Authored by:Albion MuratiOskar SkauZubin Taraporevala

Disruption in Europeanconsumer finance: Lessons from Sweden

Global Banking April 2018

Disruption in Europeanconsumer finance: Lessons from Sweden

Global Banking April 2018

Authored by:Albion MuratiOskar SkauZubin Taraporevala

1Disruption in European consumer finance: Lessons from Sweden

Disruption in European consumerfinance: Lessons from Sweden

Introduction 3

An attractive market slipping away from banks 4

What happened in Sweden? 6

The habits of successful specialists 8

Swedish lessons 10

3Disruption in European consumer finance: Lessons from Sweden 3

Consumer finance is a standout performer in theEuropean financial services sector. Average annualshareholder returns for listed institutions between2012 and 2017 were about 11.5 percent,compared with retail banking’s 9.1 percent andcorporate banking’s 7.4 percent. Privately held(often private equity backed) consumer financefirms performed even better, routinely achievingreturns on equity of more than 20 percent.

The strong earnings have drawn the interest ofspecialist providers including challenger banks,large retailers, and fintechs, which are usingdigital technology to make significant gains inconsumer finance. Sweden, with its high rates ofdigital adoption and well-developed infrastructurefor credit scoring and recoveries, has been thefocal point for this activity: Specialists accountedfor around 60 percent of the country’s consumerfinance market in 2016, compared with 20percent in 2001.

Sweden’s specialists have thrived through a mixof innovation and experimentation, usually

incorporating at least one of three elements:investment in the digital customer journey, anaggressive (typically online-led) acquisitionstrategy, and a focused and agile data-drivenoperating model.

In other European countries, universal banksretain a larger slice of the consumer finance pie;major UK banks, for example, cede less than 30percent share to specialists, according toMcKinsey estimates. However, the drivers ofcompetition, including expanding digital bankinginfrastructures and increased availability ofscoring data, are becoming more pervasive.

Given retail banking’s recent performance inEurope (return on equity in 2016 was below itscost for the seventh straight year), the industrycan ill-afford to let the profitable consumerfinance segment slip away. No bank shouldignore the shifts that have played out in digitallyadvanced Sweden, or the lessons learned.

Introduction

4 Disruption in European consumer finance: Lessons from Sweden

Western European banks generated €56 billion ofconsumer finance revenues (after risk costs) in2016, equal to 18 percent of retail lendingrevenues, and compared with just €41 billion in2012. The segment has outperformed almost allother Western European financial servicessegments, with total returns to shareholdersranking second only to payments over the recentperiod (Exhibit 1).

Strong performance in consumer finance resultedfrom solid fundamentals, including:

Volume growth in line with GDP over the■cycle. Performance in the consumer financesector has been boosted by growingconsumer confidence and higher spending.However, penetration as a proportion ofdisposable income across the EuropeanUnion has remained steady (rather thanrising), in part because of regulatory scrutinyof consumer lending.

Improving net interest margins on loan■books. A persistently low interest rate

An attractive market slipping awayfrom banks

120

140

220

240

260

380

280

180

320

340

2012

420

100

400

300

200

20092008 20112010 2013

60

160

20

40

80

360

2014 201720150

2016

Consumer Þnance

Asset management

Payments

Retail banking

Corporate banking

2008 2012 2016

36

41

56

13 18

+5.7% p.a.

Share of total retail lending%

Exhibit 1

TRS performance in Western Europe

Index 100=October 2007

Revenues after risk costs in Western Europe

€ billion

CAGR2007-17

%

CAGR2012-17

%

15.0

-3.5

3.3

-5.3

20.3

7.4

15.3

9.1

11.5 8.8

NOTE: N= payments (27), retail banking (20), asset management (20), corporate banking (5), consumer Þnance (33).

Source: S&P Capital IQ; McKinsey Global Banking Pools; McKinsey analysis

Consumer finance has outperformed most other financial services sectors in Western Europe.

