Fintech causes a seismic shift in Icelandic financial services

Fintech causes a seismic shift in Icelandic financial services

The Icelandic financial sector has changed substantially since the global crisis of 2008, in the aftermath of which the country instigated some of the strictest banking regulations in Europe and banking practices were put under intense scrutiny. “Today, all Icelandic banks have healthy balance sheets, high equity ratios and leverage ratios that are quite low when compared internationally,” says Marinó Örn Tryggvason, who until recently was CEO of Kvika banki, one of the country’s leading operators in the financial sector.

Formed in 2002, Kvika has also played a significant role in changing the landscape of financial services in Iceland by elevating competition in the industry and by promoting innovative and simple financial solutions for customers. The conglomerate is active across five main areas — commercial banking, investment banking, asset management, insurance and UK operations — and it has expanded rapidly. Having gone through 10 mergers within the last decade, it now employs around 400 people in Iceland and London. “The rational behind the mergers was to build a diversified and efficient financial group here in Iceland. If you look at the bank’s recent accounts, you can see that this business model is paying off,” Tryggvason explains.

The latest financial results from the conglomerate that is listed on Nasdaq Iceland’s main market confirm that it is in an extremely healthy position: the group’s pre-tax profit for the first two quarters of 2023 amounted $20.4 million, a 24% year-on-year increase, while its net interest income was 27% higher compared to the same period in 2022 at $33 million. By the end of June 2023, Kvika’s total assets had grown by nearly 10% percent over the previous six months to reach $2.5 billion, its solvency ratio was 1.24 and its risk-weighted capital adequacy ratio for operations excluding insurance was an impressive 23.1%.


Focus on fintech

At the heart of Kvika’s business strategy is ongoing investment in infrastructure with a focus on fintech and it has been building up a portfolio of specialized digital solutions in the commercial banking space since 2019. It started that process with its in-house development of Iceland’s first platform for online-only deposit accounts: Auður. 

Offering much higher savings rates than other banks in Iceland at the time, Auður quickly became a hugely successful brand on the market: it is currently used by about 40,000 customers and received the highest net promoter score — a metric for measuring customer positivity and loyalty — of any Icelandic brand in any sector last year.

In 2020, a merger added the car-loan and fleet-funding solution Lykill to Kvika’s portfolio and the following year it acquired the fintech platforms Netgíró, a secure and simple buy-now-pay-later payment system used in stores and online, plus Aur, another buy-now-pay-later platform that is particularly popular with younger people at the start of their financial journeys, partly due to the fact that as well as being able to make retail purchases through the mobile app, its users could easily transfer money to each other. Numerous other innovative value-added services have since been packed into Aur, which is now actively used by 30% of the total Icelandic population and 70%-80% of those aged under 25.

With around 120,000 customers, Aur’s prominence in the country means “Kvika is in a unique position to disrupt Icelandic banking, with a very strong user base and market presence,” according to its head of fintech, Sverrir Hreidarsson. This July, the conglomerate took a major step toward leveraging this position when it released an extensive update of the Aur platform, which has transformed it into a comprehensive online bank and financial services app that is geared toward younger customers. 

As part of the upgrade, Kvika has launched the world’s first hybrid Visa card, which combines a debit and credit product on the same digital card, integration with Apple Pay and Google Pay, cashback rewards, merchant networks and the ability to share expenses or balances with other users. Within a few weeks of the new Aur going live, over 9,000 of its Visa cards had been issued, suggesting that the group is well on its way to causing a seismic shift in Icelandic retail banking.

Kvika is continuing to expand its portfolio of fintech-enabled banking solutions and it launched its latest branded platform this year: a payment facilitator named Straumur. Having acquired a 25% share of Iceland’s payments market — amounting to an annual turnover of $1.9 billion — the conglomerate was able to develop Straumur from scratch in just a few months, using technology and expertise shared with its established fintech brands. Merchants are currently being onboarded onto the platform, which Kvika believes can become the preminent fintech solution for Icelandic merchant payment services.


Robust and diversified growth

The conglomerate is already a leader in digital insurance solutions through its subsidiary TM, which it acquired in 2021 as part of its biggest merger to date. TM provides comprehensive, simple and effective services to individuals and businesses that have ushered the Icelandic insurance sector into a new era. The subsidiary is achieving robust, profitable growth, with the first half of 2023 seeing premiums rise by 10.1%, claims by only 4.4% and TM recording a combined ratio of 97.5%.

Kvika’s UK operations are also growing. The conglomerate offers both Icelandic and international customers a full range of investment banking and asset management services in the UK through two London-based subsidiaries, Kvika Securities and Kvika Advisory. At present, these companies are responsible for approximate 5% of the group’s total revenues, but the goal is to raise this significantly. To help realize this ambition, in 2022 Kvika increased its stake in Ortus Secured Finance — a specialized UK real estate lender — from 15% to 80%.


Bright future for investments

Within its home country, Kvika is one of the top four investment banking and asset management service providers. It has a particularly strong position in the foreign exchange market and is the only bank offering foreign exchange trading on Iceland’s new Keldan foreign exchange market, while it also has easy access to all major stock markets in Europe and the US. 

The group is also expanding its presence in these two sectors at a fast pace: for example, the assets under its management in Iceland have grown from less than $1 billion to over $4 billion within the last decade, and in the first six months of 2023 it saw its foreign exchange volumes grow by 26% and its bond volumes by 50% year on year. 

An increasing number of investment instruments available in Iceland are green. Kvika aims to be a frontrunner in delivering sustainable investment opportunities, products and services to customers in order to have a positive impact on the nation’s carbon footprint and it launched its first green bond last year, which it hopes to follow with further green and blue offerings.

The conglomerate is a very active player in the Icelandic investment ecosystem. “It’s a small community and Kvika has relationships with almost everyone in both the private and public market. I think the future is bright for the Icelandic economy. There are a lot of interesting innovative companies and investment opportunities in Iceland, and we have seen more activity in equity investment over the last few years from Europe and the US. The Icelandic fixed income market is also something that investors should look at,” says Tryggvason. 

He expects Kvika’s asset management operations will continue to grow quickly as well:  “Icelandic government debt levels are low, we have one of the highest savings rates in the world, high interest rates and the real exchange rate of the Icelandic króna is not too high now. In addition, we have an almost fully funded pension system that is one of the biggest pension funds per capita systems worldwide, with positive demographics because we have a relatively young population, so our pension system will continue to grow. Iceland is a great place to invest in.”