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May 27, 2011updated 04 Apr 2017 1:07pm

Finland’s OP-Pohjola spurs innovation

Fifteen years after becoming the first European bank to offer internet services to customers, Finlands largest financial services institution is preparing to develop a cutting-edge mobile banking channel Its name may not be well-known outside of Finland, but its influence on the retail banking sector cannot be overestimated

By Maryrose Fison

Fifteen years after becoming the first European bank to offer internet services to customers, Finland’s largest financial services institution is preparing to develop a cutting-edge mobile banking channel. Maryrose Fison interviews OP-Pohjola’s chief strategy officer Tom Dahlström.


Photograph of Tom Dahlstrom, OP-Pohjola GroupIts name may not be well-known outside of Finland, but its influence on the retail banking sector cannot be overestimated. OP-Pohjola Group is Finland’s largest bank; a cooperative which combines banking, asset management and non-life insurance and in the past two decades it has become a beacon of light in innovative banking.

With roots that trace back more than one hundred years, the Nordic bank now boasts threem retail customers representing more than 60% of the country’s population. In 1996, it gained international prominence, when it became the first bank within Europe to offer its customers internet services, a facility which has since become virtually indispensable.

Now, two months after mobile phone provider Nokia publicly announced changes to its 2011 strategy, in particular disclosing an interest to develop a new tablet offering, it has committed to a multi-million pound project aimed at creating a brand new mobile banking channel.

It may sound like an ambitious task but the bank’s track record of capitalising on gaps in the market and growth over the past five years has put it in a comfortable position to invest in such a hi-tech project.

In April, OP-Pohjola announced its first quarter results for 2011, revealing its best first-quarter performance for three years. Consolidated earnings before tax improved to €94m ($132m), up from €59m a year earlier. Banking earnings before tax doubled to €53m from €26m and asset management increased its earnings by 11% to €6.2m, up from €5.6m.

Its annual results for 2010, were also strong although there were areas for improvement notably regaining market share in deposits. Assets under management rose by 6% to €35bn. Earnings before tax rose 24% to €575m from €464m and net commission and fees rose by 14%.

Tom Dahlström, chief strategy officer and executive board member at OP-Pohjola Group, told RBI the decision to launch a mobile e-business banking channel aimed to “tap into a window of opportunity” and could create around 100 jobs, with potentially more recruits brought on board later.

Though unable to give precise financial targets due to the project being in the planning phase, he was willing to give an indication of the size of the investment.

“It is probably fair to say it is in excess of €5m as a rough estimate on an annual basis,” Dahlström said.

Underpinning the project has been a growing awareness of the impact mobile phones and tablet devices have on consumer behaviour. Whereas in the past, Dahlström said the preferred medium for undertaking banking activities at OP-Pohjola was in person at a branch; nowadays, customers were showing more interest in banking remotely and in transit.

“A lot of things have been happening with mobile devices in the last couple of years and there are increased opportunities for innovative financial services,” he explained.

“It is becoming an increasingly important part of the overall customer experience. People like to do things using their mobile phones and they rate you very much on how cutting edge, and how well you develop your mobile services.

“Our competitors have been very active as well in developing services or special apps for iPhones and the iPad, etc. So we see there is an interest in customer behaviour and technological development is facilitating that.”

Under the proposed plan, the bank will set up a development unit in Oulu, a coastal town in central Finland, where initially 50-60 people will focus on developing eBusiness and mobile applications. The recruitment process is already underway and, depending on the speed of the set up progresses, Dahlström believes parts of the unit could be running as early as the end of this year.

A separate ICT unit is also expected and fully functional operations are anticipated during or after 2012.


Developing ‘hybrid products’

Table showing OP-Pohjola Group Q1 2011 key indicatorsAnother strand in the bank’s retail strategy is the ongoing development of its ‘hybrid products’. Because the bank comprises three business lines – banking, non-life insurance and asset management – it has capitalised on combining features from different product lines.

“Hybrid products are being offered more and more because the number of players that provide both banking and insurance products is increasing in the Finnish market,” Dahlström said.

