ISG Provider Lens™ Digital Banking Services - Core Modernization and Integration Services - Nordics 2021

DIGITAL BANKING SERVICES 2021 — Nordics

Twenty-seven million people live in the five Nordic countries of Sweden, Denmark, Finland, Norway and Iceland, and share geographic proximity and cultural affinities. Nordic banking is oligopolistic in nature. Post-COVID, imperatives are driving digitalization trends in the Nordics. Many banks are announcing debt restructuring measures to ease the pain for their beleaguered borrowers. However, the Nordic banks have reported lower NPAs and are expected to absorb the credit losses, owing to their strong financials.

The Nordic banks were the most successful in the European banking system and have survived the 2008 crisis. Also, 90 percent of the Nordic society on an average is cashless. Average household internet access is 95 percent. Even in the Nordics, like the rest of Europe, newer fintech players are challenging the traditional banks. As both homegrown and global players disrupt the market across the value chain, traditional banks are attempting to defend their territory by reinventing their digital models. For instance, the P27 initiative provides a single common payments infrastructure across the Nordic countries.

Outsourcing of IT services is the dominating theme in Nordics. Many European IT firms are trailing behind their Indian counterparts on their own turf. The overseas providers’ offshoring strategy reduced operational costs and brought to the Nordics the advantages of having a globally distributed model, including cultural learning, HR, processes, customers, incentives, and recruitment. Driven by a relentless ambition to dominate the markets, Indian IT firms have taken over the region.

Core Modernization and Integration Services

The global core banking software market generated around US$10 billion in 2020.

Core is shifting to the cloud: Many banks operate legacy mainframe core banking platforms that date back to the 1980s and 1990s. They tend to be complex and are either proprietary or heavily customized. There have been major changes in the industry, including regulatory, payments, data privacy, cross border, and digital services. Instead of propagating these changes throughout the system, the banks just added new layers of technology to accommodate the new products, regions, channels, and functions. It has become imperative for all FIs, regardless of size, to modernize their core platforms to meet the expectations of their customers and regulators, and operate cost effectively, while adding digital capabilities.

Therefore, banks are now shifting to such other platforms as service-oriented platforms and cloud-native platforms. While service-oriented platforms are offered as cloud-based software-as-a-service (SaaS) subscription model, cloud-native platforms leverage microservices-based architecture with APIs. Furthermore, cloud-native platforms support real-time processing and are highly cost effective because they are offered as a pay-per-use subscription model. Cloud-based lighter versions of the core are being provided by Thought Machine and Mambu. For instance, U.K. fintech Thought Machine offers a cloud-native platform to various prestigious clientele, which include JP Morgan Chase, Lloyds Banking Group, Atom Bank, Standard Chartered, and Sweden’s SEB. Large banks such as Royal Bank of Scotland and BNP Paribus are also the major clients of IBM. Further, banks are “hollowing out the core”, that is they are decoupling insights, analytics, and business tools, from the core banking platform. This will allow the platform to focus on its core functionality – that of a system of records.

Demand for third-party integration is on the rise: Banks are seeking IT service providers that offer commercial off-the-shelf products through customized engagements. Two factors are driving the core modernization segment. First, demand for emerging technologies such as AI, machine learning, natural language processing (NLP), blockchain, and RPA; second, demand for relevant skillsets in Agile and DevOps methodologies.

New pricing models for core modernization:

• Operate and transfer models: In this model, the IT service providers are held accountable for migrating and/or upgrading systems. In some cases, as the client transitions to cloud-native platforms over the contract period, the operating expenses are held constant.
• New tools at no extra cost: Newer proprietary tools that support transition to the cloud are being offered at no extra cost, making them highly cost effective.
• Bundle pricing: IT service providers offer bundle pricing for modernizing an array of related systems or retiring them altogether.

New approaches to core modernization:

• Low-code platforms are gaining traction: Low-code platforms carry out complex tasks and integrations by pointing and clicking rather than writing the code. They are integrated with AI and machine learning capabilities.
• Easier business rule extraction: Improved mining technologies are making it easier to extract the business logic so that the legacy code can either be refactored, removed, or replaced with microservice architecture.
• Improved incremental modernization: Using a set of increasingly sophisticated mapping tools, logical subgroupings can be identified, and legacy interfaces can be severed, replacing them with API-based architecture. Over time, these services can be optimized for a more predictable and consistent performance.

