The world has increasingly come to expect faster payments. Even the thought of paying for items by a simple swipe of a watch no longer raises eyebrows. Meanwhile, the process of sending money overseas remains costly and painfully slow.
Integrating regional payment systems with the development and implementation of common rules, standards and infrastructures across different countries is a daunting task. In order to assist regional development organisations and domestic payment systems, Dr. Leo Lipis and Colin Adams, both from the independent payments industry consultants Lipis Advisors GmbH, have written a paper for the SWIFT Institute entitled, “Cross-Border Low Value Payments and Regional Integration: Enablers and Disablers”. In order to examine how the factors identified in the working paper could be applied to the ASEAN Economic Community, due to be implemented on 31st December 2015, the SWIFT Institute took the time to interview John Wong, Managing Director, Group Head Transaction Banking, Global Banking at Malaysia’s Maybank, and Emmanuel Daniel, founder of The Asian Banker in Singapore.
Factors of success
The purpose of the Lipis and Adams Working Paper is to identify common factors deemed essential to regional payments integration. The authors of the paper interviewed representatives of nine major organisations including: Association of Southeast Asian Nations (ASEAN); Common Market for Eastern and Southern Africa (COMESA); International Payments Framework Association (IPFA); Nordic Payments Area (NPA); South African Development Community (SADC); Single Euro Payments Area (SEPA); Sistema de Pagamentos em Moedas Locais (SML); West African Economic and Monetary Union (WAEMU); and West African Monetary Zone (WAMZ).
Common features across all nine of the organisations mentioned above were found as follows:
- Targeted scope: migration to a regional scheme is more successful if one payment product is dealt with at a time;
- Common Data Standard: integral for cross-communication;
- Common Scheme: a set of rules for businesses and the technical ability to allow interoperability between different countries and stakeholders;
- Existence of a common currency for settlement: a domestic or third currency and a single settlement system to settle regional transactions;
- The importance of the need for a modern domestic system before trying to pursue a regional payment scheme.
Lipis and Adams went on to identify five categories that could be considered as “success” factors of regional payment integration including: linkage of payments integration to a political goal; common currency or common settlement currency; a centralised governance structure; a common data standard; and the alignment of motivations of different stakeholders.
Each organisation was then scored according to the five “success” factors, summarised in the chart below:
The WAMZ and ASEAN regions are both at the beginning stages of integrating domestic payment systems, hence the reason for their positions towards the bottom of the chart.
Focus on ASEAN Economic Community
The ASEAN region is reported to be one of the fastest growing and most dynamic regions in the world, made up of approximately 604 million people, which is around 9% of the world’s population. Consisting of the following countries – Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam – the IMF estimates that the economic growth of the area will reach USD 3.6 trillion in GDP by 2019, five times the size it was a decade ago.
According to the ASEAN website, the ASEAN Economic Community (AEC) envisages regional economic integration by means of the following key characteristics: (a) a single market and production base; (b) a highly competitive economic region; (c) a region of equitable economic development; and (d) a region fully integrated into the global economy.
Through our interviews with both Wong and Daniel, three of the “success” factors indicated in the working paper stood out as having more relevance to the AEC, which included a linkage of payments integration to political goals, common data standards, and a common settlement currency. A fourth factor also came to light – the effect technological innovation could have on future integration plans.
Linkage of payments integration to political goals
Successful regional payments integration projects develop as part of a larger political goal such as increased intra-regional trade, economic development, or financial inclusion and modernization. Strong political will at the member state level must be strong to ensure that the project is successful. [Lipis and Adams 2014: p13]
Lipis and Adams identified one of the “success” factors of regional payments integration as being the strong political will of each national participant. The drivers behind closer economic integration within the AEC, however, are not as clear-cut.
Wong highlighted the recent expanding levels of intra-regional trade within the ASEAN region, noting that this has in turn has resulted in an increase in the number of intra-regional payments. Since 1990, ASEAN intra-regional trade has grown from 18% to 24% of total trade, and intra-regional investment has quadrupled since 2000, from 4% to 17% of total investment.
