Consumer credit in the Nordics, with Jakob Færgeman

The Vikings are coming! The Vikings are coming!

For a long time, the Nordic financial services market was a geographically contained one, with just 25 million consumers spread across the four major Nordic nations, growth of even the best business models could be capped. But not anymore, with digital channels providing a route to the rest of the world, several Nordics fintechs are following in the wake of Klarna.

So to get a better handle on the local forces shaping the Nordic consumer credit landscape, I spoke to Jakob Faergeman of Experian. We spoke about BNPL, Open Banking, and fintech in general; we spoke about the impact of COVID-19, and we spoke about regulation.

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.

Regards,

Brendan

You can read the full transcript with timestamps here:

Jakob Faergeman 0:00

It's Buy Now Pay Later products that is most appealing for for banks and organisations to move forward with.

Brendan Le Grange 0:22

Welcome back to How to Lend Money to Strangers, the podcast about lending strategies around the world and across the credit lifecycle. Today I'm speaking to Jakob Fergeman, Principal consultant at Experian in the Nordics. Jakob is a specialist in digital optimization, regulation, risk and customer management, and has a passion for consumer finance in the Nordics.

For a long time when we thought of the Nordics, we might think of furniture and design and architecture, not consumer finance. But as fintechs have brought new digital models to the fore, that's changed. We've seen Klarna, of course, coming out of Sweden, but the whole region is full of new startups in the Buy Now Pay Later and Open Banking spaces, names that are becoming more and more familiar to those of us in the rest of the world. So I speak to Jakob about what the market looks like today, what COVID has done, and what we're looking at when we talk about FinTech in the Nordics. We also talk about how the regulator is trying to keep growth safe.

Maybe what we could do as a start, Jakob, if you wouldn't mind - could you introduce yourself and your role at experience in the Nordics?

Jakob Faergeman 1:49

Absolutely fantastic. Thanks, Brendan, for inviting me to this podcast. My name is Jakob Faergeman and I'm the principal consultant in Experian, responsible for the Nordic Region. My primary focus as a consultant is to ensure our clients get the most value and benefits from our services being data, software, analytics and consulting services to make sure our clients is ready for the ongoing changes that happens in the business environment. In particular, during Covid 19, we saw a lot of changes in the market, both from a regulatory perspective, but also enhanced digitization of banks and consumer presence.

Brendan Le Grange 2:33

Thanks, Jakob. Now we all know that Danish homes are famously happy and famously cosy... but are consumers paying the mortgages on those homes? Are they paying their credit cards? Could you maybe give a quick overview of what the consumer credit landscape looks like in the Nordics, what products are popular, what does risk look like? Things like that.

Jakob Faergeman 2:54

Yeah, great question. Because I think one thing is important to address is that Nordics - for this conversation - is four markets, primarily, it's Denmark, Sweden, Norway, and Finland. And they are four different markets, both culturally but also regulatory wise data presence wise, which has impacted also the way banks operate in the different markets.

So if I can also just put a few words on the maturity of banks across Nordics, they have quite a good footprint in terms of being digital, with 'net banks, being able to transfer money to one another between the customers at banks, but the banking operations are probably less digitised that we see in other markets, due to the fact that some of the big banks are big due to take-overs of other banks, meaning they have a legacy systems. I say that because this has also been a challenge for some of the bigger banks to be really digital towards customers impacting the way they do credit.

If you look at, for instance, Denmark, tier one, tier two, some tier three banks, very difficult to make an online loan without being known to the bank already. This is still Main Street banks where a customer comes into the branch and ask for a loan. However, we of course have consumer finance industry, but also the new digital players with payday lenders, etc, which has really rocked the boat the last 5 to 10 years, which has also impacted the way credit is being seen by regulators. But also then what does it mean to be a bank in the various markets

Brendan Le Grange 4:40

So, it's been about 11 or 12 years now since I was last in the region. But I remember from when I arrived in Denmark and I was looking to open my first bank accounts, that the offerings - across, at least, the major banks - were fairly generic. Most people were using a debit card to spend and while they were credit cards in place, everybody essentially opened at the same credit limit, and the cards weren't very feature rich. Now, as you've seen payday lenders emerge and as we've seen more generally FinTech emerge in the space, do you think that's changed the way lenders look at this? Has it pushed them to be more innovative in their brand offerings, more diverse, and likewise has it perhaps changed the way that consumers think about credit products and what they use to spend?

