Advancing cross-border payments in ASEAN and beyond

The Bill and Melinda Gates Foundation in partnership with Elevandi, hosted a discussion on cross-border payments in ASEAN and beyond, here is a summary of what was discussed.

I: Context and Introduction 

In a world where cash transactions still dominate many emerging markets and financial inclusion gaps remain, we are seeing the emergence of successful examples of digital public goods and fast payment systems that are closing these gaps. This roundtable discussion focused on:

(1) Exploring how to foster acceleration of financial inclusion in the ASEAN region by promoting domestic fast payment systems and cross-border payments interconnection. 

(2) Spotlighting the role that the Bill and Melinda Gates Foundation (BMGF) and its partners can play in facilitating and assisting ASEAN countries which do not yet have fast payment systems. 

(3) Exploring South-South collaboration, in particular with countries in LATAM. As we move ahead to Brazil's G20 presidency next year (starting December 1^st, 2023), that the Inter-American Development Bank (IDB) is helping to coordinate, and the fact the IDB is assuming the Presidency of the MDB Heads (from NDB) and RDB Heads (from EBRD), the IDB could provide a natural conduit to support this agenda.

Background: The Monetary Authority of Singapore (MAS) and the Bank for International Settlements (BIS) are driving the "Nexus" project to provide cross-border payments interoperability among the 10 ASEAN countries (Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Vietnam, Timor-Leste) on a multilateral basis. This project stems from early successes in establishing instant merchant payments between Singapore and Thailand, and Singapore and India. 

The prerequisite for joining the scheme will be that each country has an instant payment system (IPS). Five ASEAN countries with a combined population of 176M do not have an IPS:  Brunei Darussalam, Cambodia, Myanmar, Lao PDR, Vietnam. 

This offers a huge opportunity to build more inclusive, competitive, and secure financial ecosystems in these five countries and to bolster regional interconnectivity across ASEAN.  In addition, the Monetary Authority of Singapore – a founding member of the Mojaloop Foundation – can position Mojaloop as a candidate for IPS development in these five markets.  There is also an opportunity to optimise the process and employ a cost-effective regional approach by working with all the 5 countries together rather than each separately. To this end, the Gates Foundation is working with MAS (which is a founding sponsor of the Mojaloop Foundation) and the Mojaloop Foundation to advocate for and assist these countries to implement an IPS. The first active engagements are with Lao PDR and Myanmar. 

As the largest FinTech festival in the world that draws increasing participation from key FSP target audiences such as central bank governors from the global south, MAS proposes to target the Singapore FinTech Festival (Nov 15-17 2023) as a formal launch opportunity to announce this project, an opportunity to engage with the central bank governors of the ASEAN countries and an opportunity to position Mojaloop as an open source tool for helping countries implement IPS in a cost-effective way.  

Introduction: The Bill and Melinda Gates Foundation’s Strategy and support it can provide in the implementation of instant payment systems

The Bill and Melinda Gates Foundation (Gates Foundation) set the stage with an introduction on their strategy and support in implementing instant payment systems (IPS) with a focus on digital public infrastructure (DPI) and digital public goods. The Gates Foundation aims to assist lower-income countries by providing technical expertise, funding, and building digital public goods like open-source software. The primary focus of the discussion is on instant payment systems, emphasising their inclusivity for all stakeholders, including the poorest populations. 

Drawing inspiration from AfricaNenda's work, the conversation seeks to map out Asia's IPS landscape and identify countries that lack IPS or need improvements for inclusivity. The discussion addresses the challenge of funding DPI, particularly for smaller banks and cooperatives, and highlights the capital requirements for users and merchants adopting these systems in the ASEAN market. The central concern revolves around funding this initiative and exploring innovative solutions for the significant capital needs associated with implementing world-class public payment infrastructure.

Preface by Elevandi and the Monetary Authority of Singapore

Over the past seven years, three primary challenges have been observed in the journey on implementing cross-border instant payments infrastructure:

1. Cost of Digital Infrastructure: Establishing a robust digital payment infrastructure is perceived as expensive. The dilemma arises in funding a public infrastructure considered a world-class public good. While India successfully funded a $1 billion project, this model may not be viable for countries with a higher cost per capita. The fixed capital cost, often exceeding $100 million, remains unchanged despite technological developments.
2. Challenges for Smaller Banks: Top-tier banks aside, smaller banks, including low-tier and cooperative banks, lack the necessary capital to upgrade their banking systems to meet modern requirements.
3. Capital Requirements for Users/Merchants: Users and merchants face financial barriers to adopting these digital tools, encompassing costs from capacity development to the procurement of necessary tools.

In the ASEAN market, there is a shared understanding of the significance of efficient payments and their impact on lives. However, despite motivation and a strong desire for advancement, ASEAN countries face a capital deficit. Regulators' expectations for increased infrastructure connectivity and reduced interoperability issues add another layer of complexity. The overarching question that looms large is: Who will fund this crucial initiative?

