The Nordic Cross Border Payments initiative, or P27, began in 2017 to simplify cross-border payments among Nordic countries. P27 is the first integrated real-time platform in the Nordics region formed by six major banks – Danske, Handelsbanken, Nordea, OP Financial Group, SEB and Swedbank. The platform will facilitate both domestic and cross-border payments in multiple currencies, in real-time while harmonizing the Nordics and the European payments landscape. The first live transactions are expected in 2022 in three countries – Denmark, Finland and Sweden. If successful, operations will expand to other Nordic countries. And while P27 is expected to bring many efficiencies to the payments system in the Nordic region, participating banks will need to take deliberate steps to prepare for this new platform.

Why the Nordics Need the P27 Payments System

The P27 initiative was started mainly to address the existing shortcomings inherent in the Nordic payments system that often lead to higher cost and handling time. These shortcomings include:

• Each Nordic country has its own currency.

As such, any transaction between Nordic countries must go through a foreign exchange process which increases the payment handling time. Additionally, the fragmented settlement and clearing process in each country drives the cost per transaction higher.

• Different currency networks.

Unlike the EU where a transaction between two nations occurs through the cost-effective Single-Euro Payments Area (SEPA), in Nordic countries, the different currencies force a settlement to happen through the SWIFT network. The transaction costs through SWIFT are about 3-4% of the transaction amount. As the transactions go through multiple banks, consumers incur higher transaction charges.

• Cross-border transactions with multiple banks.

Furthermore, consumers and businesses in Nordic countries often make cross-border transactions forcing them to have multiple bank accounts across these countries. This creates operational inefficiencies and higher processing times.

The P27 platform will help address most of these concerns by enabling quick, real-time, batch, domestic and cross-border payments on a secure platform. The new infrastructure will bring simplicity and scale efficiencies while harmonizing and standardizing payments with better transparency. Furthermore, it will allow financial players to build complementary value-add services on top of the basic infrastructure.

P27 Readiness Check for Banks

While there are many benefits for ecosystem participants, the banking system will be faced with numerous challenges in the end-to-end implementation of the P27 platform. The following challenges could deter banks from enjoying the expected benefits arising from the new payment’s platform:

1. Impact of legacy systems on real-time payment infrastructure: Currently, all international payments are settled in approximately 1-5 business days. Even SEPA credit transfers take a business day. The only exception is SEPA instant credit transfer with a processing time of 10 seconds. P27 aims to execute transactions in real-time which requires a faster, automated and updated infrastructure to process and settle bulk payments instantly. The existing legacy infrastructure in many banks may prevent the realization of these efficiencies.
2. Overcome security issues: P27 aims to decentralize settlement by removing the central settlement body. The participating banks are responsible to alleviate concerns related to data privacy, identity and access management, third party access, etc. while simultaneously preventing any fraudulent activity like money laundering, fraud and more.
3. End-to-end integration: The most crucial part of the P27 initiative is for banks to ensure seamless data transactions between themselves. The participating banks should ensure that there are no network lapses and inefficiencies that may disrupt the payment system.
4. Regulatory burden on smaller players: As part of the P27 initiative, the Nordic Payments Council (NPC) is planning to release directions to help regulate the payment ecosystem. Compliance with the regulations will require additional costs in the form of staff, modifications in existing systems, etc. While larger banks with enough financial cushion can address the additional costs, the profitability of smaller banks might be impacted the most.
5. Differentiate to compete: The P27 initiative will create opportunities for banks to form a differentiated product strategy. Banks can offer innovative services like a request to pay and confirmation of payee which can happen through APIs. By analyzing the payments data, banks will have a better understanding of customer needs and that leads to personalized products. While not all banks are equipped with the needed analytical tools and the processing power to offer such innovative services, these are the tools that will provide the differentiation to compete.

Imperatives for Banks Derive Benefits from P27

While working with banks across the globe, Wipro’s analysis revealed that many banks may face possible issues that will prevent them from enjoying the full benefits of P27. These issues include an outdated infrastructure, an obsolete security system and a lack of financial firepower and technology prowess. To overcome these issues, banks should address the constructive actions below to ensure they are better placed to adopt the P27 initiative.

1. Integration of siloed systems: Customers interact with various segments of a bank. Banks with legacy systems contain isolated systems for every segment. These siloes impact their ability to connect to any external system and inhibit a consolidated view of their customers. Consolidation of transaction data helps banks gain valuable insights about their customers’ banking behavior, making it possible to offer customized solutions.
2. APIs for communication: Application programming interfaces (APIs) are a useful tool for banks to communicate with the P27 system and other banks in the network. They conveniently offer services like requests to pay and share payment confirmation with concerned parties. Additionally, APIs will also help small banks address their financial concerns by partnering with fintech and leveraging the latter’s tech and analytical capabilities without investing/developing on their own.
3. Upgrade cybersecurity: Participating banks must conduct a thorough audit and assessment to know the strengths and weaknesses of their existing security systems. Second, since the banks will deal with heavy loads of data, classifying data points based on their sensitivity will help prepare customized security measures. Finally, as banks open up for third-party providers through the API route, strong customer authentication, consent management and identity fraud detection will help to improve their Identity and access management system.
4. Language transition: Currently each bank has its communication language formats like LB, KI, UTLI and SISU. Post P27, all banks on the platform will communicate in the universally accepted ISO20022 XML format. Banks need investments to detect and address these gaps sooner than later. While banks may struggle to see an immediate return on investment, automation and transitioning to standard ERP and payment processing software will benefit the business in the long run.

Over time, P27 will increase interoperability, efficiency and save processing time. This will not only benefit consumers with more faster payments but it will open a wide new range of opportunities for financial institutions to collaborate and improve the consumer experience. While all Nordic banks will be watching the beta transaction program this year, taking steps now to prepare for a wider rollout is not only prudent but will help banks reap the full benefits of this new payment landscape.

To read more about the Nordic Cross Border Payments initiative (P27) click here. To follow the developments of the Nordic Payments Council (NPC) click here.

Contributors:

1. Balakumar Rengaswamy, Manager, Wipro Insights
2. Shiddhant Bhattacharya, Analyst, Wipro Insights