Jakob Faergeman 5:28

Indeed, and particularly the last two to three years. I've seen some of the tier one banks now offering more interesting credit card products, where if you use a credit card at certain restaurants and shops, you get some cash backs, also benefits, as a customer - which is something some of the consumer finance players started to do already 10 years ago. We had a bank like Bank Norwegian, a consumer finance provider with credit card and consumer loans, which actually originate from an airline, where you got the bonus points using the credit card from Bank Norwegian, and you could get some bonus points and some cash backs on that.

I think that was really the starting point that drove some of the bigger banks to be much more appealing in the product suite, particularly within the credit cards. But the challenge is that consumers now not only have one credit card, but they have six different credit cards. And they use one credit card for that restaurant, another credit card for for that airline, etc, etc. And it's very difficult to activate and make customers revolvers - meaning they start to be interest bearing and actually start to make money for the banks and various players. Banks have been very successful in handing out credit cards, but they're not making money on them. Instead, they're actually losing money because they need to do provisions, and to administer these cards is pretty expensive.

So we are starting to see a consolidation in how to go to market with various products because credit card is not that sexy anymore. We need the benefits to make it appealing for customers. And now we see new players coming in with Buy Now Pay Lproducts - we saw recently a player like Klarna and other similar players coming in, where you could buy, even a burger, a burger meal. So buying a burger for €10, it will be €1 over the next 10 months! Which is interesting, because maybe that is also what the consumer wants, they want to spend later, but live now. And that is the consolidation we see right now across Nordics. But they have to navigate in the more tight regulatory space. So it's not an easy playing field right now to operate effectively within.

Brendan Le Grange 7:46

Yeah, it's quite interesting, because I've just finished recording an episode on Hong Kong. Yeah, we had the exact same conversation, where each individual issuer, they have to understand there's four or five other cards in the wallet, and when they're getting the spend, often it's only the spend that is heavily discounted because of reward or the cashback. And so they get spend with a bonus, but they never get the normal spend that should compensate. And it's a, I think, a good lesson that if you just try to win customers with money, if you just paid for a bonus or you gave a gift, it was very easy to replicate, and then suddenly it's just an arms race who can give the most rewards. We saw fintechs step in and say well, he has a completely different model.

In terms of the the cultural change. The Nordics, as we said, not known for its excess consumerism - fewer but higher quality goods. So on the one hand, I think that makes sense as you could buy some really nice furniture and pay it over for a bit, but it sounds now like maybe it's also spilling over to buying the hamburger for €10. What is the cultural impact of this buy now pay later evolution? And I don't know it might be too early to say, but how is that filtering through to the larger financial market?

Jakob Faergeman 9:02

If I answer the latter question first, then definitely what we see right now, it's by now pay later products that are being launched - with established players, but also with players entering the market, really the product that is most appealing for for banks and organisations to move forward with.

But I think, really to see the end result of that, I think it's still too early to say. I think it's gonna depend on quite a few things, because what is the type of products they're going to use it for? You made the example with high design furniture, TVs, etc. We've seen that for a while already, but in order to pay let's say, expensive Bang and Olufsen TV, it's not buy now pay later but interest free and fee free product instead. So a different type of financing. So I think it's going to be a blend between buy now pay later for maybe more lower ticket products, and then I think there's gonna be a move towards interest free product and services.

Why I say that, is due to the massive pressure from the authorities on the APR, the prices of loans. But also, if you don't put interest and fees, there is a much different requirement in terms of doing the credit assessment, which makes it much easier to onboard a new customer. So if they can be a business case between banks and financial institutions, with the retailers without any interest and fees, then I think that is probably going to be the new thing we're going to see over the next couple of years in order to manage the pressure from the authorities.

