P27: Working together towards a Nordic payment area

P27 aims to establish a single pan-Nordic payment infrastructure for the 27 million inhabitants of Denmark, Sweden, Norway and Finland. Claus Richter, Head of Transaction Banking Solutions at Nordea, describes the collaborative approach of P27 and why the time is now right for developing a single payment area.

The P27 project aims to create the world’s first real time cross currency infrastructure. This would really be breaking new ground in terms of being able to do cross currency payments in real time. Payments would instantly transform into the other specific currency and we would execute the foreign exchange transaction and accompanying screening in real time. Today we use SWIFT financial messaging services to clear cross border payments in most cases and this volume would be placed into the P27 supra-national infrastructure as well.

Collaborative not competitive

Since the beginning of P27, we have been extremely sensitive regarding the anti-competition aspect of the project. We are very aware that when the seven biggest banks in the Nordics join together in a collaboration it cannot be seen as being something that is adding an anti-competitive element in the market. We have therefore created a three-layer model to present the different bounds of the project and what they mean for the competitive landscape.

Layer one in the model is related solely to the actual clearing platform which is a non-competitive aspect of payment processing and has been for years in the market. Here we are basically just creating efficiency for the whole market. It’s very important to state that the P27 initiative is not about creating an infrastructure just for the seven founder banks. It’s about creating an infrastructure for the entire market, that includes all of the other banks in the market on this infrastructure on an equal footing with transparent pricing and processes.

Layer two in the model adds the next level of services, which could for example be direct debits or proxy services which are needed to establish the relationship between an account number and a phone number. If you want to create a Nordic mobile payment scheme, then it is an important requirement to know the correlation between the account number and the mobile number. This correlation has been established on a domestic basis today but here we would potentially create this on a Nordic scale and is considered a layer two service. Layer two services are those where participants can opt in and out and the next phase of the initiative is to decide what those services will be.

Finally, layer three is related to all of the things that are clearly competitive between the parties, which for example could be the actual mobile service offering. This is where the banks differentiate themselves towards their customers, etc and is clearly out of scope for this project. It might be that we retain some very local services that are specific to one of the countries and therefore we choose not to make them on a Nordic scale.

Governance structure

Throughout the project the relevant authorities have been very heavily involved and there is of course interest in P27 from a central bank point of view. Central banks ultimately carry out the settlement of these payments and maintaining control of their sovereign currencies is naturally something that they are very keen to keep doing. We have continuing dialogues with the central banks on all levels right up to the national Governors.

Equally we have been involved with the FSAs (Financial Services Authority) of each country as well as the relevant anti-competitive authorities. Importantly, we have worked very closely with the Bankers Associations of each country as it is essential for us to underline that this is a market solution. As all of the other banks are represented by the Bankers Associations, it is critical to include them in this initiative. We want to have a good collaboration with the national the Bankers Associations and have subsequently been in a very heavy dialogue with them.

Obviously, our hope at the end of the day is that we can place the full payment volumes of the Nordics on this infrastructure and grow that volume through the simplifying of trade that it facilitates. In terms of the governance structure we are envisaging, we have two governing bodies very similar to those that can already be seen on a European scale. If we look at Europe in the SEPA (Single Euro Payment Area) area, this is governed by the EPC (the European Payment Council). The EPC governs the rule book and defines how payments are supposed to flow in the area.

We are looking to establish a very similar body for the Nordics called the NPC (Nordic Payment Council). This governing body will be controlled by the Banker’s Associations, not by the seven P27 banks, ensuring that all of the banks are equal participants and are able to influence the standards of the payments schemes equally across the board. We will also have an operations body which will run the actual infrastructure. This body would be equivalent to to the EBA clearing house or something similar to that. Both of these bodies will be separate legal entities that will be set up independently from the banks.

P27 aims to have the best practice and international standards so the scheme we are constructing is going to be very close to the European SEPA scheme. Having one foot in the Eurozone, there has been a lot of discussion around ensuring that there is interoperability between the Nordic and European schemes.

Long time coming

There has been a long discussion in the Nordic region about a developing a single payment area. A very similar idea was discussed a number of years ago called the Nordic Payment Area. On that occasion, the initiative failed because at that point in time we were unable to achieve buy-in from senior management. This time around we have the seven CEO’s of the seven banks as the direct sponsors of the project, ensuring that we have senior buy in from the top of each bank.

There are now also a number of aspects which make it a very opportune time to pursue the ambition of a Nordic payment area once again. There is the technology pressure; a great deal of technology is changing in the market which means there are a number of existing infrastructures that need upgrading anyway. In both Sweden and Norway local projects were already underway to update local clearing infrastructures. There was an ongoing realisation in the market that it was time to do something. Add to that the customer pressure of creating extra convenience and the regulatory pressure of each of the local entities needing to stand up to cyber security threats, etc.

There is obviously also the economic pressure. This is very much a scale business, if you look in the market, the unit price on payments is under pressure and therefore obviously all providers of payments need to look at the cost structure around this, so there is an economic pressure that everybody was realising as well. All those different factors together created a strong motivation for getting the seven parties around the table to realise that now is the right time to actually do this on a Nordic scale.

At present, in terms of cross border payments, all of the banks pay SWIFT a fee for executing a transaction. For a domestic payment, a clearing fee is also paid and depending on the countries involved, this fee can also be rather significant. With P27, from a Nordea perspective, we expect multi-million Euro savings on an annual basis. These would be fees that Nordea pays to payment infrastructure vendors in Norway, Denmark and Sweden and to the EBA in Finland. The general market dynamic is that the price we can charge to our customers is under pressure on an ongoing basis. Therefore, obviously the cost structure that we have to supply that service is something that is very important to us. We need to drive that cost down and that is part of the reasoning for initiating P27.

Nordea, along with Danske Bank, DNB, Handelsbanken, OP Financial Group, SEB and Swedbank have been working together for over one year in order to create the world’s first area for domestic and cross-border payments in multiple currencies including the Swedish Krona, Danish Kroner, Norwegian Krone and the Euro. Read more about P27 here: www.project27.info/

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