The ASEAN region is a rapidly growing hub for fintechs and digital payments innovation. However, significant frictions persist in cross-border payments within the region. These frictions increase ASEAN businesses’ trade costs, curtail the growth of crossborder ecommerce and regional value chains, and limit consumer choice. They stem largely from ASEAN Member States’ fragmented and, in some cases, restrictive payments-related policies that complicate payment service providers’ (PSPs) regional scalability.

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The ASEAN Digital Economy Framework Agreement (DEFA) negotiations open an important opportunity for promoting crossborder payments in the ASEAN region. This paper, the third in Nextrade Group’s series on DEFA, is intended to support DEFA negotiators with data on the economic opportunity unlocked by interoperable payments, and to make recommendations on the set of payments provisions that could be included in the agreement.

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The main findings are as follows:

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• The use of digital payments has grown rapidly in recent years in Southeast Asia. Digital wallets have become a popular payment method in ecommerce transactions, accounting for around one-third of transactions in most economies and some 40 percent in Indonesia. Real-time account-to-account payments are also increasingly popular, particularly in Indonesia, Malaysia, and Thailand. In point-of-sale transactions, cash is still significant, though digital wallets take up a significant share – for example, about a fifth in the Philippines a third in Indonesia.

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• Southeast Asia’s payments ecosystem has expanded remarkably over the last decade. The number of digital payment providers, digital wallets, and innovative tools such as buy now pay later apps has tripled in the past decade in Southeast Asia. The region’s broader fintech ecosystem has also grown remarkably, thanks to businesses; interest in various lending, insurance, invoicing, payroll management, and other services.

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• ASEAN has long sought to promote payment interoperability. ASEAN has had many initiatives to promote interoperable payments, such as the ASEAN Working Committee on Payment and Settlement Systems (WC-PSS). ASEAN  economies have also created multiple bilateral real-time payment (RTP) interoperability initiatives.

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• However, significant frictions exist in ASEAN crossborder digital payments, owing to fragmented and restrictive national regulations. Restrictive payment licensing rules and lack of interoperability among national rules in such areas as cross-border data transfer, payment licensing, cybersecurity, anti-money laundering and countering the financing of terrorism (AML/CFT), and others hinder payment providers’ scalability in the ASEAN region (table 1). This in turn creates inefficiencies, delays, and increased transaction processing costs for micro, small and medium enterprises (MSMEs) that transact across borders in the regional market.

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• A survey with 800 ASEAN region MSMEs reveals that intra-regional payments interoperability has improved, but that payments frictions still curtail MSMEs' exports and export diversification and cost as many as 2.7 million MSME jobs. The surveyed MSMEs report greater ease of accepting payments from other Southeast Asian markets in the past three years. However, payments acceptance challenges have still stopped almost a third of firms from closing at least one sale with a customer in another Southeast Asian economy. Firms report that payments frictions cause them to forego about 3-10 percent export revenue in the intra-regional market. (Figures 1 and 2).​

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ASEAN Member States could use the DEFA to region to achieve greater policy convergence in digital payments and support a more integrated regional payments ecosystem through the following policies:

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• Passporting for payment providers and fintechs.  Rules and especially processes to license payment providers are arcane in various ASEAN economies. To enable PSPs and fintechs’ to quickly deploy in multiple markets, ASEAN economies could encourage regional mutual recognition of payments licenses. This could be done through “passporting”, a practice used in Europe that allows financial institutions to provide services across the European Union (EU) with minimal additional authorization.

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• Relaxing local presence and ownership requirements. For payments providers, the requirement to establish local offices, have local directors, and even to form joint ventures with local companies entails costs and delays in deployments. The DEFA could promote exceptions to these rules and loosen local ownership requirements, in order to enable PSPs to enter new markets quickly and cost-effectively.

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• Easing and converging cross-border data transfer rules: Various ASEAN economies impose restrictions to the  crossborder movement of data; there are also notable cross-country variations as to where user data has to be stored and where payment processing can take place. This fragmentation of rules raises the costs for PSPs to operate across markets. The DEFA can support a regional data privacy and transfer framework that allows payment providers to apply the same template when using customer data and transferring data for processing.

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• Aligning AML/CFT Standards: Various ASEAN economies impose restrictions to the  crossborder movement of data; there are also notable cross-country variations as to where user data has to be stored and where payment processing can take place. This fragmentation of rules raises the costs for PSPs to operate across markets. The DEFA can support a regional data privacy and transfer framework that allows payment providers to apply the same template when using customer data and transferring data for processing. 

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• Ensuring open APIs. The progress on open APIs that enable different payment systems and software to "speak the same language" and promote interoperability is uneven in Southeast Asia. Singapore, Malaysia, Thailand, Indonesia, and the Philippines have made strides in open APIs, but other economies lag behind.

 

• Implementing ISO 20022. Nine ASEAN economies are in different stages of adopting ISO 20022, the international messaging standard for electronic data interchange between financial institutions. Myanmar has yet to start. The DEFA could accelerate ISO 20022 implementation.

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• Aligning consumer protection regulations: Most ASEAN Member States have consumer protection policies and laws that ensure transparency and accuracy in product descriptions and pricing, and prohibit unfair and deceptive advertising. However, ASEAN economies could still align their consumer protection rules, for example to ensure uniform refund mechanisms and cooling periods that enable a consumer to return a good within a certain time without justification.

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Many of these recommendations have already been encapsulated in the Singapore-Australia Digital Economy Agreement (SADEA). SADEA calls for the parties to make regulations on electronic payments such as on regulatory approval, licensing requirements, and procedures and technical standards publicly available; prevent discrimination between financial institutions and non-financial institutions in relation to access to services and infrastructure in operating electronic payment systems; and adopt international standards for electronic payment messaging, especially ISO 20022. ​

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​ASEAN economies can use SADEA as a blueprint for DEFA payment provisions. The promotion of interoperable payments in the ASEAN should continue well after the DEFA is finalized. To ensure implementation and drive payments interoperability further, DEFA could:

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• Set out to develop a roadmap for ASEAN Digital Payments Area similar to the European Single Euro Payments Area Framework (SEPA), which makes cross-border euro transactions as simple and cost-effective as domestic payments by standardizing the format and processing of credit transfers and direct debits across Europe. Before SEPA, international transfers within Europe were expensive and slow. SEPA has lowered costs, enabling small businesses to more easily sell across borders.

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• Promote the measurement and public-private dialogue on payments interoperability. ASEAN economies should promote the analysis of payments interoperability as well as dialogues between governments, central banks, and the private sector to ensure that the national payments-related regulations are conducive to PSPs’ regionalization and innovation.

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• Promote regional payments innovation through a regional regulatory sandbox. Southeast Asian economies could also create a regional fintech sandbox specifically focused on scalable payment innovations, and together test cross-border digital payment solutions in a controlled environment. Such a sandbox would enable regulators to share ideas and approaches, and learn from each other when considering optimal regulations that support participating firms’ regionalization.

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