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Fintechs Reach Adulthood

Within a few years, Danish fintechs have gone from being rebellious startups to sustainable organisations that are exacting a strong influence on the financial landscape. However, alongside this rapid growth must navigate compliance, licensing, and regulation issues. Tackling these adult challenges while remaining agile and innovative requires a constant balancing act.

Just 10 years ago, Spiir was an early-stage fintech startup with a small team based in Aarhus. Despite its modest beginning, they quickly got some suspicious looks from the banking industry. And when the startup began to collect account information on behalf of its users and integrating the information in its budget app in 2014, a large Danish bank, Jyske Bank, initiated legal actions over their supposed hacking.

But contrary to expectations and newspaper headlines, the startup’s relationship with banks has been mostly positive. According to Rune Mai, Spiir’s chief executive officer and founder:

“Rather than disruptors, we’ve always seen ourselves as adding value. We actually went from bank to bank to try to establish collaborations. Early on, we discovered that the banks were nervous about processes that they could not directly control and oversee. But a lot has changed since then.”

The hacking case was dropped and, since 2014, the banking sector has regularly partnered with fintechs. Naturally, this has required handing over some control, including customer interactions.
With Spiir’s growth, the sister company Nordic API Gateway has seen the light of day and has taken its place within the landscape. Since their core offering is integrating with banks, in an ironic twist, they have collaborated with Jyske Bank for account aggregation. Over the past couple of years, Danske Bank and the Norwegian DNB have invested millions in the company.

What started as early ‘disruption’ has resulted in mutually-beneficial partnerships.

Danish fintechs have grown rapidly

When Spiir was founded back in 2010, the company was one of the first Danish startups to be labelled a ‘fintech’. There are now over 250 fintechs – which have matured to the extent that they collectively employ 3,000 people and have established over 100 partnerships with industry leaders, according to numbers from Copenhagen Fintech.

From his vantage point as the Chief Innovation Officer at Copenhagen Fintech, Simon Schou has no doubt that fintech has reached another stage of maturity.

“We’ve experienced greater alignment between start-ups and established companies, which has facilitated collaborations and employment. What’s more, this mix of the rebellious and the established is crucial to turn creativity into innovation.”

In fact, the most successful Danish fintech companies have grown to the extent that they must now concern themselves with administrative demands like lengthy communications paths and financial licenses. In Schou’s words:

“It’s one thing to have a creative idea. But sometimes the rebelliousness of the idea can get lost in the process of market implementation. The financial sector is heavily regulated because it has to maintain stability and effective organisation. But fintechs still add something new to the industry, which I consider to be very healthy.”

The industry’s new gatekeepers

Because the financial sector is heavily regulated, it is difficult for new companies to penetrate. To secure access to the established banking systems and infrastructure, fintech startups are reliant on collaborations with established companies. As the Founder of November First, Mikael Nilsson knows this all too well.

The company, which specialises in payments and currency exchange, recently developed a payment engine, which, among other things, can be integrated directly into accounting software through an API.

As a startup, it is difficult to operate without an established financial institution. For instance, Revolut partnered with Lloyds Bank and Barclays, and we partnered with the Swedish bank, SEB. It’s virtually impossible to get started without entering a collaboration, because you cannot operate without the existing infrastructure. In any case, it’s difficult to make a model where you collaborate with everyone; you’ll always be a disruptor to someone,”
Mikael Nilsson 

Ultimately, the banks had the final say over whether November First could enter the system. But it does not have to remain this way. The neobank, Lunar, is completely digital and runs through an app. In the beginning, it built its solution using a banking partner’s infrastructure. But when the company received its own banking license at the end of last year, it moved its 100,000 Danish customers from Nykredit to its own platform this past spring.

Lunar’s CEO and Founder, Ken Villum Klausen explains:

Now we have full responsibility over our value chain. As a regulated bank, we can bring new products and services to our users faster, build them ourselves, and maintain control of the infrastructure. That’s the difference between being a fintech on top of another bank and being an independent bank.”
Ken Villum Klausen

Of course, this has required new competencies, including banking executives, as well as expanded anti money laundering (AML), compliance, and credit teams.