Daniel was quick to jump on the fact that intra-regional investment was the more important factor, in his opinion, as it helped explain the central banks’ leisurely pace towards closer integration. He argued that today’s multilateral agenda was being driven by the search for greater return on investments (ROI) from the more developed economies in the region (including China), resulting in an increase of intra-regional investments. Daniel distinguished between intra-regional investments from intra-regional trade, explaining that the latter assumes a supply and demand differential, which does not currently exist in ASEAN since a number of the larger countries are focusing first and foremost on building up their own domestic capacities. It was not surprising, he concluded, that there was a degree of resistance from central banks to the development of a greater integrated regional payment structure. What’s more, the central banks that dominate the process of building the ASEAN regional payment infrastructure are not party to intra-regional trade conversations due to differing political mandates, according to Daniel. The subject of trade and investment is usually held under the purview of the Ministry of Trade and Industry, hence the central banks have not been privy to these conversations. Daniel also indicated that a rather strong degree of nationalism was present in some countries such as Indonesia and Philippines. Because these countries had been upgraded to investment grade status, there was a great desire to protect this position rather than open up their markets to others.
Wong agreed that the central banks held tremendous power due to the fact that they controlled the vast majority of payments. He argued that in order to successfully create a common platform network, the regional banks would only subscribe if the system were supported by the central banks, which in turn would have to have a direct link to AEC governance. Furthermore, political goals due to the differing stages of economic development amongst the ten ASEAN countries have tended to diverge. The first founder members, referred to as the ASEAN-5, include Singapore, Malaysia, Philippines, Indonesia and Thailand. The other 5 countries including Brunei, Cambodia, Vietnam, Laos and Myanmar joined ASEAN during the 1980s and 90s. There are inevitable differing aspects between the two groups such as the modernity of IT platforms and levels of regulatory compliance (including anti-money laundering regulations). Wong, therefore, deemed that any economic integration would most likely be a two-stage process.
Without a common data standard that all participants in a regional infrastructure or scheme agree to use, it is extremely difficult for banks, central banks, corporates, and other stakeholders to communicate with each other. This leads to inefficiencies and mistakes that can doom the project from the start. [Lipis and Adams 2014: 13]
There are two main types of systems that currently exist within ASEAN countries, the real-time gross settlement system (RTGS) for high-value payments, and the Automated Clearing House (ACH) for low-value payments. The differing stages of developments between the ASEAN-5 and other 5 countries for payment systems have posed a degree of complication. Wong explained, “Some don’t have RTGS, some don’t have ACH, or some of them, like in the case of Laos, have RTGS up and running yet it has not been widely adopted by the regional banks.”
ASEAN members have also developed the Asian Payment Network (APN), which seeks to develop common standards and guidelines to enable domestic and regional switching of ATM networks and low-value payment (LVP) systems. Wong claimed this added further complexity to the region because, between the APN and the creation of bilateral inter-governmental and proprietary regional bank networks, a rather confusing picture arose of independent, overlapping small LVP networks, rather than one overarching network in the image of SEPA.
Daniel argued that certain practices legislated for in Europe, such as the capping of fees, could work well in Asia. If the central banks would mandate all players to use technology more efficiently, the benefits could then be passed onto consumers. “This would have really sped up the whole process of regional payments infrastructure,” claimed Daniel. “The central banks have been really very slow in areas such as shared standards, transparency and costs.”
Common settlement currency
The chances for success in a regional payments project increase greatly when member states share a common currency. Having a common currency and central bank means that there is already a strong base of cooperation on monetary policy among member states, which makes developing a common payments infrastructure/scheme easier. In regions that do not share a common currency for domestic payments, choosing a common currency for settlement simplifies processes and increases chances for success. [Lipis and Adams 2014: p13]
ASEAN countries have traditionally traded in US dollars, even when Japan was the dominant economic player on the scene. The recent emergence of China has meant some are considering whether the renminbi (RMB) would be a more suitable candidate for the ASEAN common settlement currency.
