Interview: “Transforming the relationship concept is based on the very real need of managing both pricing and costs”

• Petri Nikkilä believes banks are embracing and adopting digital technology at a more collaborative, cooperative and centralised level
• Nordea Bank aims to strategically transform the relationship banking concept to fit into the digital era
• The bank has dramatically decreased the number of branches with manual cash handling, while 20% of advisory sessions happen online

In spite of the low and even negative interest rate environment that they operate in, Swedish banks are among some of the most profitable banks in Europe. In the wake of slow economic recovery after the global financial crisis, central banks in the region, including Sweden’s Riksbank, have introduced negative interest rates in an attempt to increase inflation to spur growth. 

While low interest rates have squeezed margins and depressed banks’ profitability in Europe, mainly due to high credit losses, from a largely distressed corporate sector, and high operating costs, the experience of Swedish banks has been quite different. According to a study by Riksbank, Swedish banks have had low credit losses over a longer period of time. In addition, their cost efficiency is high and they have also implemented several savings plans in recent years that have further improved the cost efficiency (Figure 1). Moreover, Swedish banks have low funding costs, which is positive for profitability (Figure 2).

Source: Sveriges Riksbank.

Source: Sveriges Riksbank.

Stockholm-based Nordea Bank is a good example of a Swedish bank that has started on an internal transformation journey to revamp its business model to become more cost efficient and profitable.

Petri Nikkilä, the bank’s executive vice president and head of strategy and segments shared that its main priority is to strategically transform the relationship banking concept to fit into the digital era. He remarked: “While we have been strong with our traditional relationship banking, the landscape has changed. The challenge is to deliver on the relationship and customer experience through digital channels.”

In addition, he stressed that while banks transform, they have to do so within the economic reality and the operating environment that they are in. And in most parts of Europe and the developed world, banks have to grapple with low interest rates and margins. “So, we need to have a very big focus on both managing pricing and actively managing costs. Transforming the relationship concept is also based on the very real need of managing both pricing and costs,” he added.

And in the Nordic region, the banks are leading the change. Nikkila observed that banks are embracing and adopting digital technology at a more collaborative, cooperative and centralised level, in particular with the central bank and banking and payments associations.

“We’ve been welcoming the digitisation agenda and developments across the industry; in payments innovations, use of artificial intelligence and robotics. Compared to other markets where individual companies or startups are disrupting the market and often from outside the banking industry. The transformation here is happening to the entire market; we are building new ways of operating. Innovations are incorporated into the banking infrastructure and ecosystems,” he explained.

A good example is Swish, a mobile payment service launched in 2012 by Sweden’s major banks that today has expanded to also become the country’s leading payments mode. By working with the central bank and Bankgiro, a domestic clearing house for bill payments, Swish allow users to transfer money directly into individual accounts in real time using mobile technology. It has grown to become the leading platform for mobile, ecommerce and virtual point of sale payments, enabling Sweden to become an increasingly cashless society.

The extent to which Sweden and the region have become cashless is demonstrated by many banks that have developed digital branches that no longer handle cash.

“We have dramatically decreased the number of branches with manual cash handling, and particularly in Norway there are no branches left with manual cash handling today” Nikkila professed.

And across the other Nordic markets, such as Denmark, Finland and Norway, where the bank serves a total of over 10 million individual customers and half a million corporate customers across its four main business segments comprising business and commercial, personal, wholesale and wealth management, the number of physical cash transaction in branches is also going down.

“The number of branches handling cash is dramatically lower in all of the markets compared to what it was 10 years ago. We have been directing these transactional services to the digital channels, online and obviously the net conclusion is that the physical network can be smaller and focused on key locations,” he elaborated.

Over the period, Nordea has reduced its entire physical network of over 1,000 branches by half. And even as the remaining branches focus on higher value added advisory services, the bank is also moving them to online channels as customer behavior shift and the preference for the convenience of remote services grows.

It recently launched a new service called Online Advice which allows customers to make online meeting appointments and seek advice on personal finance products and services. Customer response has been quite positive. However, as less physical interaction occurs indication will customer satisfaction be affected?

Nikkila disagrees: “We have positive development with customer recommendation levels for online advice. Recommendation levels are higher for online advisory than traditional face-to-face advisory respectively, reaching up to 90% recommendation levels in some of the countries. Now nearly 20% of all advisory sessions happen on-line and the number is growing. Furthermore, we can reflect that online advisory has better productivity versus traditional face-to-face advisory and that is also developing favourably.”

While it is still too early to tell, this is definitely a development that is worth tracking as this is a market and a bank that is at the leading edge of transforming banking and doing so sustainably and profitably.