In this article, Mike O’Hara and Adam Cox of The Realization Group examine the factors behind a seemingly unusual success story. Despite small populations and a relatively conservative banking scene, the Nordic region is one of the most dynamic places in the world of financial technology. Many in the Nordics will cite the legacy of OM, a derivatives exchange that evolved into a regional powerhouse that was ultimately taken over by NASDAQ, and which spawned a generation of fintech entrepreneurs. But the reasons why the fintech industry flourishes in the Nordics are based on more than the example set by one company. They have developed thanks to an environment that fosters experimentation, collaboration and other qualities that are vital to innovation. Mike and Adam hear from Peter Fredriksson of Baymarkets, Veronica Augustsson from Cinnober, Morten Lindeman of Infront and Lars–Ivar Sellberg of Scila. Over the years, fintech solutions have come thick and fast from the Nordics. These executives say there is no sign of that trend letting up.
In 1984, a man named Olof Stenhammar founded a new marketplace called Optionsmäklarna, more generally known as OM. OM is still talked about by many of the Nordic region’s financial industry veterans, both for the direct impact it had by changing the way markets operated and the legacy it left in terms of new tech-focused companies and new ways of thinking.
OM was one of the first electronic exchanges in the world and it ushered in a period of sustained technological progress in the finance sector. Companies soon began designing software for electronic trading. Some of OM’s best and brightest moved on to start their own fintech companies. Eventually, a loose-knit community of experimenters, early adopters and finance specialists formed. That community is still going strong today, with old hands who were around when OM was just taking off rubbing shoulders with ‘digital natives’ who have no experience of life before the internet era. The industry, supported by a university system that over the years has developed strong IT programmes, thrives in part because of an abundance of entrepreneurs who share a number of key traits. They are curious, outward-looking and creative. They also somehow manage to mix collaboration with competition. These qualities have over time created a culture that seems particularly conducive to fintech innovation.
As financial markets cope with rapid technological change, regulatory challenges and a new breed of ‘disruptors’, the Nordic region is looking to maintain its status as one of the leading tech hubs for the industry. Experts from the region see a range of areas where we can expect more fintech focus, from the fast-moving world of foreign exchange trading to the equally dynamic, but also more complex, market for fixed income. Whether it concerns pre-trade practices such as collateral management or post-trade technologies for clearing and settlement, the market is never short of difficult problems. And, it seems, fintech companies in the Nordic region like nothing better than to come up with solutions.
Those long, cold winter nights
Peter Fredriksson, the CEO of solutions provider Baymarkets, says it all started when OM began selling its technology to exchanges all over the world. “Many of the companies that are in the fintech space were born out of that heritage,” he says.
Fredriksson says that in one respect it is a little puzzling that the region is at the vanguard of the fintech scene, considering how conservative the Nordic banking scene is and how little local demand there is for fintech innovations. But new fintech companies are constantly being created and are finding success, even though the local financial markets tend to be more traditional and are not that advanced.
Talking to some of the people leading the fintech charge in the region, one soon learns that the men and women working at those companies share many of the same qualities.
“I think it has to do a bit with how people are, mentally, in the Nordics,” says Morten Lindeman, the CTO and co-founder of Infront, a financial terminal and enterprise solutions vendor. “Basically I think we are people who look into things and think, ‘Hey, we can do this better’.”
Lindeman adds, with a chuckle: “It’s probably because we have these long, cold, unpleasant winters so that we can sit inside, thinking about all these weird things that we do.”
“It has to do with how people are, mentally, in the Nordics. We are people who look into things and think, ‘Hey, we can do this better’.”
Morten Lindeman, CTO and Co-founder, Infront
The Infront executive is one of those who were in the business when OM was gaining international traction. Noting that one of the earliest hubs on the internet was in Norway, he says Nordic people for some reason tend to be early adopters. And though the term ‘fintech’ started being widely used only in recent years, the idea of a fintech industry goes back a long way in the Nordics. “It’s fantastic, after being 25 years in the industry, that I’m finally a part of a buzzword,” Lindeman says.
But clearly the success that Nordic firms have enjoyed over the years has to do with more than buzzwords or even long winter nights. Lindeman notes that there is a tradition, even among top executives at some of the thriving companies, of wanting to devote time to staying creative.
“I like to create a solution,” he says. “This is like getting your hands dirty instead of moving paper. This is not like a PE firm saying today, ‘I want to buy this company’, and tomorrow, ‘I want to sell this company’.”
