The challenger bank movement has been slow to reach the Nordics, but the region could be a profitable venture for those who make it.

While the likes of N26 Bank GmbH, Monzo Bank Ltd., Starling Bank Ltd., Revolut Ltd. and Tandem Bank Ltd. are making a name for themselves elsewhere in Europe, the digital challenger bank wave has been rather absent in Sweden, Norway, Denmark and Finland.

In August, Denmark-based Lunar, previously Lunar Way, became the first of its kind — a digital startup aiming to become a full-fledged alternative to traditional banks — to received a banking license in the Nordics.

"Of the true startup banks, those trying to capture a customer base, innovate and offer something different, we haven't seen that many in the Nordics," Victor Kotnik, managing partner of consulting at Deloitte in Sweden, said in an interview.

Newcomer banks in the region were previously limited to those created by retailers and other established enterprises to support their primary business and leverage their existing brands, such as Bank Norwegian AS, affiliated with the airline Norwegian, and Coop Bank, he said.

Narrow focus

Nordic fintech startups, meanwhile, have typically had a narrow scope within payments and financial budgeting, Kotnik said.

In Sweden, for example, Tink offers account aggregation while Bynk AB's app focuses on personal loans. Klarna Bank AB (publ) is one of the few with a banking license and its primary business is around online payments. Germany-based N26, while available in the Nordic countries, only offers euro-denominated accounts.

One may have expected more digital challenger banks to have emerged in what is one of the most innovative regions in the world, but this could be exactly why a need for newcomers has not been urgent.

The Nordics are among the most cashless societies in the world. Scandinavians have long used their phones to pay in shops, transfer to friends and donate to charity in just one swipe, regardless of where they bank.

This is because of banks' collaboration around mobile payment applications Vipps (in Norway), Swish (Sweden) and MobilePay (Denmark and Finland), which are now universally adopted in their respective countries.

"In the Nordics in general, the banking system is very efficient," Kotnik said. "There is so much automation already done.

"The market innovates together, and that's the strength of the system. If the biggest few banks go together to introduce MobilePay in Denmark or Swish in Sweden, they capture the entire market. That's much more difficult in the U.K., Germany or the U.S."

Small market

Other factors make the Nordics less appealing for new banks to enter.

"The total addressable market in the Nordics is 27 million people," Ken Villum Klausen, Lunar's founder and CEO, told S&P Global Market Intelligence.

"When you can roll out a service in six European countries and reach 200 million customers as the likes of N26 and Revolut have done, one might ask, why even bother with the Nordics?"

Around 130,000 people across Denmark, Norway and Sweden have now signed up for Lunar. So far the challenger has provided accounts through Nykredit A/S, but with its new banking license, Lunar will launch as a fully independent bank in 2020 across the region.

Penetrating the Nordic market is complex, Klausen said. Different regulations and banking systems mean there is no such thing as one size fits all. Another problem is that the region's banking infrastructures are "very defensive," he said.

"It is managed by the stakeholders in the infrastructure today, the existing banks, and it is very difficult to get in," he said. In Denmark, for example, becoming part of the banks' national clearing system can take years, he said. Lunar has managed to join through a partnership with data firm BEC, an existing member.

The lack of regulatory support could also pose problems for Nordic startup banks, Kotnik said. While the U.K. has reformed the process for starting a new bank, including relaxing capital and liquidity requirements, Nordic regulators have not been actively encouraging new bank ventures.

Going deep

But Lunar believes it is on course.

Klausen said the Nordic banking market is the most profitable in the world because people typically have one bank from which they buy all their products, meaning income per customer is high.

Data compiled by S&P Global Market Intelligence shows that the largest Nordic banks have a significant lead on operating income per customer compared to peers in the U.K. and the U.S.

The strategy Lunar hopes will help it succeed is to go deep into the market, providing a full range of banking services and products (from investments to savings to mortgage loans) in the four countries, rather than expanding geographically. And being a digital-only bank, Lunar's cost base is significantly lower than incumbents', Klausen said.

Lunar also has the advantage of being the first in the market. Others may follow, but Lars Krull, a banking researcher at Aalborg University in Denmark, does not believe there will ever be a challenger bank revolution in the Nordics.

However, he said in an interview, challengers could still impact the banking market, for example by pressuring incumbents to optimize their processes and offerings within areas such as customer onboarding and cash rewards.