By Peter Larsson, Principal Solutions Consultant for Real-Time Payments, Covering Europe and North America, ACI Worldwide.
The Nordic region, which has some of the lowest cash usage levels in Europe, has long been a digital payments pioneer. However, compared to the strides being made on the domestic front, there has been limited progress on cross-border payments. As a region with high volumes of trade and tourism between neighbouring countries (18,000 Swedish workers commute to Denmark daily), it’s unsurprising that improving the cross-border payments experience and its efficiency is a high priority.
To that end, payment organisations in the region have joined forces 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 has been designed to solve the fragmented clearing and settlement environment that exists across the Nordics. While each member country has a 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 modernise systems in line with regulatory mandates and reduce cost per transaction. Currently, this is often reliant upon correspondent banking relationships processed over the SWIFT network.
P27 refers to the 27 million people living in the Nordics; despite tremendously high digital payments adoption, the relatively small addressable customer base does impact economies of scale. As a result, banks are desperate to reduce their internal costs, including operational overheads and compliance in order to release resources for innovation.
For this purpose, the P27 initiative has announced that sponsor banks have agreed on the necessary funding to commence the project build. The largest regional banks are the driving force, as it not only benefits their bottom lines, but also drives growth for all banks who joins to participate.
When considered in a global context, this growth mindset and approach to real-time payments (RTP) is innovative. Many regions lacking an RTP regulatory mandate, are searching for a margin in per-transaction charging. This is not realistic, especially in the consumer space, where people will not want to pay simply because a payment is faster. Therefore, 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 recognises that a payment type alone cannot be considered a competitive differentiator. The value comes from modernising the infrastructure that will allow for innovation, while also maintaining the foundational services 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. A significant part of this enhancement will come from the standardisation of the system across borders.
The majority of global banks are being challenged to evolve their legacy systems and architecture. Through sharing the cost of centralised payments infrastructure modernisation, the P27 initiative cuts the individual load on each bank. At the same time, financial capital is released to address their internal infrastructure requirements. Larger banks are currently maintaining separate infrastructures and adhering to individual rulebooks in each country where they operate – a costly process.
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.
Addressing multiple changes through digital overlay services
The innovation in the Nordics is set to take inspiration from other advanced real-time and digital payment markets, such as India, and place a focus on digital overlay services. It will, therefore, be very intriguing to see how the P27 initiative progresses 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. Through leveraging digital overlay services such as Request to Pay (R2P), electronic invoicing will increase further, resulting in additional improvements to the customer experience. Historical trends indicate that digital overlay services would results in smooth adoption by consumer and merchant customers, suggesting that R2P could be a natural next step for the Nordics.
I’d also expect to see overlay services that address the multi-currency challenges of the region; 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 go beyond just cost reduction on legacy systems and transaction pricing, in its ability to drive revenue growth. This growth will arise from delivering new services for customers across the consumer, merchant and corporate space.