Is it time for the Nordics to learn payments innovation from India?

India has completely renewed its digital payments infrastructure and created a model which the rest of the world - including the Nordic - could and should learn from when designing the payment services for the future.

The Nordic countries are the most digitised in the world. This has put the Nordic countries in a first-mover position especially when it comes to financial and payment services (among other digital services like e.g eID). But the first-mover position has also meant that most of the digital payment systems are built on infrastructure that would today be considered legacy systems and long overdue for renewal. This is especially true when it comes to the dominating bill-payment systems currently in operation across the Nordic countries. Our first-mover position should not prevent us from learning from cutting-edge innovation in other geographies, especially when we look to replace our current legacy.

Another factor that shapes the future of payments is the increasing regulation on financial services in recent years. In Europe, PSD2 (the Revised Payment Services Directive) has mandated banks to open their systems to third parties, and the IFR (Interchange Fee Regulation) reduced the transaction-driven revenue from card payments significantly. And most recently the EU's new Retail Payments Strategy is putting account-based real-time payments front and centre. These and similar regulatory initiatives in other countries have forced banks to revisit their strategies for payments while at the same time creating opportunities for banks to re-invent and recapture parts of the payments ecosystem through new and improved bill-payment and other account-based payment solutions.

This new paradigm for payments and the increased strategic focus on payments among the banks is also what has driven a group of the largest Nordic banks to set up the P27 initiative to fundamentally rebuild the inter-bank payments infrastructure and replace the many legacy systems in the different countries with one common real-time, cross-currency and cross-border system. The P27 Nordic Payments Platform(NPP) project is well underway to deliver the real-time payments platform, and while this in itself will be a major step forward, now it is time for the Nordic banks to make strategic choices as to how to leverage this new infrastructure, and become even stronger in the area of payments. This is especially critical since revenues from payments represent ~ 33% of European banks’ total revenue.  Nordic banks must consider the strategic and business opportunities that this new platform can enable for their leadership, especially in the area of bill payments, which is key to the banks’ overall customer relationship strategy. 

To seek inspiration and benefit from the learnings of others, the Nordic banks should have a look at some of the most interesting developments in the payments industry across the globe. While we have, to a certain degree, rested on our “digital laurels”, a country like India has leapfrogged generations of legacy payment systems and successfully implemented a full-fledged next-generation digital payments infrastructure with a strong foundation in three major platforms, which together today process 60+ Billion annual transactions and growing in double digits. The three platforms are: 

• Real-time payments – Unified Payment Interface (UPI) platform

• Bill payments – Bharat Bill Payments System (BBPS) platform

• Fraud and risk – Enterprise Fraud and Risk Management (EFRM) platform

Payments innovation in India

I recently had the pleasure of learning more about how India’s digital payment infrastructure has earned high appreciation from the global community, and how in a very short time it has demonstrated success in delivering results to transform the lives of a billion+ people. I spoke to Raj Jain, CEO of RS Software, the company that has exclusively built the three platforms for National Payments Corporation of India (NPCI). My conversation with Raj Jain left me thinking about how we in the Nordic financial services industry can learn from the Indian model and the company behind that built it.     

When discussing the possible learnings from his company’s journey to build UPI for India and enable the Indian banks to benefit from innovative overlay services when connecting to the real-time payments rails, Raj Jain pointed out that he believes real-time payments is not an end in itself, but rather an opportunity for banks to deliver innovative products and services in both consumer and corporate payments, and thereby transforming the customer relationship paradigm and accelerating digital commerce. 

While the scale of UPI in itself is very impressive - the underlying architecture is even more interesting from a payments strategy perspective, as the entire setup has been designed with an outside-in approach that factors in the needs of all the user groups - including banks, corporates and even end-consumers. UPI is built from the ground up applying an open and federated design, which is a significant improvement from the standard and more siloed design of the legacy bill payment systems as the ones we know in the Nordics.

The principles and open architecture of India’s real-time payments platform UPI  are already making headlines in the payments industry. The international tech giants Google, Amazon, Alibaba and Facebook have all taken great interest in UPI and benefited from its design. Google has very successfully used UPI to shift e-commerce payments in India from card-based to account-based. Their success in India has led to Google directly encouraging the United States’ Fed to adopt a similar approach when implementing the next generation of payments infrastructure in the US.

The current bill payment solutions active in most countries are owned and operated by third parties. They have provided banks with good revenues, but the solutions have not been to the benefits of the banks’ corporate clients who have suffered from the lack of innovation and a related lack of viable alternatives. Electronic bill payments, that is estimated in the US alone at a market size of $ 4+ Trillion, is transforming itself to be best served with platform architecture. Platforms like marketplaces have innate characteristics to enhance the user experience, improve efficiencies of scale, provide comprehensive fraud and risk management, and trigger innovation through secure yet open interfaces where the ecosystem can contribute.  The bill payment platform is no exception. This design and architecture allow the participating banks to focus on developing and strengthening the relationship to their corporate clients by delivering value-driven bill payment solutions tailored to the clients’ needs and with the banks in full control of the relationship with the corporate clients rather than a third party with its own commercial agenda. 

With account-based payments moving up the strategic ladder, and with an ambitious infrastructure initiative like P27, the Nordic banks can learn how services like bill payments can be reimagined and implemented in a way that delivers value to banks, corporates and consumers alike. They now have a real opportunity to re-engage actively and directly in bill payments, thereby strengthening their relationships with their corporate clients and in the process building completely new transaction-based revenue streams. The banks in the Nordics should seize this opportunity to ensure and strengthen their future role in payments - both retail and bill payments. The alternative will be a continuation of the current paradigm, where most banks have left much of the payments infrastructure and customer dialogues to global payment schemes, consequently leaving the banks with rapidly reducing margins and a higher risk of disintermediation.  

The creation of P27 is the most significant development for the Nordic countries to maintain and enhance its leadership in digital payments. From what it appears, P27 is committed to ensuring that the Nordic banks have strategic control allowing the banks the opportunity to pursue a bolder and more ambitious payments strategy and lead from the front in value-added services, starting with bill payments.