From Vaults to Clouds


By Katrin JuliusdottirManaging Director, Finance Iceland

Iver the past few years, we have witnessed rapid changes in the banking industry, moving from the vaults to the clouds. Digitization has changed the relationship between the bank and the customer as well as the customer experience, with the customer now able to do most of their banking transactions anywhere and anytime.

A few years ago, many analysts and financial market specialists predicted that traditional banks would struggle to compete in future financial markets. Some have even predicted that we will see traditional banks disappear in just a few years due to fierce competition from bigtech and fintech (financial technology) companies. Many of the challenges raised in banking were very real: regulatory changes pushed financial products towards what is known as shadow banking; large legacy IT (information technology) systems had to be upgraded, while new challengers could dive into digital processes from scratch; confidence in the system waned as a result of the banking crisis, and new pending regulations such as PSD2 (revised payment services directive) were expected to disrupt the market in such a way that banks would find it difficult to maintain or develop new sources of income.

These analysts were, for the most part, right. Financial markets have changed a lot. We saw them disrupted and rapid changes were implemented. However, the drivers of these changes have been mainly the banks themselves, encouraged by competitive challengers. They have been part of the disruption through rapidly growing internal innovation and partnerships with fintechs.

The drivers

Along with a highly competitive market in which banks must constantly innovate to stay ahead, a highly digital society, driven by good infrastructure, is an important part of the Icelandic market environment that fosters smart banking. Some key enablers have also been put in place to enable the financial services industry to focus on smart banking: a national electronic identification (ID) solution is available to members of society, and a banking service provider focuses on basic infrastructure that is shared. in the financial market. And finally, a central government commitment to digitizing government and regulatory processes has been established through a project called Digital Iceland.

Smart banking in numbers

In the 2021 Annual and Sustainable Development Reports Icelandic banks, there is interesting information about their smart banking developments.1 Between 80 and 90 percent of their customer bases are active app users, while branch business has continued to decline and represents only a fraction of customers’ banking routines. Lending has also been digitized, with one bank reporting that 99% of its loan applications were done digitally in 2021, while another said 94% of its credit assessments were done digitally. Thus, the entire loan process is digitized and automated, with more than 80% of consumer loans being self-serviced by customers themselves through digital channels. Almost all payments are now self-service and around 75% of sales transactions are made through digital channels. Another interesting finding is that Icelandic banks have reduced the number of clicks needed to create an account to around 10-15, depending on the customer’s KYC (know your customer) status, which is low compared to many other markets.2 Smart banking not only changes the customer experience, but also the cost-income ratio, which is now below 50% at the three largest Icelandic banks.

Smart home loan

Home loans are slowly becoming 360 degree digital. As noted above, most consumers apply for a home mortgage digitally; credit scores are, in most cases, numerical; and a digital mortgage registry has been operational since last year in the Icelandic market and is still under development. Some legal nuances give paper an edge, which has slowed digital development, but the banking industry has urged authorities to implement changes in legislation to give digital loan documents the same legal status as paper documents. We hope that the necessary changes to the legislation will be finalized soon as the government is committed to the process.

Interesting times are coming and we are already seeing customers have the option of managing their home loans digitally. One of the banks, for example, offered its customers variable and non-indexed rates with the possibility for them to request that the rates be fixed via the bank’s application. Digital banking has become the norm and traditional banking products have been, in a short time, digitized with end-to-end sales processes, integrating third-party services. And in doing so, banks have seized the opportunities opened up by PSD2.

Robust profitability

Despite increased competition from new players and new technologies, Icelandic banks have performed well over the past 10 years. New technologies have paved the way for lower operating costs, although increased IT spending has, to some extent, offset savings from fewer staff and fewer branches. The successful restructuring of the banking system after the financial crash of 2008 has created banks with high quality assets and without problems inherited from the past. Return on equity has averaged just over 10% over the past 10 years, and was particularly high in 2014-2015, when impaired assets from the financial crisis were liquidated with profits. The low point in profitability was reached in 2020, at 4.8%, when precautionary write-offs were made in response to the COVID pandemic. Write-offs were partially reversed in 2021, when profitability was around 13%. Reading these figures, we can see that digitization has not affected the profitability of banks, as expected just a few years ago.

Increased digitization and self-service through apps and online banking has reduced the number of bank branches and employees in Iceland. Over the past 10 years, the number of branches has decreased by 40%. During the same period, the number of employees decreased by 24%. Statistics show that digital transformation has already profoundly impacted our society. In a sparsely populated country like Iceland, this can be an advantage for rural areas which now have similar access to banking services as urban areas.

What the future holds

In the short term, there are a few drivers for new developments in the Icelandic market. First, there is PSD2, which Iceland was slow to adopt but which is becoming a reality this year and will create new opportunities not only for fintechs but also for other businesses in the payment space. We are already seeing some interesting developments in retail payment processing, for example. Second, the further development of account-to-account solutions, combined with PSD2, will drive innovation in national payments markets, with the potential to accelerate transformation within the retail space. The longer-term trends are also exciting, where investment and experimentation with artificial intelligence (AI) will lead to a different era in banking. Digitizing the lending process has been a good learning experience in developing and implementing dynamic data models, leading to more sophisticated AI models in the future. Another question is, of course, the future of money. The Central Bank of Iceland published a position paper on a central bank digital currency (CBDC) in 2018 and is actively following CBDC developments. Finally, I want to mention that the maturation of Icelandic language models and natural language processing (NLP) – thanks to significant government investment – means that the country and the banks are ideally positioned to take advantage of the Icelandic language in digital channels. Deals have already been struck with international big tech companies and streaming services, which show great promise.

Agile culture

The developments described above show us that a bank does not have to be a stagnant entity without the ability to keep up with time. A bank can actually be quite nimble. One wonders whether the continually complicated implementations of new regulatory frameworks, with ever-changing requirements that banks have become so used to, have created a culture of agility. Few other sectors have seen such changes in their regulatory frameworks in a relatively short period. To keep pace, processes must be streamlined and made more agile, and the culture must be open to change and to rapid, innovative approaches. Banks are also used to working in the complicated and ever-changing environment under the supervision of financial authorities, which is an asset in today’s regulated world. Finally, banks are first and foremost important institutions in every society and play an essential role both in addressing major challenges such as climate change and organized crime but, more importantly, in stimulating growth and helping families and others to create stable living conditions and follow their dreams. An accessible and simplified bank is a natural evolution in a service sector centered on the needs of a demanding clientele.


1Arion banki: Arion banki”2021 Annual and Sustainability Report.”


Íslandsbanki: Íslandsbanki´s”2021 Annual and Sustainability Report.”


Landsbankinn: Landsbankinn´s 2021 “Annual and sustainable development report.

2Built for Mars: “Opening of 12 bank accounts», Peter Ramsey, May 21, 2020.


Katrin Juliusdottir is the Managing Director of Finance Iceland. She was a member of the Icelandic Parliament from 2003 to 2016 and was Minister of Industry, Energy and Tourism from 2009 to 2012 and Minister of Finance and Economy from 2012 to 2013. She previously worked as project manager for an IT company. and a manager in the retail sector.


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