ASEAN governments have recently launched the Framework for Negotiating the ASEAN Digital Economy Framework Agreement (ASEAN DEFA) in September 2023 during the 43rd ASEAN Summit, to accelerate the establishment of a regional digital economy by 2025. This has been a long-awaited development in the region, as several ASEAN countries have gone ahead in establishing bilateral financial linkages through cross-border payment systems, such as Singapore’s PayNow with Thailand’s PromptPay (2016), Malaysia with Thailand, Indonesia, and Singapore, Thailand’s PromptPay with Japan, Cambodia, Viet nam, Malaysia, Indonesia, and Singapore. More recently in August 2023, Cambodia and Lao PDR have also successfully launched the KHQR-LAOQR. These significant developments create an important benchmark for laying the foundation for multilateral payment systems within ASEAN as a region.
However, what are the challenges and remaining gaps that the ASEAN countries need to prepare for? How can Japan join in the establishment of digital payment systems that can potentially promote trade in goods and services between Japan and ASEAN, and within the region?
On December 14, the ASEAN-Japan Centre (AJC) launched the inaugural episode of the ASEAN-Japan Insights Webinar Series, “The Future of Cross-Border Digital Payment Systems in ASEAN and Japan”. The webinar presented views from the financial, banking, and fintech sectors in understanding the potentials and challenges of establishing cross-border payments, and what opportunities it holds for Japan and ASEAN countries.
Key individuals directly involved in the development of digital payment systems in several ASEAN countries were invited to present updates on the digital payment systems in their respective countries, namely:
- Mr. Ouk Sarat, Director of Payment System, National Bank of Cambodia presented “The Future of Cross-border Digital Payment Systems in Cambodia”
- Ms. Fitria Irmi Triswati, Head of Payment System and Cash Management Group, Payment System Policy Department, Bank Indonesia presented “The Future of Indonesia’s Cross-border Digital Payment Systems”
- Mr. Miyazawa Kazumasa, President, Soramitsu Japan presented “The Future of Cross-border Digital Payment Systems in ASEAN and Japan“
- Ms. Anika Faisal, Deputy Head of Indonesia Fintech Association (AFTECH) Neobank Department joined as a panelist
The panel discussion was moderated by Dr. Maria Monica Wihardja, Visiting Fellow, ISEAS-Yusof Ishak Institute who focused the conversation around three points that are central to the context of cross-border digital payment systems in ASEAN and Japan:
- Trust in cross-border digital payments,
- Economic impacts, challenges and opportunities of cross-border digital payments in ASEAN, and
- Potentials of a stronger ASEAN-Japan cross-border digital payment cooperation.
Below is the summary of the panel discussion.
1. Trust in cross-border digital payments
Q: What are the initiatives and actions taken by the central bank and the financial service authorities in your respective countries to build and sustain trust in the digital payment systems?
1.1. Importance of regulatory oversight and consumer protection
From the central bank perspective, Sarat and Triswati both emphasize the crucial role of central banks in regulatory oversight and supervision of the payment system focusing on strengthening consumer protection measures, by preventing fraud and operational risks, and ensuring data protection. Triswati adds cybersecurity, anti-money laundering, anti-counterfeiting and preventing the financing of terrorism as additional layers of concern in ensuring protection for both merchants and consumers of digital payment systems.
1.2. Adoption of international standards and best practices
To ensure the acceptable minimum level of protection, Sarat underscores the significance of adopting international standards and best practices in payment systems, a point that aligns with Triswati’s emphasis on developing ecosystems based on trusted environments and Indonesia becoming a member of the Financial Action Task Force (FATF), the global anti-money laundering watch dog is a step towards this.
1.3. Digital literacy and public education
However, to build consumer and merchant trust in the system, digital literacy and public education are key factors. Sarat discusses the challenge of digital literacy especially in rural areas, while Faisal focuses on consumer education to protect against misuse and promote responsible use of digital finance.
1.4. Stakeholder collaboration
Creating an environment of trust also relies on close collaboration between various stakeholders including industry players, regulatory authorities, and market participants. Collaboration especially between regulators and industry players also fosters compliance and integrity in enhancing the interoperability of various payment systems.
Q: Even though many of the digital payment technologies that ASEAN member countries use actually come from Japan, there is a relatively low adoption of digital payments in the country. Is this due to a low trust? What can or should Japan learn from these ASEAN countries?
In the case of Japan, while the Central Bank enjoys a relatively high trust from the public, Miyazawa highlighted the lack of interoperability among payment services, as well as high merchant fees that disincentivize merchants to use the system. He offered that a potential solution to this is the introduction of blockchain or distributed ledger technology (DLT) that prevents tampering and system outages with a conventional system where manual monitoring and redundant processes are still required, necessitating a huge investment and operational costs. Moreover, blockchain is relatively inexpensive that can improve security, prevent scams, fraud and system outages. For instance, Cambodia’s digital payment system Bakong that utilizes blockchain have reduced its payment fees to 0%. The success of Bakong also lies on its interoperability, instant payment, and low to no fee, through the use of blockchain.
2. Economic impacts, challenges, and opportunities of cross-border digital payments in ASEAN
Q: How has Indonesia’s digital payment system been progressing so far? What are the main benefits obtained by merchants and consumers from digital payment systems like the QRIS payment system in Indonesia?
Indonesia has recently launched its QR-based digital payment system, QRIS. Faisal noted the rapid growth of Indonesia’s digital economy, bringing with it significant benefits like fast service, safety, accessibility, and efficiency, particularly aiding MSMEs and the e-commerce sector. Ten months after its launch in January 2023, Indonesia’s QRIS has reached about 29.6 million merchants, 99% of whom are MSMEs.