II: Recommendations coming from the discussion

What would make sense to do together as a community starting today? 

The discussion centres around the need for a comprehensive overview of instant payment system initiatives across the 10 active ASEAN countries. The vision is to achieve interconnected instant payment systems in each ASEAN country, fostering a low-cost method for domestic money transfers. 

A few suggestions were put forth: 

• There was originally a suggestion of the need to appoint an entity, possibly an ASEAN administration organisation, to track progress similar to the role played by Africa Nenda in Africa. However, participants agreed that there already exists well-functioning bodies in ASEAN who meet regularly on payments and other topics. As the issue in ASEAN is less about the lack of knowledge on the existing gaps between the countries, instead of tracking the progress of instant payment systems adoption and development, the recommendation is to consider the last mile of inclusion, highlighting challenges such as internet infrastructure. The proposal is to track solutions that bridge these gaps.
• The commitment to Nexus within ASEAN is acknowledged, with the aim of providing an interoperable platform. The recommendation was for the Gates Foundation to approach countries specifically and to understand how they can get to the level to which they can work with Nexus, given that the BIS vision for Nexus is global interoperability, emphasising the need to prevent regional silos. The Gates Foundation is also encouraged to go directly to the ASEAN platform with their services and value proposition, to work on a top-down approach to seeking collaboration amongst ASEAN nations. 
• The suggestion is also for the Gates Foundation to explore collaboration beyond ASEAN, considering bodies in the Pacific Islands. While there is a working group among ASEAN central banks addressing existing gaps, the key challenges lie in funding and governance agreements. The discussion extends to addressing hurdles for financial inclusion, including literacy issues in rural areas. 

To conclude, there is a notable parallel between the discussions in Asia and Latin America. The IDB suggests keeping the possibility open for establishing an exchange tailored to Latin America, utilising digital public infrastructure developed in collaboration with the BIS innovation hub and other stakeholders that can transcend regional boundaries, especially if blockchain technology is involved. 

Gates Foundation had also proposed to explore models where multilaterals and foundations can address structural issues and provide support. If successful in Asia, such models could be replicated in Africa, Latin America, and beyond. Collaboration with entities worldwide is encouraged to find common solutions. Foundations express interest in engaging communities, emphasising the need for effective coordination bodies to support ongoing discussions and initiatives. The hope is to convey this message to existing bodies for collective coordination among central banks and multilaterals.

Annex

The key enablers behind fostering acceleration of financial inclusion in the ASEAN region by promoting domestic fast payment systems and cross-border payments interconnection 

The Philippines aims for 70% financial inclusion by 2023, driven by digitalisation efforts. Regulatory measures on e-money issuances and engagement with non-bank entities have led to a fourfold growth in e-wallets. E-wallets constitute 40% of instant payment system transactions. The national standard for QR codes enhances interoperability. The challenge lies in establishing cost-effective structures for sustainable traction. In the case of the Philippines there is a large cost in clearing switches, and its costly arrangements with long term lock-ins can cause the state to be beholden to one entity. A review of the QR payment system's cost structure, favouring the P2M model for merchants, is in progress.

Thailand faces challenges in private sector-funded models, hindering interoperability. The government's active involvement in PromptPay, part of the national payment infrastructure, has driven adoption. Concerns arise about the sustainability of a near-zero end-user fee model. Discussions on reviewing switching fees for scalability and sustainability persist. Collaboration between industry players, central banks, and the government is vital, with Thailand's success attributed to central bank initiatives.

In Malaysia, the central bank's ownership of a percentage of PayNet facilitates public utility service influence. The emphasis is on achieving domestic and cross-border payment goals: inclusion, affordability, efficiency, safety, sustainability, and interoperability. Different models, both public and private, are under review, aligning pricing with business sense for the country.

Cambodia's Bakong instant payment system, fully subsidised by the central bank, reflects a unique digital public infrastructure. Challenges include system incompatibility and banks' economic concerns about connecting to non-interoperable systems. Cambodia explores connectivity to multilateral platforms like Nexus, despite not being a current member, with a focus on contributing to ASEAN's benefit.

Brunei has an initiative via joint venture with a GLC and three local financial institutions on a fast payment system that will be expected to go live by first half of 2024. In line with the ASEAN goal for QR interoperability, Brunei is currently drafting a consultation payment for a national QR code. Unlike other ASEAN nations, financial inclusion is not a concern for Brunei with a financial inclusion rate of 84.8% (at 2021). The pain point lies in the affordability and efficiency of payment systems.

A recurring theme for ASEAN countries is the need for a harmonised system that incorporates both public and private elements. A notable example outside ASEAN is Google Pay in India, where connecting various apps to the Unified Payments Interface (UPI) led to a significant surge in transaction volume. Google Pay's approach of opening the central bank's public infrastructure to the private sector is considered transformative. The success of this model, exemplified in India, lies in careful coordination between Google Pay, central banks, and ministries, ensuring an efficient and affordable structure for merchants. This process, involving data governance and collaborative efforts, underscores the complexity of implementation, requiring substantial motivation from central banks and ministries to achieve success.

