P27: A unified approach for payments for the Nordics

Major Nordic Banks like Danske Bank Group, Nordea Bank Oy and similar have formed an organization to establish a new payment infrastructure (for banks) in the Nordics. The slightly cryptic name is relation to the 27 million citizens across the Nordics.

The vision of the joint payment organization is to create a unified platform and approach to process payments (also between financial companies). This is with some respect in competition to the existing infrastructure that Scandinavian companies already has developed and operates today. If it was not due to the ownership of the P27 then it likely could be assumed to be a FinTech. The website (Project27.info) is still slightly cryptic regarding how and when the new digital payment platform will be available and how it will be constructed.

The problems with the current IT-architectures for the existing Digital Payment platforms is many of the digital platforms (across geographically separated markets) where developed and put into operations rather early, which enables some technical debt e.g. the use of “mainframe” technologies that enforces a rather standardised approach to programming, but also a rare to find resources.

Developing a cross-region digital payment platform can prove to become rather difficult to develop with Scandinavian resources. This is because the subject matter experts are to some extent already allocated to projects that the finance-companies already have launched in their respective portfolios. However, with the right amount of capital, the right sourcing approach and the right approach for enterprise architecture (and solution architecture) then it is likely that P27 will be able to deliver a usable digital payments platform, though the investments needed would not be without risks:

  • Lack of resources available for developing a platform for real-time payments processing.
  • Lack of resources available for creation of a platform with high-availability and high-scalability.
  • Strict governance for new features based upon input from the owners and customers can lead to a long time to market.

Further information can be found at https://www.project27.info/.

The Payment Company as a Platform

There are many good reasons for companies to provide products and services around a platform. Some of the benefits of doing so is to build a strong ecosystem and to embed the products and services in the value propositions that the right customers want to obtain to solve specific problems. There are some insights on how to enable the right strategies for the digital payment platforms for the payment companies to achieve their business strategies.

Scope

The blog post will analyze and setup the requirements for how a payments companies can approach the digital payment platform in their strategizing processes.

Elements of a Platform

The future of payments involves the digitalization of currency and provides the means for exchanging currency between a payer and a payee. The digitalization of currency involves a technology stack that involves the possibilities to ensure the transport of data between stakeholders, technical endpoints and the ability to uphold a ledger of the transaction. Kazan & Damsgaard (2013) presented a framework for digital platforms and they did apply it in their analysis of payments companies. The first part of their article identified components of the digital platform, and they applied a model by Hagiu & Wright (2011) for what Kazan & Damsgaard (2013, p. 5) identifies as a multi-sided platform (abbreviated MSP). The elements of the digital payment platform are:

  • Platform design.
  • Technology design.
  • Business design.

Kazan & Damsgaard (2013) identifies in addition to the three above components that an MSP has to facilitate direct interaction in order to be truly multi-sided (Kazan & Damsgaard, 2013, p. 5).

Regarding the platform design Kazan & Damsgaard identifies “Describes open and closed systems, and how complementary products are distributed” (Kazan & Damsgaard, 2013, p. 5). Furthermore, the technology design is defined as “The applied technology based on evolutionary or revolutionary hardware strategies” and lastly is business design identified as “Market-entry strategies through bundling products and leveraging an installed user base (envelopment attack). Alternatively, through Schumpeterian innovation, which is more radical, but rare to achieve.” (Kazan & Damsgaard, 2013, p. 5).

Design strategies

Kazan & Damsgaard (2013) identified four different design strategies for the digital payment platform:

  • The open and free approach.
  • The closed and moderated approach.
  • The open and moderated approach.
  • The closed and free approach.

The four approaches for strategies for the digital payment platform have their characteristics for how the payment company can involve the ecosystem to use the platform.

The open and free approach is according to Kazan & Damsgaard (2013, p. 6) charactized as “allows third parties to alter and adapt the system for their needs”.

The closed and moderated approach is in direct contrast to the open and free approach as Kazan & Damsgaard identifies “The closed and moderated approach is the opposite of the latter, representing a closed system with centrally organized” (Kazan & Damsgaard, 2013, p. 6).

Kazan & Damsgaard (2013, p. 6) identified a third approach they name the open and moderated approach, which the characterize as “The open and moderated strategy is fusion of the aforementioned platform schemes, where third parties get involved in the system development process; however the distribution of software is also centralized.”

The last approach, the closed and free approach, is characterized by Kazan & Damsgaard (2013, p. 6) as “is applied by platform providers, which are allowing developers to build application on top of their system, without seeking any authorization. However, access to, or modifications of, the core system are not permitted”.

Strategies for Advancing a Competitive Advantage by the Platform

There are many different approaches for advancing the competitive advantage by applying the needed infrastructure for a platform. This blogpost deals with four approaches:

  • Outpacement strategy.
  • Superior product strategy.
  • The innovation strategy.
  • The foundation strategy.