And I think, just to reinforce the message, is that there's a new guideline in Denmark from April which requires that any applicant no matter the loan size, needs to be assessed with the specific income, debt composition, and expenses. And then no matter whether I want to buy a bicycle of €500 or I want to buy a house of €5 million, ultimately, it's the same credit worthiness assessment that bank needs to make. There is no proportionality allowed in Denmark anymore, which puts quite a lot of restrictions on the banks in terms of getting the data, use the data accordingly. And so the whole market is trying to find their feet right now. And we know as we speak, that the FSA and the consumer ombudsman is monitoring some of the key consumer finance banks to monitor if they adhere to the updated guideline. And in Sweden, we'll see an updated guideline from the November 1st, which is similar in the approach as in Denmark, maybe a little bit less harsh in the wording. And we saw it already Norway three, four years ago.

Brendan Le Grange 11:58

I think that's the direction many lenders are looking at the moment, particularly where the underlying markets are relatively low risk. You know, if you're a developed lender in one of these markets, you've had maybe 10 - 20 years, 30 years even, of experience working with credit models, you might update them, there's new data sources available, maybe using alternative data, but for the most part, you understand how to measure credit risk, and you've taken a lot of the easy wins. So yes, of course you always tweaking it, you're going to invest in getting more and more accurate with your credit scores, but many lenders are going to be thinking that actually, there's far more to be won or lost based on what the regulator thinks of my business. And unfortunately, the regulator normally only talks to you in arrears. So in the future, you'll find out whether they were happy or not. You've now got to conceptualise based on some guidelines. Are we really doing what will keep a regulator happy if things should go wrong 5 - 10 years in the future? Is this a genuinely fair product? Am I doing good for my customers? Am I checking affordability in a way that's meaningful rather than just ticking a box? That discussion is far more important for many lenders than, 'okay, I can you can save your basis point here or there on delinquencies'. It sounds like that's also thinking that lenders in the Nordics are doing now.

Jakob Faergeman 13:15

Absolutely, it is really to be able to prove that they do what the regulators want them to do. And in order to prove that, they also need to use the new data that has become available in Europe, particularly with Open Banking data. Open Banking is still to be explored as a really useful tool in the credit evaluation day to day operations. I think all banks are connected, but are they actually using it actively as a credit assessment tool? They're not really using it to do better credit risk assessment. They're doing it to be compliant. But I think those banks who can start to use Open Banking data and other third party data, alternative data, can really be a differentiator and make more accurate decisions, and also make more accurate pricing and be more profitable as organisations. First let's comply, but then that use that data and information in the most optimal way.

Brendan Le Grange 14:11

What I particularly find interesting with Open Banking in the Nordics is that it used to be that this part of the world was very fiercely protective of consumer privacy rights. And consumers in general, were somewhat reluctant about the idea of masses of their data being stored in things like credit bureaus. So pushback against things like full comprehensive credit bureaus. But now, although open banking tends to have even more data fields, even more personal data involved in it, we're actually seeing some global Open Banking innovation coming out of Denmark, coming out of the Nordics. And I wonder if that's got to do with where the control sets - so in the old model, it would be lenders speaking to the credit bureau without direct involvement from the consumer, whereas now it's the consumer who decides when the open banking data gets revealed, who it gets revealed to, how often they get to see it.

Do you think that's maybe why we're seeing more openness to this concept? Or is it more of a generational thing? You know, I haven't been there for 10 years, is this just the fact that in today's world, everybody is a lot comfortable with data being stored in data been used in financial decisioning?

