Notable for Danish “hygge” flat-pack furniture design, high taxes, and socialist policies, the Nordics—comprised of Norway, Sweden, Finland, Denmark (connected to its neighbor Sweden by a marvel of modern engineering, the five-mile Oresund Bridge), and Iceland—are also home to superstar fintechs, such as Sweden’s iZettle and Tink, and payment and exchange technology companies.

 Deloitte dubbed the region a “European fintech hotspot.” The explosive growth of the Nordics’ financial services industry may seem like an anomaly due to the modest size of the region (a total of 27 million people; Texas, in comparison, has a population of 28 million), but the countries have collectively invested heavily in their financial services industries, fostering transparency, fairness, and innovation.

“The Nordics have always been a good place for innovation—from the three-phase generator that was the foundation to what today are ABB, Rovio, and Spotify. The secret: a high degree of innovation and creativity, a strong will to immediately go global since our home markets are so small, and great access to capital through our almost-unique financial ecosystem,” says Henrik Husman, vice president at Nasdaq Helsinki.

But while the ambition to be a competitive marketplace may be the primary driver of Nordic innovation that has banks re-organizing their frameworks and investing in new technologies, even the Nordics aren’t impervious to the complicated data demands of the revised Markets in Financial Instruments Directive (Mifid II), including Norway, which has agreed to fully comply with Mifid II legislation despite not being legally obliged to do so, since it is not an EU member. And—like companies across Europe—Nordic firms struggled with installing permanent data solutions to cope with future regulation. 

Fintech Investments Yield Results

Invoking French economist Thomas Piketty’s quest for equality as inspiration for its platform, Norwegian “crowdtrading” fintech firm Huddlestock is the quintessential representation of Scandinavia. The unveiling ceremony was fit for royalty (quite literally: The Norwegian Crown Prince executed the first trade). Competing against players such as Sweden’s Klarna and Denmark’s Coinfy, Huddlestock enables individual investors to pool funds, giving them access to investment ideas usually reserved for institutional portfolio managers. 

“In 2014, nobody knew what fintech was here in Norway. Everyone was wondering what we were doing. Two years later, we had the Oslo Fintech Hub and it was full of companies,” says Huddlestock CEO Murshid Ali. 

Scandinavia has been dominating the fintech scene in Europe—second only to the UK since 2015. This growth has skyrocketed in recent years due to innovative development, government investment in financial services, and the creation of new programs that make it easier for entrepreneurs to test their ideas and raise capital. According to research and analysis provider Nordic Web, which also runs an angel investing fund for pre-seed capital startups, fintech companies received the largest investments in Scandinavia in 2017, accounting for 11.6 percent of total investments. In Denmark alone, investments increased from $15 million in 2015 to $50.1 million in 2016, according to research firm Fintech Global. 

“The Norwegian government has been instrumental in supporting us through an organization called Innovation Norway, and the Research Council of Norway,” Huddlestock’s Ali says, adding that as well as funding, these organizations also help startups make contacts and provide other important services.

Government agencies aren’t the only ones supporting new initiatives: Larger banks and regulators are also providing capital and the resources to test new ideas, such as Danske Bank’s Open Banking Initiative, which was formed as a collaboration effort between the bank and third parties to smooth data and IT functions.  

Banks have also been instrumental in driving Nordic growth strategies and making movements into new, foreign markets. For example, Danske Bank developed a new platform called The Hub, which helps recruit foreign talent and raise capital, and has recently partnered with nHack, a Norwegian accelerator that helps Nordic financial participants break into the Asian markets.

“Talking about Nordic banks, if we look at their client base, there’s a lot of business originating in the Nordics, but … there’s also a focus on attracting foreign capital and international business, which is another reason why they would benefit from having state of the art solutions,” says Carl Nilsen, director of sales at Cinnober-owned transparency and reporting services provider Simplitium (formerly known as Boat Services), who previously served as head of equities at the Oslo Stock Exchange.

This willingness to invest in domestic financial services ahead of Mifid II has strengthened Nordic countries’ financial systems and increased their value, while other countries have struggled to meet the new regulation’s demands. Nordic banks, for example, have showed strong performance in equities markets of late, displaying above average growth compared to other European countries.