4

5Disruption in European consumer finance: Lessons from Sweden

environment has bolstered consumer financeperformance.

Significant reduction in loan loss■impairments. At 130 basis points acrossWestern Europe in 2017—compared with 210to 220 basis points during the financialcrisis—loan loss impairments have enabledstronger performance for consumer finance.

In market share terms, incumbents have faredbetter in some markets than in others. German

universal lenders still control more than 95percent of consumer finance volumes, whileFrench universal banks retain more than 90percent, according to McKinsey estimates (Exhibit2). Swedish universal banks, by contrast, havelost 35 percent of consumer finance volumes inthe past 15 years, capturing just over 40 percentin 2016. Swedish specialists, meanwhile, havetaken a dominant hold of some niches, forexample accounting for 55 to 65 percent of theunsecured cash loan market in 2016.

60100% =

>70

UK

<30

Germany

225

>95

23

42

77

58

303<5

Spain

>90

29

France

<10 186

Sweden

6

9

7

6

9

7

3

148

77

23

67

33

4258

2003

2008

2016

2000-03

2003-08

2008-16

Exhibit 2

Market share by player type in Sweden

% of total outstanding consumer finance volumes

Market share by player type

% of total outstanding consumer finance volumes

Growth

CAGR

Market New players and specialists Universal banks

NOTE: Universal banks include direct consumer Þnance activities of traditional retail banks, and consumer Þnance divisions of domestic universal banks. New players and specialists include nonbank-owned consumer Þnance specialists (“challenger banks”), pan-European consumer Þnance monoliners, balance aggregators, online credit providers as well as peer-to-peer lenders.

Source: National statistics and company Þlings; McKinsey analysis

Specialists have taken significant market share in Sweden.

6 Disruption in European consumer finance: Lessons from Sweden

From the turn of the century, new providers ofconsumer finance have targeted the Swedishmarket, taking advantage of technologicalchange (including simplified sign-up processesthrough BankID, launched domestically in 2003)and continued reliance on manual and branch-based processes at incumbents, seen asincreasingly inconvenient by digitally enabledconsumers. Specialists such as Bank Norwegian,Nordax Group, Klarna, Resurs Bank, and thefinancing arms of large retailers (ICA Banken,Ikano Bank) have built market share, oftenfocusing on specific products, segments, or

channels. Consistent strengths include theirability to leverage analytics to build data-drivenoperating models, proactively target newbusiness, and streamline the customer journey.

Initially, the emergence of specialists expandedthe market. Up to 2010, Swedish consumerfinance volumes as a share of GDP rose from3.5 to around 6 percent. In recent years,penetration rates have remained steady, puttingmore emphasis on the battle for market share(Exhibit 3).

What happened in Sweden?

8

7

2016

4

32000

6

2012

5

2008 2004 2015

12

2016

4

14

13

2013

5

7

2012 2010 2014

11

3 2011

10

6

UK

EU

Sweden France

Spain

Germany

Exhibit 3

Penetration rate, Sweden

Total consumer finance outstanding balances as % of GDP,1 %

Penetration rate

Total consumer finance outstanding balances as % of GDP,1 %

1 Based on nominal GDP.

Source: National statistics; McKinsey Global Banking Pools

Specialists initially expanded Sweden’s consumer finance market, but penetration has remained flat in recent years.

7Disruption in European consumer finance: Lessons from Sweden

As specialists thrived, universal banks wererelatively slow to innovate, often because ofstrategic deficits such as a lack of focus, agility,and capability. Some were also uneasy overpromoting a product segment that was seen tocarry significant credit and reputational risk.

Still, the gains made by specialists would nothave been possible without technological

change, and a surge in innovation that led to newproducts and channels. These have prompted ashift away from traditional account-basedoverdraft lines, branch-distributed offerings, andcredit cards for point-of-sale (POS) distributionand toward a higher share of cash loans (partlydriven by debt consolidation) and non-card-based POS credit (Exhibit 4).