Jakob Faergeman 15:21

Yeah, indeed. And I think you're spot on with the culture and what the markets are used to. In Sweden, they also have massive data available that is very, very useful in the credit assessment. Whereas in Denmark, Finland and Sweden, the data is much more scarce and much more oriented to negative data, having a payment remarks, having a verdict of not being able to pay your bills. Fortunately, around eight years ago, in Denmark, we allowed to have positive data. And this was actually driven not only by Experian to use it for credit assessment, but actually from the consumer finance industry, because they realise that during the financial crisis in 2008 and 2009, that not being able to see the full picture of a person's economy is a massive blind angle in the credit assessment. So they took the initiative together with the Experian to create a positive data group, then it's now mentioned in the guideline from the authorities. So just to set the chronological order, it took 12 years from the financial crisis until it was mentioned in the FSA guideline as a useful tool. So that's important to bear in mind, it takes time to change culture in a market. That's a very difficult conversation, but it requires patience.

Brendan Le Grange 16:47

Indeed. Yeah, I'm of course biassed after 10 - 12 years in credit bureaus, but I've always been a big evangelist of the full comprehensive credit bureau. I can understand the sort of privacy reasons that people might push back a little, but really comprehensive credit bureaus benefit consumers, even - if not actually, especially - consumers with a delinquency. When you only have this negative credit bureau, this list of defaults, that's all a lender will see. But maybe for 20 years, you've paid all your obligations, and this is the first time you've fallen into trouble. You know, that should really allow a lender to react very differently.

Now, you mentioned it in your introduction, and as you said, I've worked in the region, so this shouldn't have been as big a surprise as it was. But I was quite surprised to hear just how different the four markets in the Nordics are, we sort of think of them as a single block and expect them almost to operate as such. But what you're saying is that these are very much different markets and need to be seen as such.

Jakob Faergeman 17:53

Yeah, absolutely. And I think there's a there's a very steep learning curve for banks entering the Nordics and expecting one-size-fits-all, but also for a local bank in one of the markets that want to expand to the other Nordic markets.

Clearly, there are Nordic banks, the do need to operate within a certain way in various markets due to the data availability, but that also means that the whole legacy system infrastructure is different. And it's very difficult to change wheels on a car that is moving. And that's also why we see some of the bigger banks - we have seen the case with the Danske Bank - in the media last year on the collection side of things, it is very difficult to to manage old legacy systems and update them so they are state of the art solutions, providing great customer experience, lean internal processes, etc. It's not a trivial exercise. And that's really something some of the banks are trying to manage much more than they did maybe 5 - 10 years ago, but they because they realised that a new player coming in with a very solid platform, they can potentially take market share.

Brendan Le Grange 19:06

I think this gets to another interesting storyline coming out of the smaller markets. Last week, I spoke to Francis in Hong Kong. And this echoes that, and I think some of the FinTech we're seeing from places like Australia, too, where you used to have geographically limited customer bases.

So, say 10 - 20 years ago, if you were an innovator in the retail banking space, the retail credit space, in Denmark, you had 5.5 million consumers. Norway, 5.5 million consumers to aim at. Finland, 5.5 million consumers. Sweden a little bit bigger, but still, even if you added that whole bloc together, 25 million consumers - not a massive customer base, particularly when you take into account the amount of localization you have to do. But now, with this wave of FinTech as we take things like Open Banking or Virtual Banking to the mobile phone, if you come up with a succesful business model, and you invest in it, and you build it in a market like Denmark, and it works, it's far easier to scale that up. No longer is it just 5.5 million or 25 million consumers. Suddenly the world is your target market. And obviously, we've seen that with Klarna coming out of Sweden, in Denmark I've seen, I don't actually know how you pronounce it, Aaai, the Open Banking platform that's just been bought by MasterCard, doing great things. So, yeah, where we saw Skype go, where we saw Spotify go, where we saw Nokia go, maybe now we're going to be seeing Nordic brands of fintechs take on the world.

Jakob Faergeman 20:37

Yeah, 100%. I think the FinTech industry is also... there's a game right now: 'which FinTech is going to win the next battle?'