“It’s been a busy year. First and foremost, in collaboration with Saxo Bank, we launched stock trading. Next, we rolled out a new line of features, such as multiple accounts, advantageous currency exchange rates, premium subscriptions, and then we tailored our business solution for small companies,” Klausen points out.

Though Lunar has managed to become its own gatekeeper, the CEO promises to maintain its original startup mind-set:
“We’ve partnered with Subaio, Nordic API Gateway, and are having a lot of good talks with our peers. By working with other fintechs – when technology meets technology – we get to the market much faster.”

Equal partners

In an interesting reversal, Spiir and Nordic API Gateway used to be highly dependent on established banks and now the banks are just as dependent on them. Nordic API Gateway now specialises in open banking and PSD2 infrastructure. Since the company’s solution gathers all the bank’s APIs in one place, third-parties who want to use account payments and compile transaction data contact them directly rather than individual banks.

This might be one explanation to why the company has received millions in investments from Danske Bank and Norwegian DNB, which are now a part of its group of owners.
As Rune Mai sees it:

“The banks have chosen to focus on open banking, and they need a strong partner. Say what you will about structural capital, it was the right decision in our case. We’ve probably received less money than we would have if we’d chosen to focus on venture capital instead. However, with Danske Bank and DNB, we can build infrastructure for the entire industry and with the industry.”

Entering high society

It is worth noting that the Danish banking sector has been hesitant to welcome Bitcoin Suisse. Headquartered in Switzerland, the company started by offering crypto-financial services in 2013, making it one of the most experienced firms in the global crypto-financial industry. Yet this does not seem to have been enough for Denmark’s established financial industry to open its doors to the company’s CEO, Niklas Nikolajsen:

“Historically, it’s been challenging for us to collaborate with banks because we’re involved in cryptocurrency trading, and the banks are quite sceptical and cautious when it comes to this area. In fact, we’ve not been able to establish a relationship with a Danish banking partner – meaning our Danish customers risk raising suspicions from their own bank by trading with us,”
Niklas Nikolajsen

The company, which handles a significant share of the world’s cryptocurrency, raised 311 million Danish krone (DKK) (or 45 million Swiss francs) in its first investment round, raising its valuation to 2.095 billion DKK (302.5 million Swiss francs). In turn, Bitcoin Suisse applied for banking licenses in both Switzerland and Lichtenstein. Once these are secured, the founder expects that it will become much easier to collaborate with banks.

“There are several advantages to having a banking license. Above all, it helps to build trust and credibility – even though our customers’ deposits are safer with us than in a bank. Still, there are downsides to getting a banking license, particularly the administrative costs associated with authorities getting involved in your business. And you can’t just provide any new products you want; they have to be regulated,” Nikolajsen explains.

Despite the drawbacks and challenges that come with a banking license, Nikolajsen sees it as necessary for Bitcoin Suisse to stay competitive:

“My preference would be to continue without becoming a bank. But, unfortunately, the authorities have provided our competitors with banking licenses and thereby an advantage. More to the point, it’s only a matter of time before crypto-assets become so mainstream that the banks become more involved, and then we will definitely need a license.”

Shifting sands

For startups to remain part of the financial landscape, they must abide by the same regulatory rules as banks. Yet, we are already seeing the seeds of a technological paradigm shift – moving payments and credits outside of the bank’s walls.

November First is a strong proponent, not to mention a catalyst, for this change. The company developed a payment API that can, among other things, be integrated into accounting software. With this, there is no need for accountants to open an online bank account to pay bills; they can handle this directly in their accounting programme.

For startups to remain part of the financial landscape, they must abide by the same regulatory rules as banks. Yet, we are already seeing the seeds of a technological paradigm shift – moving payments and credits outside of the bank’s walls.

November First is a strong proponent, not to mention a catalyst, for this change. The company developed a payment API that can, among other things, be integrated into accounting software. With this, there is no need for accountants to open an online bank account to pay bills; they can handle this directly in their accounting programme.

