Nordic payments landscape: scalability is key

The Nordics’ growing reputation as a fintech hotbed has perhaps been felt most in the payments industry, revealing payments infrastructure challenges that are rewriting the competitive landscape for banks in the region.

Perhaps no single event did more to set the payments industry on its head than the adoption of the EU’s PSD2 which literally rewrote the rules, ushering in an era of deregulation that has been characterized by some as a gold rush.

Banks in the Nordics and elsewhere thus find themselves under increasing competitive pressure from private equity-backed fintechs and as well as established tech giants like Google and Apple, all of which are salivating over the opportunities that come with gaining access to banks’ customer data.

“When you look at the number globally, payments is one of the biggest private equity investment areas,” says P27 COO Claus Richter, who has had a front-row seat throughout much of the Nordic’s payments transformation.

A quantum leap in mobile payments

Deregulation coupled with a strong tech sector helped turn the Nordics into a fintech epicenter, putting the region on the leading edge of an emerging mobile payment revolution.

At the same time however, the Nordics’ quantum leap in mobile payments also laid bare just how antiquated the region’s core payments infrastructure had become. While the Nordic economies are relatively well-integrated, the region’s lack of a common currency has resulted in a heavily fragmented and country-specific payments infrastructure. Most of the clearing and settlements systems are decades old, creating roadblocks both for traditional banks as well as new fintech entrants.

“Today, I would characterize Nordic payment infrastructure as somewhat split. We really have a two-tier system, with core infrastructure that is old and outdated on the one hand, and mobile apps that are very modern and cutting edge on the other,” says Richter, who spent seven years at Nordic banking giant Nordea, most recently as Head of Transaction Banking Solutions.

Fintech and Big Tech

New, tech-savvy players have therefore forced banks to look at infrastructure upgrades as well as new revenue streams amid declining margins on payment transactions.

And with global tech giants like Facebook, Apple, and China’s Alibaba all getting into the payment game, banks need to re-assess their value proposition, says Richter. If they aren’t able to help emerging digital solutions like Swish and Mobilepay and others achieve economies of scale across different markets, banks risk being eclipsed by Big Tech.

“Instead of relying on revenues from the core payment itself, banks instead need to derive revenue from other sources surrounding payments,” he says.

“I think scalability is the name of the game.”

Diverse and competitive payments landscape

Looking ahead, Richter sees a much more diverse and competitive payments landscape emerging, with multiple providers offering different combinations of services around the core payments function.

The shift from physical transactions carried out in stores to digital transactions carried out online is another factor defining the competitive landscape for payments. And e-commerce is likely to accelerate further as a result of the ongoing coronavirus pandemic, which has forced consumers to stay at home and many stores to remain closed.

“Whoever has the best e-commerce solution and can provide the most convenient payment experience is likely to emerge as winners in the long-term,” says Richter.

A new payment infrastructure

With regional integration and infrastructure upgrades high on the agenda in the Nordics, and banks wishing to work with new tech-savvy players on robust and convenient payment solutions, it’s perhaps not surprising that a platform like P27 is possibly emerging.

Owned by six of the largest banks in the Nordics, P27 aims to build a payment infrastructure that will enable real-time, cross-border and domestic payments in multiple currencies.

“I think the time is right for a possible solution like P27, which can help accelerate financial integration in the Nordics, give customers the convenience they want, and help facilitate even more cross-border trade and commerce in the region,” says Richter.

NOTE: The official launch of P27 services is subject to regulatory approvals and therefore P27 will not conduct any business activities until required regulatory approvals are obtained