Because I've seen a lot of fintechs out there, which had maybe a fantastic proposition, but it lacked a few elements to be really, really successful. We do see some some smaller banks that have opened with a very clear digital strategy. They have been very successful to attract customers with a very strong marketing campaign, very visible in the media, and very visible in the streets, etc. What I do think in order for them to be successful, they need to make sure that the bank is not only marketing, colourful websites and apps, but they also need to make sure they integrate the risk policy, the credit risk policy. So for instance, if the strategy is to attract young customers, then make sure that your credit risk strategy allows to onboard young customers. It sounds very trivial. But I have seen examples over the last couple of years where there's been a complete disconnect between the two. It's unfortunate because millions of euros have been spent on great campaigns, but they have been able to onboard a lot of customers in that space, which is due to either data collection hasn't not been good enough, or the way they do the responses.

Brendan Le Grange 22:02

No, it's definitely worth calling out because as you said, it should be obvious, but it's not. And I've had a very similar situation: I was doing a project for a high street bank whose branding pitches them as the bank for the professionals, and as such they had a relatively high income cut in order to open an account with him. So no matter what your credit profile was like, if you weren't earning over a certain amount, you wouldn't get a card. Now they were getting a little bit nervous as digital banking was becoming the norm, that they weren't appealing to younger borrowers, and that perhaps they would get left behind. So they were kicking off a bank-wide project to examine whether it was worth spinning off a whole new Millennial-friendly brand. And as part of the preparation for that they approached me for some numbers on their market share, just to confirm what the state of play really was. So I pulled some numbers. And at first glance, sure, the market share among millennials was far lower than it was amongst all the borrowers. But as soon as I added the layer of income, it became very obvious that the problem wasn't that Millennials weren't opening accounts with him, it was that Millennials didn't earn enough money to open accounts with them. Because as soon as I applied the income cut offs, above that point, their market share was great. So they didn't necessarily need a new brand, they just maybe needed to spin off a product for younger borrowers with a lower income cut. So if you're under 25, if you're under 30, and you earn X amount, we'll give you the products or maybe if you've graduated at this university with these degrees, we'll give you the products.

So yeah, if you want to attract 22 year olds, you've got to be realistic about what a 22 year old looks like, they're not going to earn as much money as a 44 year old, they're not going to have the same credit history as a 44 year old. And they may be a little bit more risky. And you have to accommodate all of that before you do the marketing, which luckily in my case they had this was pre-launch. But still, the point stands that you need the whole organisation as you said to be aligned, otherwise marketing's efforts are going to be wasted by credit models that haven't been updated.

That said, it is still very hard for a bank to do this. It's not necessarily in the DNA of the organisation to go fully digital. It's also challenging in that a lot of these fintechs aren't making profits and a bank has to make a profit, you know, you have very different investors in a bank. So pension funds are sitting there wanting this steady stable return. Whereas investors in Klarna can take however many years of losses in search of that future big win. And so you could find yourself chasing after customers in non-profitable spaces. So that's why I think we do see many banks sitting a little bit on the sidelines, obviously, moving in that direction, building acceptable experiences, making things digital but waiting to see which of the fintechs do win that battle you spoke of.

And now of course there's also the pressure from the regulators or the public in general about what is the greater good and I'm not sure that it is as obvious as the headlines make out, you know. In the UK, we see a lot of headlines about buy now pay later being a tool to expand consumerism and maybe to chase people into unsustainable debt. But I can also see an argument against that - with a credit limit on a credit card, you know, there was always that joke that consumers would see that as a target, you don't have that in Buy Now Pay Later. And psychologically, every time you make a transaction with Buy Now Pay Later, you're subjecting yourself to the possibility of being declined. So I could even see some arguments saying that Buy Now Pay Late is better in some regards for consumers on that front. But you're gonna get those cases where someone's putting a €10 hamburger onto an annual payment. And again, amongst these sort of unknowns, where we don't quite know where public opinion will fall, we don't quite know where the regulator's opinion will fall fintechs have a little bit more leeway. Their job is to test boundaries. But the banks can't do that their reputation risk is too high. So that's also something that's pulling back the banks.