Veronica Augustsson, CEO of Cinnober, which provides technology to trading and clearing venues, says people in the Nordic region are simply curious about technology and management tends to be open to allowing new ideas to be tried.
“I think our management culture is actually an important aspect of it,” she says. “It’s also creating an environment where you will come up with ideas, where you are curious, where you’re actually there to challenge something.” That means investing the time to test and develop ideas. It also means allowing for failure.
Augustsson says the region has built a strong university system for IT, which means that there are capable graduates these companies can hire. Add that to the fact that management embraces new technology and it makes for a powerful combination. “In Stockholm, because we have a lot of the fintech companies, we’re also creating a brain hub with that type of competence,” she says.
There is one other point that these executives make that has helped Nordic countries breed successful fintech companies. They need to be outward-looking and ready to go after foreign markets. In that sense, the region is turning a weakness – the relative smallness of its markets – into a strength. Sales of new technology to only local markets would never generate enough revenue to build successful companies, so Nordic firms are forced to build products for foreign markets. This was true in OM’s day and it remains so today.
As in other sectors, a key distinction is often made between retail and wholesale-focused FSIB firms. While B2C firms’ use of digital channels is driven very much by customer satisfaction considerations, Becker notes, B2B firms may be focusing more on seamless, efficient delivery service. The challenges and opportunities for the latter may be different, but are no less profound, says Richard Morecroft, Senior Partner for Strategy and Leadership at Digital Works Group.
“A B2B business doesn’t necessarily have to be multi-channel, but it will have a digital element and a transformation requirement. For any business, it’s important to get a very clear understanding and vision of how will multi-channel change your business,” he says. “Before you go too far down the path, you have to have a very clear picture of how it will operate and how it work. Will consumers embrace the digital channel?”
“It’s about creating an environment where you will come up with ideas, where you are curious, where you’re actually there to challenge something.”
Veronica Augustsson, CEO of Cinnober
For instance, surveillance solutions provider Scila primarily sells abroad, according to its Executive Chairman, Lars–Ivar Sellberg.
“At the moment we don’t have a single customer in Sweden. So this means that we are prone to try new things, since we have this experience of selling things abroad to the global market,” he says. “A lot of these products wouldn’t make sense just isolated in the Nordic region. They really need to be exported in order to gain momentum. I think this combination of trying out new things, new technologies, new ways of doing things, with the general experience of actually doing business abroad, has been a really key factor in expanding the industry.”
Cinnober’s Augustsson also says most companies developing fintech products and services in Sweden generate their revenue abroad, adding that many local people probably don’t even know how prominent the country is in this area. “The whole concept that Sweden is the fintech hub is more known abroad than in Sweden”, she says.
“This combination of trying out new things, new technologies, new ways of doing things, with the general experience of actually doing business abroad, has been a really key factor in expanding the industry.”
Lars-Ivar Sellberg, Executive Chairman, Scila
Even taking into account the fintech-friendly corporate culture and characteristics, there is still the question of how Nordic companies are able to produce successful products and services given the size of their markets. After all, it may be one thing to target foreign markets, it’s quite another to conquer them.
For instance, how can a company keep track of all the regulatory or industry-related changes going on in major marketplaces and ensure that its offerings address current and future requirements? Sellberg of Scila says there is no getting around the need for multiple sources of information and simply staying abreast of all the documentation. But in many ways the most important information the company gets comes from its own customers; after all, they are the ones that are facing the demands of a changing marketplace and intense competition. “We really see the feedback we receive from them as a valuable commodity and we try to leverage that in the best possible way,” he says.
Not only do Nordic fintech firms collaborate with their customers, but also they do so with each other. Executives say this is one of the factors that fuel their growth.
As Lindeman says, people in the Nordic fintech community tend to know each other and, when the occasion calls for it, work with each other. “There are so many personalities when it comes to the fintech world in Scandinavia who like to talk to each other and exchange ideas, because we are not necessarily one-on-one competitors,” he says.
For example, Infront has worked with companies such as Itiviti, formed when Orc Group merged with CameronTec. “When you sit together, you’re evolving ideas,” Lindeman says. “Since we are not direct competitors, we can actually use these ideas in our separate fields to try to grow. It’s not like we are doing this for the public domain; we are doing it, in a way, with our own interest. We are into this with our hearts and our souls.”