“Mifid II has definitely levelled the playing field. Some of the Nordic countries have moved ahead quite quickly with that, which shows their appetite for more international access,” says Brian Collings, CEO of back-office technology provider Torstone Technology. This is evident in Sweden’s record-breaking recent levels of IPO offerings, including five in a single day on June 21, 2017—a first in the Nordics and Europe overall.

The spirit of fairness and collaboration evident across the Nordic countries’ core has not only proved beneficial in generating growth and encouraging new developments, but has also made it easier to comply with regulatory demands, creating greater market transparency and encouraging investments in Nordic companies.  

Compliance Conundrum

European banks have made significant strides in implementing new, innovative business solutions, but are failing to capitalize on regulatory compliance. Even the most innovative firms have not been immune to the data demands of Mifid II’s 196 pages of legal requirements.

“In the US, the UK, Germany, and certainly in the Nordics, I’ve seen very few instances of companies taking a strategic innovation business value view of regulation,” says Åke Freij, head of risk and regulatory management at Capco Nordic, and a researcher into innovation, business models, and regulations. Freij says most financial institutions have done great work in developing data management capabilities, but in most cases “are waiting for new regulations to hit, and are starting all over again,” failing to reuse their existing faculties.

The problem has largely been the sheer overload of data that firms are required to gather, disseminate, and organize for filing. The filing requirements, especially when it comes to the addition of new asset classes, have been particularly problematic.

With a number of new directives coming into play this year, Collings says, “Across the board, data quality has been one of the key problems in Europe with Mifid II implementation. Regulators will start to look closely at the data quality that is being fed through now, so everyone’s transaction reporting will need to be accurate, full, and complete—and that will be the focus of the regulation going forward.”

Since 2007, 80 new rules and legislative items have passed in Europe, with no end in sight. Freij says the problem is that firms generally view regulation as a negative force, rather than as a positive driver to adopt the kind of fast-moving data supply chain technology that can shoulder the burden of filing and reporting requirements. State-of-the-art data solutions will not only help firms increase growth, but will allow smoother implementation of data management requirements for compliance in the future, he adds.

“If companies analyze regulation, then they understand what they need to do to innovate, and can look forward to building capabilities required for all future regulatory management—including data supply chain capabilities … and [being able to] manage the world around them in a more interactive way than before,” Freij says.

Gorm Praefke, COO of wholesale banking at Nordea, notes that Mifid II has been a huge and costly undertaking, especially for smaller market participants. And as these undertakings reach a scale where the requirements more closely reflect larger firms’ business, “it becomes more difficult for smaller market participants to be a part of the market,” he says. “The simple cost of running an implementation is the same effort, even if you are mid-size bank or large Nordic bank. So I think some of the smaller participants will potentially struggle more because of the cost of implementation.”

Despite the costs of implementing Mifid II, Nordic firms have been investing in solutions—such as artificial intelligence at Nordea, exchange data services at Nasdaq, and reference and market data from Danish, Swedish, and Norwegian fintechs—to optimize growth, tap into new markets, and secure data quality as a priority for future compliance efforts.

“Data can be a blessing and a curse, because sometimes you get a lot of data that doesn’t make sense. Getting data quality up is important so we can monitor the markets. Data is also used for financial stability purposes. It could also be used to tell how markets are functioning or for consumer protection,” says Klas Granlund, director of the market analysis department at Finansinspektionen, the Swedish Financial Supervisory Authority (FSA). “The data will be very useful once we get the quality up to a level that is acceptable in order to get through all the analytical skills [required] to use it.”

Improving data quality reduces the complexity in the market and creates a more stable financial system, allowing companies and regulators to better assess risks and reduce complexity in the markets—particularly in more obscure asset classes created in recent years.

“As the Mifid II deadline was approaching, some of the firms across Europe have had a ‘sticking-plaster’ type of approach to gathering data to send it to regulators. I don’t think the regulation changes are going to stop. Firms need to take a step back and look at what they need to do to achieve flexibility,” Torstone’s Collings says. 

Finns with Benefits

The Nordics—like the rest of Europe—have struggled with the data demands of regulatory compliance, but their history of openness in government and financial services has made them less resistant to implementing legislation, and has meant they are more open to using data for innovative purposes and the future-proofing upcoming regulatory challenges. For larger banks operating within the Nordic region, developing internal technologies has been central to being Mifid II-ready, and being able to move into new markets. Many have even used the legislation as a way to evaluate and create new management frameworks.