Banking Governance, Risk and Compliance Services

Global GRC market size is expected to be around $29 billion in 2020.

• Rising regulatory scrutiny and compliance costs driving growth for regtech: Banks are facing challenges due to rising regulatory scrutiny and costs. As a result, the demand for regtech is increasing. This has become even more imperative in the post-COVID world, where external risks are shutting down businesses and increasing the credit risk and non-performing assets (NPAs) of banks. The high growth areas include data privacy, enterprise risk, cybersecurity, financial crime, and risk management.
• Digital GRC is gaining market traction: Moving to the cloud enables the banks to respond quickly to any changes in regulations, and dynamically adjust their risk weighted assets and NPAs and undertake stress tests. Also, emerging technologies can be easily implemented. Such offerings save time, money, and effort when compared to on-premises implementation of GRC.
• Clients demand in-built compliance and risk features for cost effectiveness: The demand for cost-effective digital transformation offerings is increasing. Also, software, services and processes that are being digitized must have risk and compliance capabilities in-built in them.
• Banks are regulated but fintech is not: Third-party risk is emanating for the banks from the exponentially rising fintech, which may not have adequate internal compliance systems. These include, for instance, lack of KYC at the associate fintech.

Transformational and Digital Banking Services

The global digital transformation market in banking generated US$55 billion in 2020.

• Ongoing fierce turf war increases DX adoption: Nordic banks are facing intense competition from global and local banks across the banking value chain on all main product areas. Banks are embracing digital technologies like never before to prepare themselves for this change. As fintechs unleash the cashless revolution, many Nordic retail banks could witness a substantial fall in their revenue over the next two years. A major factor contributing to the vulnerability of the Nordic banks has been their lack of preparedness and foresight to embrace digital technologies.
• Demand for hyper-personalized services to deliver Uber-like UX: Banks want IT service providers to enable them to leverage emerging technologies such as AI, machine learning, RPA, and blockchain to deliver hyper-personalized services focusing on UX to their customers. This will improve revenue opportunities and optimize costs. Nordic countries also have governments that are highly digitized. For instance, their eID schemes can be used to log into bank accounts.

Payment and Card Processing Services

The global payment and card processing market size was estimated at US$138 billion in 2020.

• P27 payment initiative is driving the payments segment in the Nordics: P27 is a real-time, cross-border payment system that supports multiple currencies for domestic and cross-border payments. The initiative will also support transactions in the rest of the eurozone, in harmony with Single Euro Payments Area (SEPA) standards. It is aimed at reducing the associated transaction costs and hassles related to these transactions and will boost intra-regional trade and travel.
• Fintechs are challenging hegemony of banks: Fintech firms’ tech expertise and user-friendly services are driving the market. P27 is a joint initiative by Danske Bank (Denmark), Handelsbanken (Sweden), Nordea (Denmark), OP Financial Group (Finland), SEB (Sweden), and Swedbank (Sweden) to fight back against the looming threat from fintechs. Banks recognize that the payments segment is the vital gamechanger that can help them reconnect to their customers.
• .Big tech is a game changer: In addition to fintechs, there are many big techs such as Amazon, Apple, and Meta (formerly named Facebook) that are progressing with superior UX offerings. They have a formidable advantage in routing the traffic of millions of dollars via mobile payment apps and other in-built payment apps. Their abundant financial resources help them have a higher staying power in the low margin, high volume world of payments.
• .Interbank collaboration and shared IT service providers paving the way for open banking adoption: In Denmark, 27 banks made an agreement with Nordic API Gateway through BEC, the IT supplier they collectively own, to provide open banking services to the group’s more than two million customers. Similarly, nine Danish banks made an agreement with their IT service provider Bankdata, to access open APIs from Nordic API Gateway for their 1.7 million customers. So far, 42 banks have signed up with Nordic API Gateway. Many banks are cutting jobs to become lean. Also, 96 percent of Nordic households have internet access, paving the way for open banking.

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