2.1. Interoperability of digital payment systems
A major breakthrough accomplishment of Bank Indonesia is to standardize the QR code, which is interoperable among banks. Now, users and merchants using QRIS do not have to worry about interbank transaction, and the transfer fees have been reduced to zero. This is expected to boost the tourism industry in Indonesia, especially with the implementation of cross-border QRIS.
2.2. Cross-border digital payment expansion
Q: Considering the potential of cross-border digital payment systems, can it be extended to other areas of capital and financial markets, such as cross-border, peer-to-peer lending and investment?
Sarat says that the National Bank of Cambodia is focusing on moving the cross-border connectivity beyond payment to credit. As a case in point, the bank is collaborating with the UNDP to establish the Universal Trusted Credentials for Small and Medium Enterprises, which will enable SMEs to conduct transactions worldwide. At the same time, the bank is building trusted credentials for Cambodian SMEs to be able to transact with other SMEs globally.
Indonesia is also moving in the same direction, with initial plans to expand the payment interlinkage to Japan, India and China. Triswati mentioned plans to include cross-border peer-to-peer investment in future digital payment initiatives, emphasizing the focus on tourism and the benefits of QR code payment systems. Faisal described how digital payments have simplified transactions, reduced fees, and enhanced the transaction capabilities of MSMEs in Indonesia, with a particular impact on e-commerce.
2.3. Consumer and merchant benefits
Both Miyazawa and Faisal expressed aspirations for deeper economic ties between ASEAN countries and Japan through enhanced digital payment systems. Miyazawa outlined a vision for using digital payments to facilitate inbound tourism and cross-border e-commerce transactions. In the long-term, he aspires for the digitalization of the trade supply chain between ASEAN and Japan, in manufacturing industries such as automobiles and electronic products and in distribution industries like shopping malls. Faisal observed the mutual benefits in trade and tourism between Japan and Indonesia, underscoring the inclusive nature of digital payments in balancing different scales of transactions. She also sees the opportunity in the use of digital payments not only in the tourism sector, but also in the export of Indonesia products such as arts and crafts by MSMEs that are particularly attractive to the Japanese consumer. Given the potential benefit of digital payment systems, she emphasizes the need to balance the scale between small and large players, and that digitalization has enabled small ticket items to compete in the market.
3. Potentials of a stronger ASEAN-Japan cross-border digital payment cooperation
Q: How can Japan capitalize on ongoing regional advancements in digitalization, especially in the context of a more integrated ASEAN market through the ASEAN Digital Economy Framework Agreement?
For Miyazawa, he hopes to see Japan actively participate in this circle soon. As for Soramitsu, they are proceeding to introduce CBDC to other countries in ASEAN and Pacific Islands, and connect this system and the data payment system using blockchain technology.
3.1. Interoperability, harmonization of standards and regulation, digital infrastructure, dispute resolution mechanism, and stakeholder collaboration
In order to embark on an ASEAN-Japan cross-border digital payment cooperation, Sarat identifies the following crucial components: (1) interoperability and interconnectivity of the payment system infrastructure, (2) harmonization of regulation and technical standards, (3) development of digital infrastructure including digital identities, authentication and consent, and (4) development of a dispute resolution mechanism with an independent centralized institution representing both the public and private sectors, and (5) collaboration among all stakeholders especially from the industry and regulatory sectors who will establish commercial terms, governance, and technical aspects.
3.2. Enhanced security and protection against money laundering
Miyazawa adds that from a regulatory and system perspective, adhering to anti-money laundering standards and ensuring user convenience are also important. Specifically, this involves agreeing on the level of identity verification between countries, to reduce multiple verification processes. At present, cross-border connections between countries using CBDCs are done through bilateral cooperation, but multilateral country connections are also possible using public blockchains, which are independent platforms and has the potential to streamline the cross-border payment system across countries. For instance, Soramitsu and Asian Development Bank are working to create a prototype for a cross-border security settlement system in three countries.
A question from the online audience was raised on how can banks and digital payment providers operate sustainably with zero commission. Faisal offered Indonesia as a case in point, as Bank Indonesia has established the fast payment platform or BI-FAST, the cost is covered by the government and remains minimal. In the future, banks will not profit from conducting payment transactions as payment is a facilitating instrument that complements other financial services offered by banks. Miyazawa affirmed the cost reduction through fast payment systems as is also the case in Cambodia, where merchant commission has become zero.
In closing, the discussion wrapped up the current developments in digital payment systems between ASEAN countries and Japan. In 2022, Pay Indonesia has signed a Memorandum of Cooperation on a QR code-based payments (Indonesia QRIS and Japan Unified QR code) with the Japan Ministry of Economy, Trade and Industry. In December 2023, Cambodia and Japan have entered into a Memorandum of Understanding on the cross-border digital payment connection using QR code.
Recording of the Webinar
To access the full recording of the webinar on YouTube, you may view it here (https://www.youtube.com/live/izHIP07dPto?si=clFu1XmAuRMm3UL5).
The ASEAN-Japan Insights Series
The Series aims to be a relevant and leading information sharing platform in the region on ASEAN-Japan matters. It is a hybrid, bilingual (English and Japanese) webinar series that features hot topics in ASEAN and Japan and facilitate information sharing and knowledge sharing among industry, academia, governments, and enterprises within the region. Each webinar will be co-organized with a partner institution in ASEAN to foster cross-collaboration and co-creation between ASEAN and Japan stakeholders. For more information, please email the Research and Policy Advocacy Cluster at info_rpa@old-site-backup.asean.or.jp
