Divide and conquer? Why P27 could be the making or breaking of smaller banks

What is P27? And what isn’t it?

P27, the new Nordic banking payment protocol, is coming soon. It represents the most significant overhaul of banking transactions since Sweden’s foundation of Bankgirocentralen in 1959, with implications for all financial service operators throughout the Nordics.

In essence, it’s a move to real-time cross-currency payments aimed to lower costs and increase efficiency across Nordic borders, updating the legacy systems of institutions such as Sweden’s Bankgirot with state-of-the-art modern infrastructure, capitalizing on technical improvements in communications hardware and integrations.

However, it’s also critical to understand what P27 is not. It’s not a transaction method in itself, more the underpinning infrastructure that facilitates those transactions. To use an analogy, if a transaction is a car, P27 is the highway, freeing up the vehicle to take the fastest, most efficient route (rather than the current, scenic meandering through the Swedish backroads…).

What does this actually mean?

Think of P27 as a profound change in philosophy. At the moment, Nordic banks operate on a centralised clearing system, with individual banks connecting to, for example, BGC, who then process and clear payments before sending them on to the recipient. For obvious reasons, this creates a bottleneck, with files batched and sent to BGC for handling en masse. This is the main reason that our expectations for receipt of funds is normally on a next-day basis.

P27 changes the whole approach, laying the foundation for banks and financial institutions to connect directly to each other, in real time. The benefits are obvious – instantaneous confirmation and payment transaction, with total transparency and traceability.

So what’s the catch?

Well, direct bank-to-bank connectivity requires a new, universally accepted payment file format. Legacy formats such as LB, KI, UTLI, and SISU are no longer fit for purpose, so a new, universally standardised format – ISO20022 XML – will be used in their place.

The problem – and it’s a big one – lies in the switchover. In financial services, more than in virtually any other industry, there can be no gentle adoption period, no conversation with a customer that goes “bear with us while we get up to speed” – there has to be seamless, lag-free conversion to the new standards, since there will be zero-tolerance for interruption to business.

P27 itself is a joint project between six of the largest banks in the Nordics: Danske Bank, Handelsbanken, Nordea, OP Financial Group, SEB and Swedbank, with the ownership of the project divided equally between them. For these banks, the changeover will not be a massive problem – they have the resources and personnel to prepare for a seamless transition. The greatest challenge will be that presented to smaller banks and financial operators, who lack the revenue to allocate what might end up being a significant proportion of their operating budget to IT integration projects.

The challenges in detail

Moving to a direct, decentralised system presents a range of advantages, most notably in an ultimate reduction in transaction cost and an increase in speed of fulfilment. However, by taking responsibility for issues such as compliance and security away from bodies such as the BGC or Norway’s BBS, a huge burden is placed upon the financial institutions themselves to demonstrate adequate governance of transactions, particularly as relates to issues such as money laundering.

Regulatory compliance is, of course, an absolute requirement for operation in the financial sector – P27 could be seen to place a disproportionate burden on smaller operators, since they would have to devote an unsustainable proportion of their budget to maintaining IT systems that meet the standards required.

Those operators who are running legacy systems, particularly where using older on-premise hardware, will face an unpleasant bill when it comes to upgrades and maintenance, one which will place them at a disadvantage when it comes to their larger competitors.

So what’s to be done?

P27 may seem to play into the hands of the larger banks, but with the right perspective it might actually present an opportunity for niche players. That lower cost of transaction we mentioned earlier could ultimately lower the cost of business for all operators – providing they’re able to take advantage of it.

The key lies in working together. Small banks need an option to leverage their communal buying power if they’re going to be able to compete with the big 6. What might be a prohibitive cost for an individual, smaller player becomes attractive and manageable when shared across multiple parties.

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The Crosskey solution

Crosskey is a company with a unique history and DNA, which positions it perfectly for this exact moment. Born of Ålandsbanken, Crosskey exists solely to provide innovative integration solutions for the banking sector. Unlike other IT services companies, it has no interest in integrations outside of this field – and unlike other IT services companies it draws on specific and extensive expertise from the banking sector. Dealing with issues such as regulatory compliance and security comes as second nature – there’s no uncertainty when it comes to deployment of new integrations, since compliance and governance comes built-in as standard.

While that expertise has served Crosskey well, this specific moment – that of the P27 rollout – serves to provide the perfect opportunity for the provision of a service that can help ‘level the playing field’ for smaller operators in the financial sector. The Crosskey Payment Hub.

The idea behind a payment hub is simple. One central, modular, cloud-based platform for all transactional data, allowing operators to pick and choose the services they require. Since the hub itself is always up to date with regulatory requirements, the headache of keeping current with legal demands is outsourced from the operator, enabling them to focus on their core business, rather than taking on an additional compliance burden.

And since the hub itself is cloud-based, operators with legacy systems can continue to use in-house hardware should they so require, while still taking advantage of modern, cutting edge systems. Since individual operators don’t have to devote budget to R&D, cost can effectively be shared across multiple interested parties, reducing the financial burden for all.

Why Crosskey?

Crosskey aren’t just experienced in banking integrations – we have specific experience that relates to the advent of P27. When Finland joined the EURO payment area (SEPA) 12 years ago, Crosskey helped to manage that transition, ensuring that what could have been a significant disruption to normal business was handled smoothly and seamlessly.  

The banking industry – even allowing for today’s disruptors from Fintech and open banking – has always been fairly traditional. Major changes, such as the move from central clearing systems to decentralised ones, or changes in currency usage such as in Finland, do not come along very often. As such, there is often a lack of historical expertise to deal with these changes. Crosskey is unique – as part of Ålandsbanken, we have first hand experience of the potential challenges and pitfalls and have the knowledge to calmly and pragmatically handle any transition.

Where’s the benefit?

So, a central payment hub can help manage the move to P27, but it can do so much more. While P27 is a major change to the way we will all conduct business, it’s not a black swan event. There will always be changes, always be technological innovations that have the power to disrupt or empower. Change is an inevitable part of business evolution – but while one cannot anticipate the exact nature of the next big challenge, one can prepare for the fact that there will be many challenges to come.

A payment hub can help future proof a business, outsourcing the need to keep current with technical and regulatory issues and letting operators focus on their core profit centres. No-one has ever made money by devoting huge percentages of their revenue to infrastructure, but they have lost it by ignoring the need to keep up to date.

By working together, companies can maintain – or indeed enhance – their competitive viability against the larger players. It would be cynical to suggest that the big 6 banks knowingly suggested a payment protocol that would exclude smaller players from the game, but unless those smaller players recognise the need to approach the challenge from a position of shared interest, that might indeed be the result.

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What’s next?

P27 has been a long time coming, but now that it’s almost here things are going to change – fast. Crosskey has a solution in place to help financial operators of all shapes and sizes maintain their competitive position.

Get in touch today to find out how we can help you stay ahead of the game.