By Peter Larsson, Principal Solutions Consultant, Real-Time Payments – Europe & North America
The Nordic region has long been considered a pioneer of digital payments, with some of the lowest cash usage levels in Europe; however, the impact on cross-border payments has been limited when compared to progress on the domestic front. And this is a crucial area to address for a region with large volumes of trade and tourism between neighbors, as evidenced by the fact that 18,000 Swedish workers commute to Denmark on daily basis. Not surprisingly, improving cross-border payments experience and efficiency is a high priority.
Payments organizations in the region came together to design two parallel streams to address these local challenges. The first was the creation of the Nordic Payments Council as a counterpart to the European Payments Council, which is drafting the rulebook needed to align the countries. The second was the launch of the P27 initiative.
P27 as a response to Nordic needs
P27 is designed to solve for the fragmented clearing and settlement environment that exists across the Nordics; while each member country has different infrastructure, there are many banks with operations across the P27 initial deployment countries (Sweden, Denmark and Finland) that are supporting technologies, rules and processes unique to each country. There is a critical need to modernize systems in line with regulatory mandates, as well as to reduce cost per transaction, which is often reliant upon correspondent banking relationships that are in many cases processed over the SWIFT network.
P27 is a reference to the 27 million people who live in the Nordics; despite extremely high digital payments adoption, the relatively small addressable customer base does impact economies of scale. Banks desperately need to reduce their internal costs, including operational overheads and compliance in order to release resources for innovation—to develop differentiated services that will ultimately drive growth.
The most recent announcement from the P27 initiative is that the sponsor banks have agreed on the necessary funding to begin the project build. The largest regional banks are the driving force here, as it not only benefits their bottom lines, but also drives growth.
This growth mindset and approach to real-time payments (RTP) in the Nordic region is innovative when considered in a global context. Many regions without an RTP regulatory mandate are looking to find margin in per-transaction charging, which is not realistic – especially in the consumer space, where consumers will not want to pay simply because it is faster. This means that margin will need to be found in value-added services built on top of real-time payments.
A growth mindset as a catalyst for change
The Nordic approach recognizes that a payment type itself is not a competitive differentiator. The value is in modernizing the infrastructure that will allow for innovation, whilst maintaining the foundational service levels that all customers expect; security, availability, and scalability. They also seek to improve the basics, such as the onboarding experience for both consumers and corporates – and they’re finding ways to incrementally improve technology, which will exponentially improve customer service. A large part of this improvement will come from the standardization of the system across borders.
Most global banks are challenged to evolve their legacy systems and architecture, but by sharing the cost of centralized payments infrastructure modernization, the P27 initiative reduces the individual load on each bank, as well as releasing financial capital to address their internal infrastructure needs. Larger banks are currently maintaining separate infrastructures and adhering to separate rulebooks in each country where they operate, which is obviously costly.
With P27, it is expected that banks can simplify their technology stack and the associated overheads by condensing to a single infrastructure and rulebook. The scheme also aims to align its standards with those of SEPA, to bring further consolidation benefits to Nordic banks that are facilitating payments to Europe. Additionally, smaller banks are likely to see a cost benefit from the increased number of enriched data payment services that are provided by the P27 central infrastructure itself.
Digital overlay services could address multiple challenges
We expect that innovation in the Nordics will take inspiration from other advanced real-time and digital payment markets, such as India, and place a focus on digital overlay services. It will be very interesting to see how the P27 initiative develops plans for such overlay services.
Electronic invoices, which enable consumers to pay via bank account or with alternative payments like Klarna, are very common in Sweden. Leveraging digital overlay services such as Request to Pay (R2P) would enable scaling of electronic invoicing, and further improve the customer experience. R2P (also called Request for Payments – RfP – elsewhere in the world) would be a natural evolution for the Nordics, where historical trends indicate that digital overlay services would see smooth adoption by consumer and merchant customers.
I’d also expect to see overlay services that address the multi-currency challenges of the region, as this is a primary focus of the P27 initiative as the region looks to move beyond single currency schemes. From an adoption perspective, shoppers are most comfortable paying in their local currency and preferred method, so developing consistency across the Nordics in terms of real-time payments methods will drive conversions at the point of sale. Accepting real-time payments in any Nordic currency, regardless of physical business location, would become a competitive differentiator for merchants.
The long-term success of P27 will be in its ability to drive revenue growth – not just cost reduction on legacy systems and transaction pricing. This growth will come from delivering new services for customers; across the consumer, merchant and the corporate space.
The convergence of real-time payments and open banking is introducing new complexity as well as new opportunities into the payments ecosystem. Understanding the implications of this change and how it will affect the competitive landscape will prove essential to gaining an advantage in this dynamic market. We developed this whitepaper as a key resource to help outline an overarching strategy for navigating these changes successfully.