A recent observation in Rwanda showed an example of the central bank initiating the development of a parallel system alongside the existing one. This new system, leveraging open-source technology, is designed to be more cost-effective. Traditional legacy systems often face challenges in being upgraded at a reasonable cost while accommodating all existing use cases.

How can some of the partners - multilaterals and foundations - facilitate this process? 

International Monetary Fund

The International Monetary Fund (IMF) is actively engaged in three key areas. 

• Firstly, it collaborates with the World Bank to provide technical assistance in cross-border payments, aligning with the G20 roadmap for enhancing such systems in member countries.
• Secondly, the IMF conducts cross-country case studies to understand the varying success of fast payment system adoption, considering factors like merchant incentives and central bank influence. 
• The IMF also explores complementary approaches, such as Central Bank Digital Currencies (CBDCs), which could enhance fast payment systems. On the domestic side, CBDCs may expedite financial inclusion in countries with low banking penetration. Internationally, the exploration of cross-border payment platforms and the potential for a new generation of platforms linking CBDCs across countries is underway. 

ASEAN Governors are particularly interested in CBDCs for foundational improvements in payment systems, emphasising their potential impact on remittances. The ASEAN 5 nations are actively exploring CBDCs, focusing on wholesale CBDCs over retail CBDCs, with ongoing initiatives in Singapore, Malaysia, and the Philippines. The latter is piloting a wholesale CBDC in collaboration with a technology vendor and six participating partners, including a non-bank EMI, for the fractional distribution of government securities.

World Bank

The World Bank's Project Fast, funded by the Gates Foundation, aims to address gaps in fast payment system adoption worldwide. The initiative encompasses diverse financing forms, including project and development policy financing. Within ASEAN, the World Bank supports countries in enhancing their fast payment systems. Project Fast focuses on knowledge sharing in technical areas, legal regulatory policy reforms, and incentives to foster digital payment adoption. The project extends beyond fast payments, integrating social protection agendas and clean energy use cases. 

The World Bank advocates for the inclusion of smaller financial institutions, endorsing diverse models like community arrangements. It highlights the often underestimated costs of IT infrastructure in implementing fast payment systems. While central banks and governments play a crucial role, diverse modes of engagement are possible. The World Bank emphasises the need for robust IT infrastructure and provides further information at fastpayments.worldbank.org. 

The discussion challenges the idea that Central Bank Digital Currencies (CBDCs) are a solution for pervasive financial inclusion gaps, suggesting a focus on fast payment systems first. Cambodia's case, where CBDCs were employed to address issues unsolvable by fast payment systems, is cited as an example of redesigning payment systems for specific needs.

BIS Innovation Hub

Turning to Project Nexus, the collaboration between the BIS team and the efforts of the IMF and World Bank is synergistic, aiming to establish a use case for connecting cross-border applications of fast payment systems. Nexus initially observed developments in domestic payment systems and commenced bilateral connections. The emphasis is not solely on technology but on the comprehensive governance of the entire system, recognising the scalability challenges of connecting growing instant payment systems. The focus with ASEAN partners is to develop a scalable use case and provide technical blueprints for countries without instant payment systems, ensuring cross-border interoperability. Nexus seeks sustainability and efficiency, leveraging existing domestic infrastructure in a hub-and-spoke model, fostering open-loop interconnectivity. 

The project aims to avoid a race to the bottom, promoting the adoption of higher standards and best practices. A service-level description is developed to centralise regulatory requirements, reducing back-office frictions and streamlining processes using ISO2022 standards. The goal is to transform the status quo in payment systems, aligning with international standards. 

Acknowledging the evolving geopolitics, payment systems are identified as a key factor, raising considerations about governance and geopolitics in Nexus. A potential name change for Nexus is suggested to better reflect its collaborative intent.

Asian Development Bank

The Asian Development Bank aims to transform existing challenges into vibrant opportunities, positioning itself as a valuable partner with a strong operational and strategic focus. Payment systems hold a crucial place in its mandate, primarily addressing the access to financial services during disasters and lowering international remittance costs, aligning with a goal to reduce costs to 3% in the coming year. Recognising the diverse capabilities among countries and partners, ADB, with member countries like Brunei, Cambodia, Vietnam, and Laos, engages in ongoing collaborations and discussions. With resident offices in each country and a coordinating body in Manila called the financial sectors group, ADB is actively involved in providing technical assistance, knowledge exchange, and capacity building for digital finance infrastructure. The ongoing memorandum of understanding with the Singapore Ministry of Finance emphasises collaboration with the Monetary Authority of Singapore to incorporate these initiatives into their joint efforts. ADB stands ready to contribute to the next phase of this collaborative discourse.