Frictionless Cross-border Payments: Let’s Start in the Nordics

In one corner, the evolution towards becoming a cashless society demands that more banks adopt a digital-first approach towards product development and customer service. Already, 71% of people in Sweden indicate that they could manage their daily lives without cash.

This is of course the direct result of the second major change: the explosion of new (and robust) digital banking services for both consumers and businesses. Crypto assets, e-wallets, acquiring and payment initiation services and instant peer-to-peer payments have only accelerated the demand for faster, cheaper and simpler payment tools.

The G20 focus on cross-border payments

One area that lags sorely behind, however, is cross-border payments. In fact, the G20 flagged cross-border payments as a global priority at its last meeting in 2020.

It’s no surprise why: the process is laden with complexity. Lack of data standardisation and interoperability, various and sometimes conflicting compliance requirements, disparate operating hours and outdated legacy platforms are just a few of the challenges that contribute to high costs, slow transaction rates, limited access and lack of transparency.

Acknowledging that the Covid-19 pandemic has affected the payments landscape by turning many nations’ focus towards domestic matters, the G20 commission has emphasised the importance of taking the long view. Globalisation is a reality, and reducing the friction within cross-border payments is necessary for long-term economic growth.

Today, perhaps due to these challenges, a vast majority of consumer payments are conducted domestically. But there are two problems here:

First, the demand for rapid cross-border payments is rising. Financial institutions must find a way to provide the same level of simple, instant payment services for cross-border payments as they currently offer for domestic payments. If they don’t, they’re sure to be outpaced by third-party, Fintech upstarts.

Second — and perhaps more interestingly — this disproportionately benefits large, single-currency markets such as the US, the UK or the SEPA zone. In a region like the Nordics which has to contend with the increased complexity of multiple currencies and clearing systems, streamlining cross-border payments is vital for commercial growth and competition.

P27: a test and an example

With so much at stake, Nordic banks have joined forces in the form of P27. Named for the 27 million inhabitants of Denmark, Sweden, Norway and Finland, its goal is to build the world’s first multiple-currency cross-border payment system. By establishing a pan-Nordic payment infrastructure, P27 hopes to reduce barriers for trade both within Nordic countries and between the Nordics and the rest of the eurozone.

Martin Georgzén, Head of Strategy and Communication for P27, put it this way when speaking recently at Sthlm Fintech Week: “Today, 25% of all the cross-border trade from the Nordic countries is actually staying in the Nordics. So by solving that you really solve a big part of all these different things when looking at how we can get private persons and corporates to prosper. If we can make that simpler and more efficient, in the same way that we pay domestically, then we will have come extremely far.”

In fact, looking to domestic payment structures may be the key. With so many countries in Europe now offering instant domestic payment options, half the work may already be done.

SWIFT, the financial messaging network, has been experimenting with connecting different domestic instant payment systems to each other. “We actually had the instant payment system in Singapore sending a transaction to Europe,” said Saskia Devolder, Managing Director at SWIFT. “It ended up in Germany and then it went through TIPS, the European system, into Spain. And all of that happened in like 41 seconds. That was just the pilot so we assume that once we can automate that, it can go even faster.”

Of course, that technology only applies to consumer-facing solutions. But for wholesale payments, instant payments are perhaps not the top priority. More than speed, corporates care about transaction costs, especially when there’s a currency exchange involved. They also want to have clear visibility into the status of the transaction, when it will be executed and what potential risks there might be to cause the transaction to be rejected, such as currency controls, AML practices or something else.

This is exactly what P27 seeks to harmonise. By setting international standards, P27 hopes to offer lower costs and greater flexibility while stimulating the development of new products and services for both consumers and retailers.

Making payments disappear — in a good way

It’s easy to envision a future — not too distant — in which the difference between a domestic and a cross-border payment is indistinguishable to consumers and inconsequential to corporates.

Steve Jobs said that “great technology is invisible.” Perhaps soon payments technology will join those ranks and — from the perspective of the end-user — disappear completely. Right now, transactions are linear: agree on the terms of the sale, then conduct the payment. But in the future, having an extra step for payments may be as obsolete as writing a paper cheque.

Saskia Devolder put it this way: “It might be more difficult to have a conversation in 2025 about payments exactly, because it’s going to be part of something much broader than just payments.”

In a way, the Nordic region is a perfect place to develop these new technologies. Despite the added complexities of multiple currencies and disparate clearing systems, Nordic countries are at the forefront of digital banking and well-versed in collaboration. Perhaps P27, after fulfilling its goal here, will grow to become P78, for the 7.8 billion people around the world today.