Nilsson is quick to acknowledge that it’s a messy arena, where banks provide the infrastructure and fintechs provide new technology that disrupts the industry.

“We have to maintain blind faith in our ability to move payments outside the banks and keep them in the hands of those who are making the payments. By doing so, we can move some streams of revenue into spaces where the banks used to have a monopoly.”

Ageras Group is on the same page. Since it launched in 2012, the company has developed into a conglomerate that streamlines business operations for small companies, with a focus on accounting. Even though the company was not conceived as a fintech startup, it has added a line of fintech-tools over the years – including Billy and Meneto – to its line of accounting services. Undeniably, this pinches into the banks’ business areas and market shares, just as it moves these services closer to customers.

According to Martin Hegelund, Ageras’ co-founder and chief marketing officer:

“The value creation involved in operating as a bank is changing. Compare it to the railway network. Today, banks have the trains and tracks, but in the future they will only have the tracks. Why would you bother going into your online bank account to pay bills when you could do this just as well with accounting software?”

For Hegelund, the essential financial services that are performed by banks will soon be nothing more than a mere commodity. Completing the analogy, banks will need to bring new value to customers if they want to hold more than the railway tracks in the future.

Powerful players in a new arena

While large fintechs are in the process of minimising their dependency on established banks, a future driven by technology is working in their favour. Even still, Lunar does not consider itself to be a financial powerhouse in the Danish landscape – at least not compared to large banks that have expansive scopes and many customers.

The early-stage neobank is lagging when it comes to traditional products, such as mortgage loans and savings accounts. Though they are striving to provide some of these products, their end goal is not to offer the same services as established banks. In Klausen’s words:

“We see ourselves as a financial super app that goes beyond banking and lets you save, spend wisely, invest your money, grow your business, and achieve your lifestyle goals. Quite simply, we’re committed to bundling everything that’s linked to our customers’ financial lives – from loyalty products to bills.”

Like, Klausen, Rune Mai does not view Spiir and Nordic API Gateway as threats to traditional banks but rather powerful players in an entirely new arena:

“We’re a power factor in the sense that we aggregate a line of APIs, ensure they’re solid solutions, and collaborate with banks, account holders, and the authorities. The banks could actually do this themselves, but then they’d have to make it one of their core competencies. We’ve already done this for them and it puts us in a powerful position. I’m certain we have the best open banking platform in the Nordics. And this is the same model that we’re about to scale throughout Europe,” says Mai.

More of the same?

True to Lunar’s roots, Klausen has maintained the organisation’s culture and what they aimed to do – namely, build something different. That being said, with 175 employees, decisions now take more time to make than when they started five years ago.

Lunar HQ

Echoing this, Mai acknowledges that Spiir and Nordic API Gateway are more challenging to manage today. The company has grown, has more employees, and more administration. Despite the fact that incumbent banks co-own the company, Mai is not the least bit worried that they will end up offering more of the same:

“For now, we’re the majority shareholders. I don’t know whether it will remain this way, but I also don’t consider it to be that important to our future success. The most important factor is our agenda. We’re committed to developing an infrastructure for the future that can control data and enable low-cost payments. I have absolutely no intention of building a company with 500 employees. If it becomes more about large-scale operations than innovation, I will consider my exit.”

Unlike established companies, many startups focus on the technological aspects rather than financials. Born under different circumstances and with different values, such startups tie their relevance to their origin story. Otherwise, established companies could provide their target market with a better solution.

On this point, Nilsson claims there are fundamentally different mentalities:

“Most fintechs consider themselves to be born technologically savvy and global. From the beginning, we are driven to create products and services that work in Europe, if not the whole world. After we build something new, we test it on the market, solicit feedback, and adapt our products until we fit the market’s needs. If we just did what all the established companies were already doing, we would never get there or achieve massive growth.”

Stian Faber
Stian Faber
Stian is founding partner of NFM and acts as Head of Partnerships.
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