Summary: A twenty-year journey
In his classic study, Manias, Panics and Crashes: A History of Financial Crises, the American economist Charles E. Kindleberger (1910–2003) describes how financial systems have fallen into crisis once a decade during periods of free movement of capital.
This was only interrupted by tight regulation of the banking sector from the Second World War years until the 1970s–1980s. Bank crises again proliferated in the 1970s, as regulation was dismantled on a global basis. This generalisation could also be applied to Finland and its banking system. However, the revival of the banking system in the 1990s was remarkably successful. Its structure was quickly made more efficient, with new practices being introduced that suited the changed operating environment.
That is why Finnish banks have survived crises – such as the dotcom bubble in the early 2000s and the financial crisis that began in 2007 – comparatively well in international terms. In his colourful diaries, the long-dead Finnish statesman and banker J. K. Paasikivi often describes Finns as bone-headed and stubborn, but this does not apply to the banking executives of the 2000s. The brutal lessons of the 1990s have been learned and not forgotten.
From a bank group to a financial services group
As soon as the amalgamation was achieved, it was clear to OP Bank Group’s managers that the markets were largely divided up and organic growth would be slow. This problem was solved by buying the insurer Pohjola, adding non-life insurance to OP’s traditional banking business and turning the banking group into a financial services group.
The change demanded much of the organisation and its employees. Another challenge was the hybrid nature of the organisation, which was mainly cooperative-based but had grown the share of its business done by limited liability companies after buying Pohjola.
OP’s faith never wavered in the outstanding ability of a cooperative organisation to attract new customers and build customer loyalty. The shared aim of becoming Finland’s leading financial services group was achieved even faster than anticipated. Led by President and Group CEO Reijo Karhinen, the Group overcame the difficulties associated with the merger of two large businesses with different forms of governance.
A changing business environment
Improving the professional skills of employees was another major challenge. Banking had changed in a short time, with rapid developments in IT transforming the entire sector.
Previously, the service network had mainly been based on customer service provided directly by branch staff, but as the 1990s progressed it became a multichannel service network covering branch, online, phone and mobile services. The Group now provides personal service both at branches and digitally. It also has a presence on the general social media, enabling it to obtain direct feedback on customer experiences and intervene quickly if problems or shortcomings occur in the system.
OP’s multichannel service network also enabled the centralisation of several tasks in the central cooperative or separate service centres. This improved efficiency but increased tensions between the central cooperative and local organisations, which feared loss of business opportunities. Such fears reached far into the past.
As the years went by, changes in the banking sector had led to the disappearance of what individual banks regarded as profitable activities. Examples include acceptance credit, which was highly profitable for the banks: the related markets were taken from them by the finance company run by the central cooperative. Another, similar change, was the transfer of home loans to OP Mortgage Bank. In addition, demand for small consumer loans tailed off, being replaced by payment cards with credit facilities.
Perhaps the greatest problem was the sudden fall in the reference interest rate, squeezing interest rate margins. This deprived banks of a key margin from a traditional financing activity. Such developments required a keen eye for psychology when managing the relationship between the central cooperative and local banks. The outcomes show that this was done successfully.
Insurance business brings balance
Expanding from traditional banking to insurance filled the gaps created by the huge changes in banking. Banking and the related asset management account for over half of OP Financial Group’s income – insurance has taken just over a decade to grow into an operation of corresponding size.
There are permanent points of contact between banking and insurance: long-term customer relationships and the management of imperfect information are crucial to both. There are also synergies between them, which benefit the whole group and have enabled continuous growth. Without this, OP Financial Group could not have maintained its wide service network or fulfilled its promise of serving customers on an equal basis all over Finland.
Capital adequacy and risk management take centre stage
The change in the nature of the banking business is partly due to external factors such as tighter legislation and supervision, which now falls under the ECB due to the banking union. A key new element is the far-reaching change in the ground rules applied between the banking sector and supervisory authorities. Actors in the Finnish banking sector have had to accept that new regulations come from outside Finland’s borders and that lobbying opportunities are very limited at national level.
In the old banking culture, the focus was on growing market share, whereas capital adequacy and Group-wide risk management took centre stage in the new business environment. Growth was still highlighted, but not at the expense of capital adequacy.
OP cooperative banks have succeeded so well over the last couple of decades largely because related factors – such as capital adequacy, risk management, customer orientation, remuneration schemes and management systems – form a well-functioning whole in OP Financial Group’s strategy.
Only change is certain
The governance structure of the amalgamation and Group may seem complex to outsiders, but this kind of organisation has worked well in practice. OP Financial Group has undeniably been successful, as revealed by graphs showing balance sheet performance, growth in the number of owner-customers, operational efficiency and capital adequacy.
The key challenges of forthcoming years are related to social trends such as the ageing population, migration from inside and possibly outside Finland, and environmental matters. Such factors can be seen in the group’s strategy, but the size of their actual impact cannot be accurately predicted.
On the other hand, greater bureaucracy due to tighter legislation and supervision is an everyday reality that we must prepare for. We must also accept that stricter regulation and supervision are intended to guarantee the long-term continuity of banking, regardless of the circumstances. The future will show whether the costs of bureaucracy can be offset by digitalisation, or whether structural changes will be needed in OP Financial Group too.
1 May 2022 Antti Kuusterä