For instance, Nordea has committed to revamping its data governance practices by establishing the Group Data Management Office and focusing on its data strategy by putting an emphasis on data quality, governance, and architecture. 

“What was learned from 2007 and the requirements of Mifid I was that yes, we were compliant, but the biggest challenge we had afterwards was the change in behavior and the change in our ways of working. We focused this time on not just being compliant—which, of course, is important—but also on changing the way we work and evaluating our business models. So from the start, it involved a lot of broader organs internally: We had everyone from the front office to the back office involved in compliance right from the start,” Praefke says. “The biggest difference from what we’ve done is look at the full process. Not only looking at what needs to be implemented in order to be compliant, but what we want to see as far as changes. For example, transparency: What does that actually mean from a customer service perspective? We need a 360-degree view on the implementation, and not only on the technical compliance implementation.”

There are many advantages to being a firm with larger-scale operations, like Nordea, especially when it comes to costly regulations, but in the Nordics, being part of a small market may also prove advantageous. The small community that comprises the Nordic financial services industry has allowed all participants to develop autonomous relationships, easing compliance demands.

“If you’re a regional player and have a presence, are well known, and if you have client relationships either with big, small or medium-sized companies, or with private individuals, that can be used to your advantage in a post-Mifid II world. Mifid II demands that you know your customers better and know what they want and need,” Freij says.

One disadvantage of being part of a smaller marketplace is that these are generally the last to receive guidance from regulators, which adds to the already huge challenge of navigating complex regulations. Thus, key to preparing for future requirements is working closely with regulators to ensure transparency, which Praefke says is at the core of Nordic values. This facilitates data and information sharing, which is fundamental to creating market transparency and allowing regulators to mitigate systemic risks. In the Nordic markets, greater transparency has led to more accountability by financial institutions, and is generating investor confidence. This will only become even more vital as the regulatory burden continues to grow.

“Transparency has always been high in the Danish market—it’s not something that we’re afraid of,” Praefke says. “Right from the start of Mifid II, all of us in the Nordic countries have had a good open discussion with regulators. Not that we expect the regulators to tell us everything, but we’ve had a series of discussions between all the Nordic countries jointly with the four local FSAs on what the regulation means.”

Fortunately, local regulators share the view that collaboration is a core Nordic value: “We are, of course, open to meet with the banks or industry organizations. We’ve been having great meetings—which takes a lot of industry organizing—with the Swedish Securities Dealers Association (Fondhandlareföreningen), and I think they’ve put a lot of effort into helping the banks to understand the Mifid II regulation,” says Finansinspektionen’s Granlund.

Superior relationships with regulators has facilitated a collaborative environment between banks, exchanges, regulators, and fintechs to share data for compliance, transparency and market development. This, along with their willingness to invest in new frameworks, has put the Nordics in a good position to address data quality and compliance measures in the future. 

“Transparency is a core value in the Nordics. It has certainly increased our appreciation of transparency globally, not just in the financial markets, but more broadly speaking. It can surely be seen as a helpful thing for the Nordic participants,” Husman says. 

According to anti-corruption organization Transparency International, Denmark, Sweden, Finland, and Norway all rank among the top 10 least corrupt countries in the world, and exhibited the most transparency in their systems, with Denmark in the number one  spot. Similarly, the Nordics rank high on the list of countries that are straightforward to do business with, according to the World Bank’s 2017 “ease of doing business index.” 

These strong values around transparency and accountability can lead to greater investor confidence in the markets, while transparent and open data is essential for maintaining investment in regional industries and providing investors with transparency into the assets they want to buy. 

“High-quality market data is the backbone of transparent markets, and is indispensable to ensuring investor protection. Markets are also dependent on more data than before. It’s important to keep the right incentives for all those that are involved in the production and dissemination process, including exchanges, so that good quality market data remains available to investors,” Husman says.

Collectively, the Nordic countries—whether because of their size compared to other European nations, or perhaps their culture—have been able to foster a financial markets ecosystem of collaboration and data sharing between governments, FSAs, and banks, allowing each of these actors to capitialize on market opportunities, improve data quality, and increase transparency, making it easier to mitigate financial risk. When other European countries are seeking leadership on dealing with the data challenges of regulation, they could do worse than look north to the example set by their bridge-building neighbors.