POS loans

Unsecuredcash loans

Auto loans

2016

22

Credit cards

29

2010

Overdrafts

5.6

3.3

-1.4

0.7

7.1

Exhibit 4

Outstanding balances

% of market, total in € billion

CAGR 2010-16

%

Sweden product mix development

30%23%

14%19%

14%12%

13%15%

29% 30%

Source: National statistics; McKinsey Global Banking Pools; McKinsey analysis

Sweden has seen a shift towards cash lending and noncard-based POS solutions.

8 Disruption in European consumer finance: Lessons from Sweden

Specialists in the Swedish consumer financemarket have gained share on the strength of theirproduct features and service offerings. In POSloans, unsecured cash loans, and credit cards,these firms share the following traits:

A focused business model, targeting specific■products, customer segments, and channels.

A speedy, convenient, almost exclusively■digital customer proposition, backed byflexible and tailored offerings.

An aggressive, proactive customer acquisition■strategy, powered by advanced analytics.

A highly-focused, agile, and data-driven■operating model, enabling short-cycle testingand fast decisions.

The dominant consumer finance productcategories—cash loans, non-card-based point ofsale loans, and credit cards—have seensignificant disruption, with distinct lessonsemanating from each:

Cash loans. In Sweden, cash loans were■traditionally offered by retail banks on aresponsive basis in branch. In the early tomid-2000s, specialized players entered themarket, building share with proactivemarketing, new channels, and convenient,digital application processes. Traditionalbanks did not respond effectively. Proactivemarketing was regarded as a reputational risk,and the segment was small, and not a priority.After 2010, once brokers and aggregatorsemerged, providing transparency forconsumers and distribution for smallspecialists, market share started to shift morequickly. Speed of response became anincreasingly important differentiator, withspecialists leading the way through the use of

automated decision engines. Thedisintermediation process was acceleratedthrough consumer debt consolidation offers,in which revolving credits were folded intoinstallment cash loans at lower rates. Finally,specialists such as Bank Norwegian andLendify invested in digital marketing,emphasizing the growing importance of thedirect online channel for customer acquisition,already used extensively by online brokers. By2016, traditional banks held just 35 to 45percent of the cash lending market.

Non-card-based POS loans. Sweden’s■market for non-card-based POS loans(including online and physical store offerings)was traditionally dominated by banks, thanksto synergies with their merchant cashmanagement and financing offerings. Often,however, the products did not meet the needsof either customers (in terms of convenience)or merchants (low conversion rates andinsufficient merchant support). In the 1990sand early 2000s, some merchants startedtheir own financing companies, which werelater spun off to become specialized POSfinancing firms (e.g., Resurs Bank and Qliro).In 2005, Klarna entered the market, offeringconsumers more online convenience andsecurity by allowing them to pay via invoicewhen receiving merchandise, and in duecourse launching check-out solutions formerchants, leading to a significantimprovement in conversion rates (from basketto payment). Klarna later introduced newconsumer finance solutions, such asinstallment loans, winning market share fromcredit cards in the online space. In someSwedish retail segments (e.g., consumerelectronics), the majority of leading firms arenow served by specialists, particularly inonline sales.

The habits of successful specialists

9Disruption in European consumer finance: Lessons from Sweden

Two priorities currently dominate POS financing

specialists’ agendas. They are integrating their offer-

ings into the online and offline shopping experience,

often working alongside merchant sales teams.

They are also focused on offering a consistent fi-

nancing proposition and customer journey across

channels, a response to rising demand from retailers

for omnichannel solutions.