Jakob Faergeman 26:02

Your point is interesting, because I think there's a fundamental question to be answered by the banks in terms of what is the success criteria. It sounds basic, but is it profitability, or is it growth in terms of customers? And I think that question will really determine when the market will be consolidated. Because I think it's not really profitability right now, with certain players, its growth in terms of number of individuals, in order to be able to sell the bank or institution to someone else. In Nordics. We've seen a lot of aggressive consumer finance providers, but in Norway particularly, they want to expand very fast and then be sold to be consolidated elsewhere. But that market is, is very mature right now, it's not possible anymore to do that trick. So the regulators are trying to stop it by putting some pressure on the affordability calculation. But what does that then mean, in terms of the market, because people still need financing in order to keep the growth of the economy, etc.

Brendan Le Grange 27:06

Exactly, exactly. And I think before we move too much further, I just want to loop back onto that point of COVID. Because echoing what we mentioned earlier, the Nordics are distinct countries, and each of them had their own levels of lockdown and their own levels of government support. Could you maybe just give a high level review of the state of the various markets during COVID? And how they faring today?

Jakob Faergeman 27:31

Indeed, I've very valid question and it's been asked that question multiple times, we've done many webinars since the start of the COVID-19 until early this year. And our message has been, make sure you understand your customers, the situation, are they stressed or not stressed, etc, etc. But surprisingly, we've seen the economics have come out stronger so far. But the government stimulus have also been very generous, both to support SMEs, but also consumers. That's great, great stimulus to spend money. What that has meant is that we are buying either new houses, new summer houses, doing a new kitchen. So the whole economy has grown quite significantly. And there's still a bill to pay, someone needs to pay the bill. And I think that is often forgotten right now, for instance, in Denmark, they have delayed VAT payments for two years. So that means that small companies that may have used this liquidity will be in a very, very difficult position early next year when they need to pay. So either banks will take over and do a Corona loan, we call it, or all the bank will say this is not sustainable. This business is not healthy, we will terminate it. So the big question around March, April next year is how many SMEs will not survive that blow because we're pushing the snowball in front of us and hope that it doesn't suddenly become too big to manage.

There are some concerns in terms of the NPL levels because they have increased during Corona in Denmark, not so much in the other markets in Nordics. But particularly, banks need to monitor the customers very, very carefully. Why I don't think COVID-19 is over from a financial perspective, because there's a price to pay, whether it's the future generations, or our generation next year that needs to pay for it is sort of seen so so that's really how we address the COVID-19 situation right now in Denmark and other markets as well.

Brendan Le Grange 29:45

A sobering point to end on Jacob but a valid one. This is a story that is being echoed in most developed markets where in those first few months of COVID, as the scale of the lockdown started to become clear, there were great fears about what this would mean for delinquency and economic strife in general. But then through government initiatives and lenders initiatives, the blow was lessened. And so as we look back 18 months into the crisis in these markets, the impact is actually relatively muted. But to your point, it would be far too soon to make that call because there is a cost to pay. Not only are the bills to pay, as you say, but because we were also somewhat protected by the fact that consumers couldn't spend so while income to reduce so outgoings now that's not the case. We're getting back towards fully functioning economies back not everybody's back at work, and not everybody's back at work full time. So yeah, we will need to keep an eye on this before we can really say what the cost of COVID was. But thank you, Jacob, for joining me. It's been an absolute pleasure having you and catching up on the Nordics.

Jakob Faergeman 30:54

Thanks, thanks, Brendan. The time flew really, really fast, very interesting and great to chat with you again after such a long time. So so really great to chat around loadings, which I really am very passionate around this.

Brendan Le Grange 31:07

And thank you all for listening. This has been How to Lend Money to Strangers, the podcast about lending strategies around the world and across the credit lifecycle. If you're enjoying the content, don't forget to subscribe to rate and to share the show. I'll see you next Thursday with a look at lending in India.