How the BankID Verification Tool Capsized Norway's Banking Industry

Over the last decade, non-collateralized debt in Norway has increased by more than 220%. It now equates to almost 15% of the national government's budget.

Why? The short answer is technology.

This is the story of how a simple bank verification tool named BankID upended an entire industry, before fueling a large debt bubble through the issuance of consumer debt (known as forbrukslån).

In the Norwegian language, forbrukslån is a portmanteau, which mends the two words "consume" and "loan" into one single phrase.

Automatic verification with contractual power

In 2006, a small local Norwegian bank introduced a new program utilizing a computer chip called BankID. It runs on RNG technology (random number generation), which prevents scammers from mimicking the user's login credentials.

It grants access to bank accounts by issuing a randomly generated code (similar to a standardized 2-FA). On its face value, the solution seemed insignificant. Nothing had really changed, except adding an extra layer of security.

Then 4 years later things began to change...

Under heavy pressure from banking interest groups, The Norwegian government revised its laws so that users could sign financial contracts electronically with the help of BankID.

A randomly generated code now held the same contractual power as a physical signature made with pen and paper.

As a result anyone could apply for loans, transfer money to other banks and enter into contractual agreements through their computer and cellphones, without ever putting their feet within the premises of a bank.

In order to obtain the computer chip an individual would visit the bank in person, provide their passport and get verified. Their social security number is then tied to a number ID code.

Few (if any) knew what impact it would have on the nation's debt levels, and the financial industry as a whole.

Norway has no cap on usury rates

Forbrukslån is the Norwegian equivalent to an American consumer loan. Debtors are not obligated to put up their personal property as collateral, and interest rates tend to be high.

Unlike most western European nations, Norway does not set a legal cap on interest rates. This type of legislation is often referred to as "usury laws" in the United States. In practice it means that financial institutions are free to charge whichever rates they want, regardless of the ramifications.

Rates for an average consumer loan lies somewhere between 7 and 40%, although it can surpass 1.000% in some instances.

Compared to US banking

Most Americans will know what I'm talking about, when I say that US banking is slow, tedious and allergic to innovation. The whole system is designed to resist technological change.

With more than 50 financial jurisdictions (when accounting for US jurisdictions) plus a federal regulations, it can be a behemoth task to launch new products and services.

Many Americans still use checks for payments, whether it comes to depositing money or paying for their groceries.

Online banking in the US does not support immediate cross payments between banks, nor is there a national ID verification system. Sure, some services circumvent that issue, such as Venmo and Zelle, but the banks themselves remain frozen in time.

In Norway it used to be the exact same way, until BankID arrived.

The ripple effects of BankID

As BankID went mainstream, more Norwegians began to borrow money. The debt increase was buyoed by two particular changes:

1. Borrowers could now fill out an application for a forbrukslån within minutes, signing it online.
2. Banks were also given permission to harvest tax returns, credit scores and other information automatically, instead of having to request physical signatures and paper copies.

Before the introduction of BankID, a forbrukslån application would typically take between 3-10 days to process. They had to be sent by mail, or filed at the bank's offices. Post-BankID, the processing time shrank to a mere few hours.

In effect, it allows any individual to apply for uncollateralized loans 24/7, with no restrictions.

Unsustainable debt levels

Between 2010 and 2018, outstanding debt tied to forbrukslån posted annual growth rates in excess of 10%, every single year.

The Norwegian central Bank (Norges Bank) carried out a market survey in 2017, which showed the industry swelling by more than 30% between 2015 and 2017 alone. Numbers are even higher when accounting for compound growth rates.

Reference: Sterk vekst i forbrukslån - Norges Bank.

In effect, the total uncollateralized debt swelled to almost 15% of Norway's national budget. In 2019, non-collateralized loans (including credit cards) totaled almost 200 billion Norwegian kroners.

Higher default rates

Due to the explosive growth in debt, more loans have fallen into delinquency. In March 2020, Finanstilsynet (Norway's equivalent to the Consumer Financial Protection Bureau), warned of an impending floodwave of defaults, tied to uncollateralized debt.

Their survey indicated that default rates had jumped to almost 16% of all outstanding loans, when isolating loans held by specialist banks (lenders that only target the forbrukslån industry).

The coronavirus crisis has undoubtedly exacerbated the issue, as thousands of Norwegians have lost their jobs. Social security will only help debtors cover up to 2/3 of their normal salary, which makes it hard to handle expensive debt obligations.

Some industry experts expect that default rates will jump as high as 40% in the coming years. Banks will post significant losses, while debtors will be forced to sell their homes and valuables to cover the debt.

Those who do not own real estate will need to enter downpayment plans, which extend over a period of 4 years, after which they can get out of the debt trap.

The social ramifications are significant, and politicians can be blamed for their inaction.

Is BankID the real culprit?

It is difficult to say for sure whether BankID singlehandedly caused the uptick in debt levels, but it certainly played a crucial role.

Automatic debt applications make it much easier to apply for credit, while simplifying the bank's overhead costs. Another important factor has been the introduction of a national debt registry.

Once a consumer sign their forbrukslån application, banks have permission to collect all relevant data from a central registry. As a result, the entire process have become completely automized.

Moral of the story

The Norwegian lending boom (and subsequent collapse) serves as a good example of how technology can impact any industry in both positive and negative ways.

Other sources: https://www.finansnorge.no/aktuelt/nyheter/2017/11/fortsatt-hoy-vekst-i-forbrukslan/
https://www.forbrukslån.no/med-bankid