The outpacement strategy is all about applying the strategy for an open and free platform. Other businesses will be able to develop products that embeds the product and as such makes the platform more valuable as a business asset for the platform owner and for the service consumer. In Porter’s generic strategy model (Porter, 1985) it can be both within the cost-leadership and the differentiation strategy. In order to achieve this form of strategic pattern the payment company will have to open up for APIs the market actors are looking for and make the APIs generally available. Scope of communication with market has to be broad and the sales and marketing scope has to focus on communication with many different communities for spreading adoption. Pricing for access to the APIs would have to be reflected.

Superior product strategy is within the closed and moderated approach. In order for the company to survive it has to produce products of a higher perceived value. In Porter’s framework (Porter, 1985) it would be named the differentiation focus strategy. The payment companies trying to establish this particular strategy pattern has to ensure communication and sales for a specific community. As such knowhow of the customers and their needs are key for this strategy to prevail, and the company would have to engage a sales and marketing team that are able to ensure sales for with high-touch-point with the customers.

The innovation strategy is for companies that have the resources to spend time developing innovative products that the companies will continue to deliver to the customers and continue to moderate elements provided for the platform together with identifying additional products that have to be either upgraded, replaced or all together eliminated from the platform. In Porter’s generic strategy framework (Porter, 1985) it will be the differentiation focus strategy or the differentiation strategy. This company delivers a platform that ensures the end users and direct customers innovative top-of-the line services. This type of company is able to sell products to the customers purely on the “wow” moments of the customers.

The last strategy is related to establishing a platform that will work as the foundation. The company provides the platform and opens it for other companies to develop solutions for it, but as such they do not moderate content for the platform and as such the providers and customers cannot expect the platform provider to deliver anything else than the foundation. This approach is in Porter’s framework the cost leadership or cost focus strategy.

Conclusions

The approaches for establishing platforms e.g., for the payment companies can enable different forms of competitive strategies and competitive advantages by using their digital platforms to enable payments for other companies or organizations.

The payment companies must team up with the right people and the right setup to reach the right clusters or communities that can and will embed their services in their products or subscribe to the services in order to enable features and capabilities. The digital payment companies have to enable the digital platform to receive, manage and process services and requests from its customers and the customers customers.

Companies that prefer the closed and moderated strategy would have to enable a superior amount of resources in creating innovation results that attracts customers to the digital platform. For these companies a need to balance innovation and user-experience and continuously deliver services of greater perceived value for the end-users.

Sources

Kazan, E. & Damsgaard, J. (2013). Towards A Framework of Digital Payment Platform Design: A Comparative Study of Four European Solutions. ITM Communications 2013/2.

Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. London: The Free Press.

A Keynote on the Future of Money: Smart Money

Professor, Dr. Jonas Hedman, Ph.D. presented his view of five scenarios for the future of money, where the scope of “smart” money was dealt with. The keynote took place at Nets Denmark. It is worth to note that smart money is according to Hedman money that can be programmed for specific purposes.

Before Hedman presented the five scenarios for the future of money, then Hedman defined the concept of money as: “Money is a trusted system”. Though Hedman is of the opinion that the current money system is not particular smart since it enables unintended usage. From this perspective Hedman presented for the audience the history of the money system and how it has evolved over time. One point that Hedman made was about the introduction of the credit card and debit card had to some extent stopped the evolution of the money system, at least to some extent. Currently an evolution has occurred according to Hedman: The crypto-currencies such as bitcoin and the central bank supported currency the “eKrona”. The scope of the “eKrona” is to replace the current physical currency in Sweden and that led to five scenarios that Hedman asked the audience to consider:

  1. Pocket money.
  2. Welfare money.
  3. Anti-money laundering.
  4. Corruption and the misuse of money.
  5. Taxation in real-time.

Some of the presented scenarios made the audience react regarding upbringing of children, the role of the state in a democratic society and planning of the economy.

Hedman did predict that it is very likely that the Nordics are among the first nations who will go all in on the digital currencies. Regarding the usage of the smart currency the value adding activities where among the misuse on a personal level, but also on a societal level. This led to some discussion regarding the value adding perspectives of the “smart money”, and Hedman mentioned that regardless of how the individual sees money, then budgeting, savings, planning etc. is about trade-offs in order to achieve an objective.

Furthermore, Hedman mentioned that he was of the impression that the Danish national bank was rather conservative compared to the Swedish when it came to the visions for the monetary systems and forms money might have.

Conclusions

All in all, a thought-provoking presentation that Dr. Hedman gave at Nets Denmark the 16th of May 2019, though it seems like most of the perspectives applied by Hedman were about how to limit the use of money and not as such on the enablement. The value adding activities should be in scope for future research not just how to limit the usage of money.