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ASEAN intra-regional payment flows: the missing piece to an ASEAN economic community

The Missing Piece to an ASEAN Economic Community

In mathematics, numbers can be relative or absolute. To me, the scale of the Asian market is absolutely huge and everything else seems relatively small compared to the opportunities we see in the region. And herein lies the problem in building an ASEAN Economic Community; the scale of the task itself.

The AEC represents a huge economic opportunity as gross GDP is forecast to grow (from $2.4 trillion in 2013) to more than $6.2 trillion by 20231. The region already represents 4.4% of the world GDP, and growth is the second strongest after China. An important component of this growth is the development of an intra-ASEAN market.  Bolstered by the reduction in trade tariffs, this market has grown exponentially over the past decade. 70% of intra-ASEAN trade now incurs a zero tariff rate2, though this does not apply to services trade, which has been harder to liberalise. The ASEAN intra-trade in goods is now a $600bn market3.

There is, of course, much to be done from a political and economic co-operation perspective. The key challenge for the ASEAN community is finding a common path in consideration of the contrasting infrastructures, technologies, social and legal DNA of the 10 AEC countries4. Further, the capacity for intra-trade to grow is, and will continue to be, limited by the lack of integration of the various payment systems.

Including SMEs in the path towards growth and integration

The cost, FX risk and legal complexity of cross-border payments in the region are the reasons for the many high-value (rather than low-value) transactions that largely originate from corporates. In a region where 70-80% of the industry is made up of small and medium enterprises (SMEs), this fact presents an obvious issue. Nevertheless, the demand for goods is booming, especially with the development of mobile-commerce. Recent research from IDC, commissioned by ACI, shows the ASEAN region is increasingly a mobile-first society. Non-bank led financial services, such as Alipay and WeChat Wallet, are disrupting emerging markets and challenging banks with viable alternative payment methods resulting in increased use of online payment services (72.4%), smartphone wallets (32.8%), and mobile money (13.3%)5.

The differences in the countries’ payment maturity helps explain the challenges for further integration in the region and the continued reliance on a cash economy. This has given rise to alternative payment methods to support e-commerce, such as Cash-on-Delivery (CoD). However, by 2020, close to a third of the population will be between the ages of 20 and 39 and an expected 60 million new consumers will gain mobile Internet access, significantly boosting mobile commerce use. This generation is also likely to embrace new digital methods of payment and new internet services concepts, such as the shared economy.

Payment integration through technology innovation

Although there is no payment integration component to the AEC’s pillars, technology is bringing the region closer to enabling real freedom to the flow of goods, capital and investments. The different national switches are at various stages of developing their infrastructures, but we are still seeing a move toward more real-time based payment systems.

Another key development is the broader adoption of ISO 20022. The standard offers the flexibility to carry critical information previously obscured or altogether absent from the payments value chain. With the ISO structures, organizations can supply and receive the information critical to automation. In addition, financial institutions can offer services to assist in the migration to these ISO 20022 capabilities as well as enhanced reporting and capital management tools related to the improved information flows.

The use of ISO 20022 in the intra-bank space offers operational efficiencies.  A common standard drives interoperability across platforms and systems. Information, such as for remittances, can be exchanged more expeditiously to associate the payments and information flows.  In addition, investigations and issues can be resolved more quickly.  Overall, the common use of a standard like ISO 20022 facilitates improved visibility and transparency to customers while processing transactions.

Removing friction and enhancing the value of payment flows would lower the costs of transactions and open up intra-regional trade to smaller businesses—although FX practices still need to be simplified. Finally, given the high mobile usage in the region, banks and regulators need to consider that smaller businesses will be looking for omni-channel support for payment initiation, billing, invoicing and reconciliation. Given the remoteness of some of the locations, a branch network is costly and slow to deploy, limiting the financial accessibility for both consumers and businesses.

Deploying digital-based services will offer a competitive edge and promote greater financial inclusion. And while the equation might be complex, the result will always be greater integration.

I will be discussing more on this at the ACI in-booth theatre at Sibos. Click here to see the full schedule of speaking sessions and to add them to your diary.

 

1 BMI Research
2 Asian Development Bank
3 ASEAN Economic Community Chartbook 2014 – 2013 data.
4 Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam
5 The Future of Digital Payments Asia