October 10 Nordic Finance Innovation (NFI), held its first meeting in Helsinki in cooperation with OP Financial Group, hosted by Chris Skinner and Iren Tranvag. It was the first meeting that I attended as a member and representative for NFI in Iceland. This was an inspirational event challenging the current approach in financial services to transform into “Banking as a Service” organisations or BaaS and enhancing customer engagement.
What is BaaS? BaaS for banks is similar as Amazon Web Service for e-commerce, that is being an aggregator of banking services, whether integrating third party services and combining them with banks’ core services portfolio.
The agenda was impressive with speakers from OP Financial, Tieto, ePassi, Holvi and of course Chris Skinner. Following are highlights of my takeaways and observations from the two key companies presenting at this meeting: OP Financial Group and ePassi with Alipay.
Transformational journey of OP Financial Group to BaaS
OP Financial Group is Finland’s largest financial services group, where they focus on Banking, Non-Life Insurance and Wealth Management. The Group was founded over 100 years ago and has some 180-independent member cooperative banks, the OP Cooperative, including its subsidiaries and closely related companies.
From the outside, OP appears as a traditional banking organisation, but it was incredible to hear of the cultural and digital journey that they are undertaking.
In the summer of 2016, OP updated its long-term strategy with: “The aim to gradually change from a plain financial services provider to a diversified services company of the digital era with strong financial expertise. The strategy highlights customer experience enhancement by digitising services and processes. At the first stage business diversification involves expanding, for example, the health and wellbeing business.” (Image source: OP Investor Relations)
But how are they embarking on this journey?
The OP Lab was created in 2015 with Kristian Luoma as the head. The OP Lab is an Internal Accelerator program to find new business opportunities, which are either developed internally or through partnerships with third parties. They are based out of Helsinki, but also have a presence in both Berlin and Silicon Valley to discover new ideas and potential partners.
They were proud to say that this the OP Lab operates independently from the bank with very few bankers in the mix. This is so important to avoid “Innovation Killers”, where most creative ideas die before they are implemented. The have a core team of 5-6 persons, with UX/design/programming/startup skills, who brainstorm on ideas that are then developed into project proposals. These proposals then get reviewed by a committee within OP Financial Group, who then decide which ones to support going forward, at an approval rate of about 50%. Since creation, they have put in place 30 projects.
Their team fluctuates between 100 to 150 people, half of which are contractors. We spoke with one of their team members who is a contractor (and a millennial), but considers herself as an integral part of the team. When building these teams, considering millennial values and motivations are a key part of attracting the right talent. And talent management goes hand in hand with digital transformation strategies.
Good things come in small packages, and having a maximum team of 150 is a magical number for innovation. In Malcolm Gladwell’s book “The Tipping Point”, he wrote of “the 150 rule”. Gladwell defines a tipping point as “the moment of critical mass, the threshold, the boiling point”. He refers to Dunbar who looked at 21 different hunter-gatherer societies and found the average number of people in their villages was 148.4. The same pattern holds true for military organisation. Dunbar argues: “It is still possible to run an army with larger groups. But at a bigger size you have to impose complicated hierarchies and rules and regulations and formal measures to try to command loyalty and cohesion. But below 150, it is possible to achieve these same goals informally”.
The unanswered question I had was how the decision was made to create the OP Lab. One of the biggest challenges in traditional banks is bringing digital strategy into the boardroom. Who was the sponsor at the top who push this through and how did he or she do this? Something to ask at our next NFI meeting.
What has come out of OP Lab since its creation?
These are projects that they have rolled out, continue to develop and are looking for contribution from external parties. All of which were done under one year.
- OP Kulku – car as a service (November 2016)Pivo Kassa – point of sale system for SMBs (June 2016)
- OPn Metsa – solution for managing forest wealth (November 2016)
- OPKK Asunnon nyyntiapu – helper for selling an apartment (February 2017)
- OP Ajotapapilotti – reducing insurance costs and making driving safer
You can read more by going to OP Lab projects page. At a glance though, most of these projects do not have anything to do with banking. But these are all services that are important for individuals. And this, for me, is what defines “Banking as a Service”.
ePassi and Alipay Collaboration
ePassi was formed in 2007. The original idea was to find a way for employers to encourage employees to start exercising more and the first-ever electronic payment method for tax-free personnel benefits was launched. In 2014, ePassi was ranked as the No. 1 fastest growing technology company in Finland by Deloitte. In 2016 they signed an Alipay cooperation and launched to the Chinese mobile payment platform in Finland in only four months.
Today, ePassi is the leading electronic payment system for personnel benefits in Finland.
Background on Alipay
Alipay is the world’s leading mobile payment platform, originated from the Chinese e-commerce company, Alibaba. Alipay has more than 450 million active users and over 100 million transactions every day in China.
Chinese mobile payments were nearly 50 times greater than those in the US in 2016, at $5.5tn in 2016 in China versus $112 bn in the US. China’s lead over the US in mobile payments is also the result of lack of other viable options for non-cash payments. Credit card penetration in China is small compared to developed markets and online payments with debit cards are cumbersome. By contracts, payment with Alipay requires only the scan of a QR code (Source: Financial Times).
Why did Alipay want to come to Finland?
Alipay’s international strategy is to follow the Chinese consumer. Chinese citizens like to travel abroad and also enjoy spending while doing so. 120 million Chinese travelled abroad in 2016 and they spent EUR100bn. Alipay has formed partnerships with major payment players all around the world.
In 2015 there were around 80,000 Chinese arrivals to Finland. In 2016, Alipay and ePassi formed a partnership and within four months, ePassi was launched.
In 2016, the total Chinese arrivals doubled to 160.000.
Alibaba also has a travel website, Alitrip. Earlier this year, Alitrip announced that it aims to fly six to eight million Chinese tourists to Europe in 2020. And that they plan to bring 50,000 Chinese tourists to Rovaniemi next year. Rovianiemi recorded 17,000 overnight stays of Chinese travellers last year, spending two nights each. The Chinese are interested in the pristine nature and clean air and water of Lapland, and the auroras. (Source: Daily Finland)
Since the launch, ePassi has over 500 merchants signed up. During his speech, Risto said it is not uncommon for retailers to experience that when Chinese customers go to the cashier and see there is ePassi, they then go back to buy more.
When it comes to the story of AliPay and what will happen to the Nordics, Finland is aiming to offer a cashless journey for all the Alipay customers so they can easily visit Helsinki with no cash and find all the locations with offers on the Alipay app.
What will be the impact in the Nordics?
The big question remains, will mobile pay replace the traditional card markets in Finland and across the Nordics? Or is it just a matter of time? And at what point will the Nordic markets become cashless?