Malaysia is one of several ASEAN countries where Visa and Mastercard might face challenges.
Asia Pacific is home to most of the world’s population and a significant amount of economic activity. The region is also one of the most diverse, comprised of numerous cultures, languages, governments, and economies.
Although this diversity adds to the character of the region, it has also made it challenging to achieve any sort of regional political or economic cooperation.
One of the few is the Association of South East Asian Nations, or ASEAN, which was established in 1967 with a focus on accelerating economic growth, social progress, and cultural development across the bloc’s member countries. The sub-regional group has grown quickly in the years since.
From 2005 to 2018, total merchandise trade across ASEAN grew from US$1.2 trillion to US$2.8 trillion, of which 23% was related to intra-ASEAN trade. E-commerce grew even faster from US$11 billion in 2017 to US$24 billion in 2018.
As trade has increased, many stakeholders in the region hoped that more sophisticated, and cost-effective, payment systems would keep pace.
However, the region has struggled to have any cohesive specific regional real-time payment integration. E-commerce gateways and card schemes like Visa V and Mastercard MA are spread across the region to enable cross-border commerce, but merchant and consumer fees can add up to 8%+ depending on the corridors and networks; a significant tax on cross-border transactions. Similarly, bank remittances via SWIFT are similarly costly and can incur $50+ in fees.
Payments as the underlying infrastructure
Following in the footsteps of the European Union, it was expected that ASEAN would pick up the reins and help drive a Single European Payments Area (SEPA)-style payment network that would facilitate and streamline cross-border payments. As originally envisioned, this ‘Asian Payments Network’ would begin in the ASEAN countries and eventually grow to include many nations across the Asia-Pacific region.
SEPA initially provided a common set of standards and frameworks that were used to streamline payments between the 36 Single Euro Payments Area participants. By standardizing formats and structures, a French merchant could as quickly pay a supplier down the street in Paris, or one in Italy using a single bank account and set of payment instructions. In 2017, the SEPA platform modernized further to enable real-time payments across the region with the launch of instant SEPA credit transfers at a pan-European level.
However, the lack of uniform regulations, a common currency, and a consistent economic agenda within ASEAN, have impeded the development of a region-wide agreement on cross-border payments. The ASEAN organization itself is still undecided on how to approach the creation of an APN and fundamental questions such as who will own the underlying infrastructure and what settlement currency should be used, remain unanswered.
Regional Payment System Modernization
Yet, the discussion around a cross-border real-time payment system in Southeast Asia comes at a time when the region is making significant strides in payment modernization. Nearly every country in the region has a domestic real-time payment infrastructure in place. The increased adoption of the ISO 20022 standard is enabling streamlined communication between payment systems and additional overlay services like DuitNow in Malaysia, PayNow in Singapore, and PromptPay in Thailand.
As both public and private initiatives progress, we can see the broad brushstrokes of a real-time cross-border network in Southeast Asia forming. Leveraging domestic real-time payment central infrastructures (CIs) as a basis and establishing cross-border linkages are creating a network of payment rails increasingly being used for both retail and commercial real-time, cross-border payments. Indeed, it is the private sector rather than government which is leading the way in the development of a regional real-time cross-border payment network in what is a natural evolution of the payments industry in the APAC region.
This real-time cross-border payments network could further define and implement payment standards within the region as well as ensure interoperability amongst member countries. This standardized, instant, and seamless cross-border payments network could further enable economic activity at a lower cost.
Establishing a common payment platform can provide tremendous value when applied in a regional context, especially considering the importance of intra-regional economics. The establishment of the Single Euro Payments Area, or SEPA, in Europe has helped to create more than US$23.8 billion in value through both increased economic activity and cost savings. With a growing economic footprint, ASEAN would likely have a similar opportunity.
The Reality of the Situation
In many ways, this transition to real-time cross-border payments is a natural next step. As nearly every Asia-Pacific country has, or will shortly, migrate to real-time payments domestically, this is just the start of a larger digital transformation in retail and commercial payments across the region.
The payment network will start in ASEAN but will expand quickly. Much like SEPA has not only streamlined payments within Europe but also facilitated payments into Europe, an Asia-Pacific payment network could accomplish the same. This connectivity would help ex-Asia businesses expand quickly within the region and enable connectivity for cross-border business-to-consumer (B2C) and business-to-business (B2B) payments.
QR codes would be an integral part of cross-border retail payments.
QR codes may provide the last piece of the puzzle. Historically, a card transaction relied on a magnetic strip or a chip, but QR codes have opened the possibility for cardless, secure, and hardware-independent payments. As QR code standards are agreed both globally and across ASEAN, QR codes could emerge as the primary channel for retail transactions.
The benefits of a cross-border real-time payment network in Asia Pacific are clear. Existing cross-border payment methods in the Asia Pacific region are expensive for both retail and commercial customers. Assuming the economics of this network mirror those of the domestic real-time payments infrastructure, it will be a very compelling value proposition and likely a vital competitor in the increasingly crowded cross-border payments market.
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