“Hybrid products are a way of creating synergies between these businesses and differentiating yourself from pure banks or insurance companies and their offerings.

“One example of a hybrid product is Pohjola’s Rahoituskasko, which combines finance leasing or part payment/hire purchase and car insurance for physical damage and liability.

“Our card products have also been combined with various insurance features, for instance our OP-Visa and OP-Visa Gold and OP-Visa Platinum cards contain Ostourva, [a type of purchase insurance] where a product purchased with credit is insured against theft or damage for a limited period of time.”

Continuing the development of these hybrid products is “one definite line of development” for the bank, Dahlström added, saying there were “all kinds of interesting things in the pipeline”.

The bank is also continuing to launch new bond products. At the end of June, it will issue a new index-linked bond, called the Pohjola Tutkimuksen Taehet, targeted at retail investors and carrying a maximum nominal value of € 40m for a five-year maturity term.


Boosting deposits

Bar chart showing OP-Pohjola Group Q1 2011 income by segmentWhile much of the bank’s performance was strong in 2010, market share for deposits reduced slightly from 33.2% on 31 December 2009 to 32.5% on 31 December 2010. Money deposited in household current accounts was flat, standing at €12bn in 2009 and 2010.

Underpinning this, was a “challenging pricing environment”, Dahlström said, explaining price competition for deposits had intensified to such an extent during the first half of the year that competitor banks began offering interest rates which exceeded the Euro Inter Bank Offered Rate (Euribor) rates on fixed deposits.

“The interest rates offered especially on term deposits of 12 months and above have at times even exceeded Euribor rates of equal maturity,” Dahlström said.

“This makes little sense unless a bank is either seeking to significantly alter its funding structure or is counting on attracting new customers with Bar chart showing OP-Pohjola Finland market sharesthese offers and being able to get revenues from subsequently selling other products to these customers.”

Rather than using a single-pronged attempt to boost market share through exclusively focussing on raising retail customer numbers, Dahlström indicated that the bank is using a multi-dimensional approach.

“Improving our performance will require both active product development, increased sales activity and marketing, more responsive pricing -being more sensitive to day-to-day pricing in the market- and probably also more aggressive pricing overall,” he said.

“We are not looking to increase the number of retail customers so much, we are more focused on increasing the share-of-wallet. We haven’t set an absolute target for deposits, but our target is to grow our deposits faster than the domestic market, in other words., to increase our market share by the end of the year.”


Solvency II

Pie chart showing OP-Pohjola assetsWith part of its business focussing on insurance, OP-Pohjola has a vested interest in ensuring it is up-to-date with the evolving Solvency II proposals. It successfully increased its Tier 1 capital ratio from 12.6% to 12.8% as of 31 December 2010 and Dahlström is confident the bank will be where it needs to be come implementation of the new regime in 2013.

“There is still work to be done but I don’t see that as a major issue,” he said. “It is more of an issue that there is still some uncertainty as to how the final regulatory regime will look. Uncertainty is always a bad thing. If we had detailed knowledge of everything that would be expected of us we would have an easier operation.”

And while many European retail banks have negative public sentiment to contend with following the financial crisis, the cooperative structure of OP-Pohjola, combined with Finland’s strong position economically means the bank is well placed to continue its growth.

The World Economic Forum’s Global Competitiveness Report 2010-2011 (GRC) ranked Finland as the seventh most competitive country in the world, putting it well ahead of the UK, France, Austria, Canada and Australia.

Perception of Finnish banks has been further bolstered by strong positive perceptions of financial institutions. The country was ranked third in the GRC for the ethical behaviour of its firms and was found to have among the most transparent institutions in the world.

One quarter of OP-Pohjola’s customers are “owner-members”, meaning they are eligible for the bank’s annual bonus which was last year worth €150m, and with positive sentiment on its side Dahlström said the public’s trust in Finland’s banks remains strong.

“In the UK there used to be a very negative sentiment towards high street banks and there is also a long tradition of shopping around and using independent financial advisers,” he said. ” That has not been so much of an issue over here. The larger banks have a very strong position in the market.”


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