Credit cards. As non-card-based solutions■have gained ground with merchants inSweden, brand-linked credit cards, oftenbacked by traditional banks, have lost marketshare. In addition, differentiated credit cardvalue propositions (e.g., loyalty, rewards,

insurance benefits) have been difficult tosustain as regulation, such as interchange feecaps, and competition (fueled by pricecomparison websites) have pressured coreincome streams. Traditional banks remain themost important players in general purposecards, but specialists are gaining share withno-frills propositions (no fee, high reward)offered to all segments. A proactive,multichannel approach is a critical element oftheir success. Bank Norwegian, for example,acquires customers through both direct andbroker channels (digital and nondigital) andinvests significantly in digital marketing.

10 Disruption in European consumer finance: Lessons from Sweden

Consumer finance specialists found fertileground for disruption in Sweden, thanks to itshigh rate of digital adoption (in both banking ande-commerce), accessible credit scoring data,and efficient recoveries. Specialists have alsobeen adept in adopting new electronicidentification technologies (e-ID), creatingefficiencies in compliance, and introducingconvenient functionality such as the ability toaccept e-signatures.

Similar enablers are now pervasive acrossEurope, with digital banking growing fast, andregulation and technology innovation leveling theplaying field. Several countries, for example, arelaunching their own e-ID schemes. Specialists arelikely to aggressively pursue consumer financeprofit pools in markets ripe for disruption.

As competitive threats intensify, retail bankingleaders in Europe need to take action. They mustbecome more focused and customer centric, andembrace the end-to-end transformation ofoperating models. McKinsey has set out fourstrategic steps for banks to protect and growtheir consumer finance franchise:

1. Develop a focused strategy and proposition To compete with consumer finance specialists,banks must leverage their significant dataresources, customer knowledge, and marketexperience to focus on products, segments, andchannels in which they can offer the strongestproposition. Any repositioning should be backedby a strategic analysis of the consumer financepool, and estimates of potential value by product,segment, and channel for each geography. Banksshould leverage their data and marketingresources to develop sharper insights intoconsumer needs, the competition, and potentialnew entrants (local and international), anddevelop a clearly defined go-to-market model.

Sweden provides a number of examples ofsuccessful go-to-market models: Resurs Bankbuilt a merchant POS-focused customeracquisition engine through which it cross-sellscash loans and cards. SevenDay Finance focuseson cash lending for highly-rated customersthrough a digital broker channel and uses a strongAPI solution to seamlessly link with brokers.Nordax Bank also focuses on cash lending, but fora broader spectrum of customers, and backed bydirect marketing. Bank Norwegian has a masscredit card- and cash-lending offering, acquiringcustomers across the Nordics, primarily throughdigital marketing.

There is no single preferred model, but leadersshare a clear product category focus andexceptional execution capabilities leveragingspecific unique selling propositions.

2. Revitalize the customer proposition withstrong executionThe key to a successful customer-focusedstrategy is a customer proposition defined bystrong execution across the journey, includingloan applications (relevant offerings, tailoredmarketing, seamless application process),converting applications into paid out loans(effective and accurate credit engine automatedto enable a speedy response), and managementof customer lifetime value (cross-selling, churnmanagement, and collection/recoveries).Successful specialists execute at a high level,creating distinctive brands and operationalcultures. Klarna, for example, employs advancedanalytics to deliver seamless customer journeysand innovative credit scoring (Exhibit 5).

3. Adopt agile operating models and build capa-bilities Consumer finance at Swedish banks has oftenbeen organized into product silos, separating

Swedish lessons

11Disruption in European consumer finance: Lessons from Sweden

cash lending, POS, and credit card businesses.IT organizations are often run separately from thecore business, and digital marketing and risk areroutinely located in their own units. Withconsumer finance rarely at the top of thestrategic agenda, innovation has bled away.

Successful specialists by contrast createstructures with clear leadership (e.g., CMO, CRO,

COO, CTO) and distinct accountabilities, but withcross-functional teams to develop the business.Leaders tend be guided by two key principles:

Business development grounded in the voice■of the customer, leading to fast innovation and“test and learn” set-ups, and supported bycross-functional task forces. Successfulspecialists harness real-time customer

Distinctive features Example elements Example firms

Exhibit 5

Leading-edge digital marketing capabilities and performance; search engine marketing; search engine optimization; social media and display.

