Innovation in payments has long dominated the fintech industry. However, when it comes to clearing houses and large payment infrastructures, progress has been slow. Facilitating instant payments at scale and across borders, for example, has been on the global agenda for a while, such as the implementation of PSD2 which aimed to increase the use of API technology for account-to-account payments. Yet uptake is still low.

New rails are now being mandated for instant payments around the world. In fact, the European Commission recently published its draft EU law to regulate instant payment (IP) services. As customer demands become more prevalent, delivering real-time payments, across borders and at scale is becoming a global priority.

One promising initiative is P27, led by Danske Bank, Handelsbanken, Nordea, OP Financial Group, SEB and Swedbank. It aims to provide an open-access, ISO 20022 compliant infrastructure for real-time payments, domestically and cross-border in multiple currencies. It aims to harmonize the entire payments infrastructure through a platform that allows payments to flow instantly, initially between Denmark, Finland and Sweden. It will align with the Single Euro Payments Area (SEPA) standards, helping to bring further harmonization to European payments.

The hope among industry leaders is that this platform will transform how payments are sent and received in the Nordics and beyond. However, as with every region, there are challenges that need to be overcome.

Creating interoperability in payments

Banks are no longer a one-stop shop for financial services. The value chain today is much more disjointed, with various companies specializing in different areas. There is an abundance of fintech and big tech players in financial services, especially in payments, who own the customer interface but do not produce payments. These solutions also often operate within closed ecosystems and lack interoperability with other providers.

This creates significant challenges for facilitating instant payments, as disconnected processes and interfaces can cause delays, limit access to data and make payments across providers and borders difficult. Implementation and compliance factors also add to this challenge.

For P27 to be a success, there needs to be a harmonized infrastructure that enables all banks, processors, merchants and fintechs to benefit from consolidated and interoperable payments without stifling marketplace competition or the ability to adapt to regulatory demands. It requires a balance between innovation and futureproofing, and the only way to achieve this is by working closely with the regulator. 

Getting ahead of the competition

The penetration of peer-to-peer and non-card transactions in Sweden is one of the highest in the world, with Swish, a popular mobile payment system, in high use. This infrastructure has been delivering instant payments for around ten years, contributing to the rapid decline in card transactions. The first 13 banks to test the P27 platform are already connected to Swish.

There is a lot of innovation in payments and P27 aims to consolidate it into one platform. By supporting access to frameworks such as Request to Pay, businesses can request a payment for a bill, customers can pay or defer the payment, and banks can streamline payment services and improve predictability.

Unlike the EU’s IP, P27 is not a regulatory initiative, but it could be an essential way for banks to gain a competitive edge in an increasingly saturated marketplace of fintechs and tech giants. To make it a success, we need to see a clear vision. Banks need to understand the competitive advantage and return on investment, so they can be sure that the framework is worth the investment.

More data fuels innovation

We all know that access to quality data is essential for innovation. P27 aims to make data more accessible, enabled by the new ISO 20022 messaging format, which could transform how products and services are designed to meet customer demands.

Banks could, for example, with user permission, see more data about customer purchases, including the amount, location, store and type of product. If a customer purchased a pair of shoes in one location, while an app payment was used in another, this could be a helpful way to detect fraud.

Lending decisions can also be transformed. Banks could use alternative data to make more informed decisions rather than relying on traditional credit scoring, which often does not provide a completely accurate picture of a person’s financial situation. Sources such as rent payments could be used to underwrite a mortgage loan.

A major challenge is that banks’ legacy systems often do not support the processing of ISO 20022-compliant XML payment messages. For many, major upgrades are therefore required which can be costly, time-consuming, and disruptive. Partnering with the right fintech partner can help to mitigate these challenges, while providing access to a broader ecosystem of value-added services. With the right approach, the cost-savings to come will outweigh any initial outlay.

As the race for instant payments heats up around the world, only time will tell which region will win. Whatever happens, banks need to make sure they are ready to embrace the new era of payments, in which are seamless, interoperable and instant.