The Nordic region has long been considered a pioneer of digital payments, with some of the lowest cash usage levels in the European Economic Area. But where it has struggled to modernize services is in the cross-border space. This is particularly crucial in a region with large volumes of trade and tourism between the partners. 18,000 Swedish workers commute to Denmark on daily basis. As a result, improving cross-border payments experience and efficiency has been a high priority for years.

The region came together to design two parallel streams that would address local challenges. 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. Secondly was the launch of the P27 initiative.

P27 is particularly designed to solve for the fragmented clearing and settlement environment across the Nordics. Each of the member countries has different infrastructure, but there are many banks with operations across the P27 initial deployment countries, Sweden, Denmark and Finland. Meaning they are supporting technologies, rules and processes in each unique country. There is a critical need to modernize the systems against regulatory mandates, as well as to reduce the cost per transaction, which relies on correspondent banking relationships, in many cases processed over the SWIFT network.

P27 references the total number of people in the Nordics: 27 million. So, despite extremely high digital payments adoption the relatively small addressable customer base does impact the economy of scale. Banks desperately need to reduce their internal costs around operational overheads and compliance in order to release resource for innovation.

The most recent announcement from the P27 initiative is that the sponsor banks have agreed the necessary funding to begin the project build. The largest regional banks are the driving force behind this as they see the benefit to their bottom lines in terms of reducing operational overhead, and increasing the speed and efficiency of cross border payments. More importantly, they see the opportunity to release resource for innovation in order to develop differentiated services that will drive growth.

This growth mindset and their approach to real-time payments (RTP) is innovative when considered in a global context. Many regions without a RTP regulatory mandate are looking to find margin in per-transaction charging, that is not realistic especially in the consumer space. The Nordic approach recognizes that a payment type itself is not a competitive differentiator. They place value on modernizing the infrastructure that will allow for innovation, whilst maintaining the foundational service levels that all customers expect; security, availability, and scalability. They are also seeking to improve the basics, such as the onboarding experience for both consumers and corporates. They are finding ways to incrementally improve the technology that exponentially improves the customer service. A large part of this improvement will actually come from the standardization of the system across borders.

The banks recognise that the payment type is not the competitive differentiator, it is the enabler for the new competitive services. The ecosystem needs the modern infrastructure to allow for innovation. Most global banks are challenged to evolve 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 human resources and financial capital to address their internal infrastructure. Larger banks are currently maintaining separate infrastructures and adhering to separate rulebooks in all countries. With P27 it is expected that banks can simplify their technology footprint and the overheads associated with this, 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 facilitating payments to Europe. Additionally, for smaller banks they are likely to feel a cost benefit from the increased number of enriched data payment services provided by the P27 central infrastructure itself.

We expect that innovation to take inspiration from other advanced real-time and digital payment markets, like India, and place a focus on digital overlay services. It will be most interesting to see the P27 initiative flesh out further details for its digital overlay services plans.

Swish is the dominant RTP service in the Nordics due to the uptake of merchant payment services, but the next step would be to see an eCommerce experience. Electronic invoices are very common in Sweden which enable you to pay via your bank account or with alternative payments like Klarna. Leveraging digital overlay services such as Request to Pay (R2P) would enable scaling electronic invoicing, and improve the customer experience even further. R2P (also called Request for Payments (RfP) elsewhere in the world) would be a natural evolution for the Nordics, where historical trends indicate 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. The region is looking to move beyond single currency schemes. From an adoption perspective, shoppers are most comfortable paying in their local currency and preferred method. Developing consistency across the Nordics in terms of RTP method will drive conversions at POS. Accepting real-time payments in any Nordic currency, regardless of your physical business location would become a competitive differentiator for merchants.

The long-term success of the scheme 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 corporate space.

How to Respond to the Advent of Real-Time Payments and Digital Overlay Services

Developing a future-proof strategy for real-time + open payments

The convergence of real-time payments and open banking in digital overlay services 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