Wong suggested there could be two methods for determining a cross-border settlement currency; the first would be based on a basket of market exchange rates, and the second would use the renminbi. Wong pointed out that a common factor shared by ASEAN countries is that they all trade with China due to the significant size of its population, which has led in turn to an increase in creation of RMB offshore or settlement accounts. Although the usage of RMB for settlement still remains relatively low in terms of world currency payment values, adoption has been increasing at a steady rate. According to SWIFT’s RMB Tracker, renminbi settlement amounts have gone up from a rank of 13th in the world, at 0.63% in 2012, to 5th at 2.17% as at the end of 2014. It would not be difficult to foresee RMB soon overtaking Japanese Yen (2.69%) and perhaps even GBP (7.9%). Wong, therefore, considered that a common transaction in renminbi would work, commenting, “Trade comes from a commercial perspective and commercial firms usually try to trade with the largest partner they can find. The largest country in Asia happens to be China.”
Daniel disagreed, however, with Wong’s outlook claiming that US dollars would remain predominant due to the deep liquidity USD provided, the historical dollar-driven trade, and the fact that the dollar remained the cheapest counterparty currency for most countries in the region. He claimed that China could not be counted on to keep its title as trade heavyweight in the region. Daniel elaborated, “It used to be the big exporter, then became the big importer. China risks becoming irrelevant because it is not able to compete on price anymore and manufacturing has been moving to lower-cost countries such as Bangladesh. All of these changes are occurring in very short cycles; every five years the formula changes, therefore, China as the ‘Germany of Asia’ is a moving target. It might become that, but it’s not that right now.”
As the speed of payments increases in domestic environments, banks, corporates, and consumers have come to expect faster and more efficient payments across borders as well, and the current reality of correspondent banking is increasingly falling short of customer needs and expectations. [Lipis and Adams 2014: p1]
Whilst the paper refers to the expectation of faster and more efficient payments, Lipis and Adams do not mention the threat new technology could pose to fledgling regional payments systems. Organisations are advised to focus the scope of integration and migration of payment products, such as SEPA did with low-value ACH payments. Within the ASEAN region, however, the APN is facing many challenges from mobile telecommunication and start-up technology providers also providing low-value payments. Or, as Daniel put it, “The agenda has been hijacked by technology already, so it’s actually a quid pro quo. It is possible nowadays to do a remittance from any Asian-to-Asian country using companies such as PayPal, MoneyGram, and Western Union. The payments infrastructure technology for low-value payments, therefore, has fast-forwarded the agenda far more quickly than the official response from the central banks representing ASEAN.”
The question remains whether the telco’s and start-up technology companies will end up winning the race for low-value payments in Southeast Asia. Daniel maintained that central banks would intervene if technology-driven platforms were to become large enough to pose a systemic risk within the market, or if price distortions due to profiteering were to appear. Volumes of these platforms, however, were not yet sufficiently large enough for individual central banks to treat them as systemically important.
AEC’s patient ambitions
During a video interview with the Finextra publication, Lipis and Adams expressed surprise with regards to their findings to do with (1) the sheer ambition of some of the organisations they interviewed, and (2) how difficult it was to establish criteria for success, given how very different the goals and ambitions of each organisation were.
Both Wong and Daniel acknowledged that the creation of the AEC would indeed be ambitious given a lack of linkage to political goals, a lack of common standards across the region, the disagreement on a common settlement currency, and the increasing challenge posed by mobile telephone companies in the area of low-value payments.
Going forward, Wong envisaged the possible creation of an ASEAN secretariat representing the AEC with an economic, rather than political focus. The supranational entity could help with efforts including the creation of trade tariffs, harmonising fees, and the integration of payments, as well as being charged with protecting the interests of the less-developed countries.
Daniel cautioned, however, that the argument that served as a basis for the creation of a European unified market would not apply to Asia in the same way; that same sense of urgency, therefore, does not exist. He also pointed out that from the countries that made up the ASEAN region, there was not one main economic generator since every respective domestic market was potentially as strong as the other. Daniel stated, “It’s the one region where integration for the sake of integration is not a valid argument.”
In the meantime, ASEAN nations have been benefiting from technological innovation especially with regards to the creation of low-value intraregional payment infrastructures. Time will tell whether the ASEAN central banks will coordinate to create an integrated payments system, or whether technology start-up companies will find a way to start without them. Watch this space.