The contingency of payments in the Nordic countries has already been discussed for a decade – and is more topical than ever. Losing national control over the critical infrastructure together with national interests has been the issue. This includes the banks providing services locally, clearing houses’ intermediating and central banks catering for bank-to-bank payment transmissions, which ensures that the card acquirers and issuers can use their card locally during outages. The key word here is locally.
Even if payment customers are often tied to a specific country, the common denominator for all payment systems has been the ability to serve customers increasingly from abroad regardless of where they spend their time. This change has happened over many decades, and for a good reason. However, we must ask if we reached too far from home markets. Should we start investing more locally to be able to provide payment services for customers and citizens with better local resilience?
The banks have the most at stake as they provide the longest portion of the payment value chain. Everything from payment initiation through payment execution to the point payments are exchanged with local clearing houses, banks own the value chain and capabilities. After decades of investing in the consolidation of capabilities, European infrastructures, and efforts in overall industrialization of payments landscape, they can provide the services from dispersed locations with both technology and operational staff.
This benefits the customers but poses multiple points of failure from the contingency perspective. The solution for the problem is two-fold. Can the banks provide operational resiliency in all countries they operate in and ensure that the critical data is stored within the same country? So simple a question, but immensely difficult to solve.
With a shared mindset, clearing houses and central banks are operating a smaller portion of the value chain, but are perhaps the most critical from the operational standpoint. Banks are unable to exchange customer payments between different banks without clearing systems, and the clearing houses are centralized to a few countries.
Some of the Nordic countries are still operating their own systems, but there are obvious signs that the local systems are becoming increasingly dependent on European or global infrastructures. Finland's national payment landscape is already fully consolidated to European and global infrastructures, namely Target2, TIPS and SWIFT network, and other Nordic countries are following.
An important aspect to consider are card payments, the most global example of payment services. Over the years, more countries have started to use global card schemes. The value proposition is excellent as customers can purchase without a limit in the world with the promise that they will not lose money if they do not get what was promised.
However, card schemes are very dependent on the same global network that is susceptible to DDos, Distributed-Denial-of-service attacks, and they are usually hosted in other countries the customers reside. It is the same problem that the banks have for account-based payments, but on a global scale.
One potential solution for dispersed payment infrastructures is a concept called Sheltered Harbor. In essence it is a local implementation, a copy of operations, of the most essential capabilities that can be put into use in a national context.
It is particularly important to understand what problem we are solving. As the examples describe, this is an extensive topic with a multitude of complexities. The key issue is the scenario we prepare for. Point solutions will be sufficient for simple scenarios, whereas the more sinister scenarios will require more extensive efforts. Fortunately, this is not a technology issue for industry. The technology is already there, but how to ensure right-sizing and fit-for-purpose solutions that solves the problem is what requires further dialogue.
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