last approach,

“Fintech is a movement that will eventually disappear because in reality, it is about access to infrastructures and data. In a few years, everyone will use financial data in their solutions, as it enables personalisation and services that know us. So as we know it today is prone to disappearing.”