On the road towards a single Nordic payment area

The P27 project aims to establish a single pan-Nordic payment infrastructure that will benefit the 27 million inhabitants of Denmark, Sweden, Norway and Finland. The project has the potential to impact the lives of everyone in the Nordics and transform the way payments are made and cleared in the region. Claus Richter, Head of Transaction Banking Solutions at Nordea, describes the motivation behind the project and the next steps towards making P27 a reality.

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. The P27 vision of establishing an open-access, pan-Nordic payment infrastructure has three main dimensions. These dimensions can be described in terms of the society aspect, adding customer value and creating industry wide systemic improvements.

Supporting economic development

Assessing the project from a society point of view, 50% of all cross-border trade in the Nordic countries actually happens between the Nordic countries, meaning that there is already a significant amount of inter-trade between Denmark, Sweden, Norway and Finland. It is obvious that if you want to support that cross-border Nordic trade and therefore increase economic development in those countries, your objective should be to make that trading as easy as possible. This is one of the cornerstones from a society point of view of why we want to do this; to make an underlying infrastructure that supports trade.

If you look at this from a customer perspective, it is easy to see that we have some challenges with the way the structure is set up today. Obviously, there are a lot of border regions in the Nordics which are directly impacted by the present system of national payment infrastructures. For example, if a person living in Copenhagen goes to Malmø in Sweden for the weekend to do some shopping, they are unable to use the Danish mobile payment application MobilePay. In the same way, if a person from Sweden visits Copenhagen, they are unable to use the Swedish mobile payment application Swish because they run on different underlying infrastructures. With the P27 project, we will deliver one Nordic payments infrastructure so that these systems will be integrated. This means that people will be able use these mobile payment solutions interchangeably across the region.

Adding e-commerce into the equation, with a substantially increasing amount of trade moving from physical stores to the web, obviously these businesses are prone to far more cross border trade than physical stores in border regions. With the removal of the physical element, a person in Denmark buying something on the web is just as likely to be actually making a purchase from a Swedish webstore as a Danish one. Once again, it’s difficult for a nationally based webshop to support mobile payment applications such as Swish, MobilePay, Vipps in Norway, Siirto in Finland and so on. One underlying payments infrastructure would be able to support both online trading and cross border purchases in physical stores to a much greater extent.

Driving cost efficiencies

Lastly, there is an industry dimension to the P27 project. Currently Nordea and other banks in the Nordic region have to support multiple clearing infrastructures. That drives up costs, increases complexity and creates multiple challenges related to long term sustainability. It goes without saying that all of the national payment infrastructures we have in place at present need to have robust defences against cybercrime and fraud and are fully focused on making sure AML (Anti Money Laundering) processes are in place. All factors that are increasingly becoming more frequent in the modern digital age. As we are still comparatively small markets in the Nordics, making sure these systems are in place for each country means that there is already a very high starting cost for each unit. Therefore, aggregating national payment infrastructures together into one entity creates some scale advantages which are of course very important.

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. 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. The exact methodology for calculating foreign exchange rates has yet to be discussed but I expect that we would have different solutions depending on the amount size of the transaction and whether we are talking about private individuals or larger corporations. There are some challenges in terms of how to deal with large foreign exchange transactions outside of market opening hours and this is one of the very interesting things related to P27 that we will that we have to solve.

Next steps

At this point in time with the project we are currently running through a process with key decisions. At the end of 2018 the seven CEOs of the seven founder Nordic banks met together to approve the formal investment in the P27 company. During the first part of this year, this has to go through formal board approval in the banks. Following that we will begin taking the formal step to create the legal entity.

Transparency is also key for us and that has been important in terms of mitigating the concerns of our stakeholders. Obviously with a project like this, which is quite ground-breaking and offers fundamental changes to the current payments infrastructure, concerns can be raised both from authorities but also from other players in the market. Therefore, we have run a lot of sessions with different stakeholder bodies to make sure we are transparent about what we are doing. We have also established a website as well which is about making sure that we share as much as we can as the project progresses. We have done our upmost to be as transparent as we can to the market to alleviate any suspicions that this is purely about banks trying to capture fees or establish market power.

Once the boards of each of the seven banks has approved the formal investment in the P27 entity, we will begin merger filing with the European Competition authorities to actually get the company up and running. In parallel with that process, we will file for a clearing license with the Swedish FSA. We are aiming for the first transactions made on the P27 infrastructure to run in pilot mode in Q2 2020.  With regards to the authorities, it’s of course hard to predict up front how long it will take but I think we have prepared as thoroughly and robustly as possible. A migration plan is currently being delivered regarding how we will migrate volumes onto the new infrastructure and as it looks right now, we are likely to begin with instant payments in Norway.

We will shortly be announcing a new CEO for the P27 entity. There will be a transition period as we move from a project organisation to the CEO beginning to hire employees into the new legal entity. That is why getting the legal entity up and running is a key thing because prior to that you can’t hire people. We believe we will have a legal entity that you can hire from at the end of February. We will slowly see that the legal entity will take over the workload. There will be a board established for that organisation and Nordea will have a representative on the board and slowly the workload will shift over to that entity as the CEO starts to build his team. Internally in Nordea we have started to establish a programme to deliver towards P27 as this requires changes to our internal systems just as it will for all of the other banks.

Working together

In total around one hundred people have been brought together from the P27 banks and the bankers associations to collaborate in different workstreams looking at how this should be designed. This is a fantastic illustration of how we in the Nordics unlike some other parts of the world are able to come together and do things which benefit the market as a whole. This includes all the way from our customers, society and obviously the industry itself in a collaborative approach without breaking anti-competition regulations.

Success factors

For me there are a few key success factors that will signal whether this ambitious project has achieved its goals. Number one is that we actually manage to migrate away from the old payment infrastructures, which is key in terms of realising the efficiency gains for the sector. Number two, at least from a Nordea perspective, is that we manage to bring customer solutions to the market that take advantage of the new infrastructure and provides better offerings to our customers. I will obviously be very happy as well if P27 supports the overall growth in the Nordic region in terms of trade.

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