Cinnober’s Augustsson has an explanation for why fintech companies in the Nordics are able to work together without worrying about giving away trade secrets. “At Cinnober, we create products and services for our customers but I don’t really see it as a product company. I see it as a people company,” she says.
Even if the company has the right product today, if it has the wrong people it will end up having the wrong product tomorrow. As a result, she is less worried about sharing information. “We’re not top secret,” she says. “Software and services and products – you need to all constantly keep improving them. The way you improve them is actually by having the right people.”
That is one of the reasons Augustsson and others focus on the university scene in the Nordics. Cinnober works with one of the leading technical universities in Sweden in Umeå and recruits some of the best developers. Scila’s Sellberg says his firm sponsors Masters students.
And the education process doesn’t stop there. “Very often they know nothing about the financial infrastructure. What’s the purpose of a clearing house? What is an option and why is it important with a safe, secure and robust system? And so on. So we have to educate them internally for many years before they become experts,” she says.
Executives such as Augustsson, Fredriksson and Sellberg all believe the Nordics could go even further if the interaction took on a more formal hue, with an industry association devoted to their space. “That’s something I think could be useful,” Fredriksson says. “Like in London, you have various associations such as LEBA, the brokers’ association. But there is nothing like that here.” Sellberg notes that such a group could help the industry work with universities to help them focus more on finance.
With the right mindset, the right people and the right strategies, Nordic fintech firms feel confident that they can take on the world. The question is: where specifically do they see the next hotspots? What problems do these executives think are most in need of new solutions?
“At one point Oslo was home to the NordPool exchange and clearing house, to NOS clearing house, to Imarex exchange, and Oslo exchange and clearing. Out of this heritage there is a lot of exchange and CCP knowledge.”
Peter Fredriksson, CEO, Baymarkets Technology AB
Cinnober sees the foreign exchange market, and specifically the prospect for FX clearing for exchange-based currency trading, as one interesting area. FX, she notes, is a global market that can be accessed from everywhere. She also says Blockchain technology will have a large impact. “Maybe not this year, maybe not next year, but if you look five-plus years ahead, I think there will be a lot of new initiatives based on that new technology.”
In terms of asset classes, Sellberg believes the fixed income market could benefit from more fintech focus. As far as disruptive technologies go, he notes that a good deal of activity has been on the peer to peer lending side. “If you look at it with a broader perspective – the fixed income market in both the Nordic region as well as in Europe – I think this is an area where there still is a lot of potential for innovation. It’s still handled quite traditionally and without going all the way to peer to peer lending, I think there are many opportunities to make this market more efficient and more transparent, and more accessible by more parties in the market,” he says.
The fixed income market has some rigid structures, so change will not happen overnight. But the Scila leader says he would be very much surprised if the situation did not start to change within a reasonable timeframe.
Fredriksson says Nordic fintech activity is continuing to play to its historical strengths by focusing on exchange systems. He cites the example of Oslo, which enjoys an unusual concentration of exchanges and clearing houses for its size and location. “At one point Oslo was home to the NordPool exchange and clearing house, to NOS clearing house, to Imarex exchange, and Oslo exchange and clearing. Out of this heritage there is a lot of exchange and CCP knowledge that partly Baymarkets with its new subsidiary in Oslo is benefitting from”, he says.
Fredriksson believes that post-trade represents a major opportunity. “It’s a lot about complying with MiFID II and also taking care of collateral and risk. At least that’s where we see the need is and the trend is.” He notes that collateral has become more expensive, with new regulations having a big impact; so addressing that issue can make a big difference for trading firms.
But regardless of what market is in focus or what problem needs addressing, the expectation is that the Nordic region will maintain an edge in this space.
“By just having so many of the fintech companies now will create even more – and it will continue,” Augustsson says. Her firm, for instance, sees a clear trend among what she called the next generation in this space.
“They want to be entrepreneurs and they want to have ideas. They want to run their own companies. There are many that try, which I think is a very good thing. Also many of the people nowadays, they prefer to work for smaller companies that allow for more freedom: you can actually influence and feel you make a difference.”
Lindeman calls these kinds of companies ‘guerrilla organisations’. They are small and nimble and can find solutions to problems people did not even know existed. That kind of work is what he calls the ‘really cool stuff’.
Can we expect more of that ‘really cool stuff’ from the Nordics to continue to transform the way markets operate and participants go about their business? Judging from the views of these executives, there seems to be little doubt that the answer is yes.