Tailored and proactive marketing with follow-up on conversion rates.

Bank Norwegian, Lendify, Nordax Bank

Klarna

Resurs Bank, Klarna

SevenDay, Klarna, Bank Norwegian

Bank Norwegian, Klarna

Marketing analytics and digital marketing

Prompting customer via SMS or customer portal/mobile app to make payment or offer extended repayment period.

Machine learning to identify cross sell/activation triggers or churn predictors.

Customer relationship management

Advanced self-learning algorithms leveraging unconventional sources of credit- rating information, e.g., online shopping history, social network information, etc.

Instant credit approvals.

Credit scoring and processing

Streamlining application process to minimum number of steps and “one click” experience; approving customers quickly, and focusing on a mobile Þrst experience.

Simpler user interface and digital customer processes

Integrating Þnancing offers into product browsing experience (upstream customer journey integrations), ßexibly based on retailer/merchant needs.

Integrating Þnancing know-how into merchants’ sales campaigns to drive sales.

Offering merchants opportunity to leverage Þnancing provider’s customer portal as marketing channel or source of data.

Support consumption decision at merchant

Source: McKinsey analysis

Specialists offer distinctive features across the customer journey.

Albion Murati is an associate partner in McKinsey’s Copenhagen office, Oskar Skau is a partner inthe Stockholm office, and Zubin Taraporevala is a senior partner in the London office.

The authors would like to acknowledge the contributions of Pontus Averstad to this article.

12 Disruption in European consumer finance: Lessons from Sweden

feedback on new offerings, generatinginsights into what works. They learn fast, forexample by obtaining real-time analysis ofconversion performance across the salesfunnel following a marketing campaign.

Powerful management information systems,■enabling a clear view and data-driven decisionmaking. Successful specialists use powerfulmanagement information systems to trackmarkets, segments, and channels at each stepin the customer engagement journey (fromawareness to loyalty). The systems generategranular insights into performance andmomentum—all linked to financials. Whenconditions change, for example when acompetitor updates its offering, managers canquantify the impact and respond in a timely way.

4. Develop next-generation consumer financesolutionsAs technology continues to evolve, innovation willlead to new opportunities to offer consumercredit. Payments apps are one area of potential.Financial institutions across Europe havelaunched a new generation of mobile paymentapps, including MobilePay, from Denmark’sDanske Bank, Sweden-focused Swish, owned bya group of banks, and TWINT, offered by financialinstitutions in Switzerland. With their high levelsof consumer trust, these are powerful tools forincumbents in the battle for share. They may alsohelp banks expand into consumer finance atpoint of sale, leveraging flexible in-app solutionsat the point of purchase or after. However, banks

must act urgently; Klarna, for example, recentlylaunched mobile payments and lending solutionswith retailers including fashion brand KappAhl.Other opportunities could stem from integrationof consumer finance offerings into personalfinance management solutions, for example byproviding flexible credit lines based on aconsumer’s spending or balance status. Finally,European banks could partner with large non-banking platforms such as Facebook to generatenew leads or gain access to non-traditional creditscoring information (e.g., social media activity)..

■ ■ ■

In most European countries, high street banksdominate the consumer finance market. TheSwedish experience shows, however, that withthe right formula new entrants can quickly winsignificant share. It is imperative for banks inother European markets to learn from theSwedish experience.

Banks possess strong advantages, includingcustomer trust, vast stores of data, and marketposition. To defend and grow their share inconsumer finance, they can build on thisfoundation by developing a focused strategy, andby revitalizing the customer proposition andexecution engine, backed by strong digital andanalytics capabilities. By taking an attackermindset, and adopting the best practices ofwinning consumer finance firms, European banksstand to achieve double-digit growth and strongROEs.

Global Banking Practice April 2018Copyright © McKinsey & Companywww.mckinsey.com/clientservice/financial_services