Bridging ASEAN through regional payment connectivity

In November 2022, the central banks of Indonesia, Malaysia, the Philippines, Singapore, and Thailand signed a Memorandum of Understanding (MoU) to work together to achieve interoperable regional payment connectivity by 2025. This MoU marked a ground-breaking step towards the G20 goal of removing frictions in cross-border payments, paving the way for inclusive growth and better trade opportunities for companies in ASEAN and beyond.

Currently, regional payment linkages are bilateral. For example, Singapore’s PayNow service is linked with PromptPay (Thailand), DuitPay (Malaysia), and UPI (India). While multilateral payment linkages across the region are in the works (covered in the later part of this article), payment partners are already enjoying cheaper, faster, and more transparent cross-border payments.

Payment connectivity brings benefits for businesses, organisations, and individuals alike. Users are able to avoid multiple currency conversions before final purchase, and tourists in ASEAN enjoy lower conversion fees by paying via QR codes instead of credit cards. The recent bilateral linkage between Indonesia and Malaysia has been hailed for enabling migrant workers to remit funds back home at a lower cost.

It has also allowed small- and medium-sized merchants, previously catering to local buyers, to tap into the larger ASEAN market. More broadly, pursuing ASEAN cross-border payments could also reap macro benefits: from lessening the region’s dependence on the US dollar to strengthening trade between member nations and spurring economic growth.

Driving regional payment connectivity in ASEAN

There are technologies that enable payment connectivity across ASEAN. These range from established systems to emerging technologies that are capable of bringing payment linkages to the next phase of maturity.

Cross-border quick response (QR) code transactions

Currently available in Singapore, Malaysia, Indonesia, and Thailand, cross-border QR code transactions free users from the burden of carrying cash or cards, often without transaction fees and at lower conversion rates than traditional payment methods. The technology will soon be made available in Vietnam and the Philippines.

Retail payment systems

Cross-border QR code technology can be paired seamlessly with retail payment systems. For instance, the UOB TMRW app uses PayNow to enable cash-free overseas payments (using QR codes) or instant overseas fund transfers.

Furthermore, retail payment systems can be tapped to fund e-wallets – one of the fastest-growing payment methods in the region – with 84 per cent of Southeast Asian consumers expected to use e-wallets by 2025. As ASEAN’s retail payment systems become more connected and integrated with FinTechs, traditional banks and digital banks, fast and convenient cross-border payments are becoming a reality.

Retail payment systems are becoming more integrated with FinTechs and banks ‐ further enhancing payment connectivity. Photo courtesy of Getty Images

AI and predictive analytics

With enhanced interconnectivity and ease comes the need for stronger anti-fraud measures to protect users. This is where artificial intelligence (AI)and predictive analytics come in to assist regulators and central banks identify and prevent fraud. National ITMX from Thailand — which operates PromptPay – uses AI and analytics in their fraud detection and prevention activities.

Blockchain-based payments

When talking about quick and convenient cross-border payments, digital currencies are part of the conversation since they enable the movement of digital assets in a digital economy. Blockchain-based payments have the potential to smoothen interoperability between banks and facilitate instant cross-border payments.

Asia Pacific countries are also researching Central Bank Digital Currencies (CBDCs) as a secure and stable means towards payment efficiency, financial inclusion and widespread access to services. While there is no large-scale CBDC in Asia yet, some countries are initiating proof-of-concept models to support the roll-out of CBDCs when the time is right.

The Monetary Authority of Singapore (MAS) has initiated two projects in this vein. One is Project Orchid, which explores the design and technology needed to support a digital Singapore dollar, as well as how it might integrate with existing payment systems. The other is Project Guardian, a policy-focused initiative in collaboration with policy makers and the financial industry, to test the feasibility of tokenised assets and decentralised finance while managing risks to the stability of the financial industry.

Project Orchid

Project Orchid is part of MAS’ vision to build an innovative, interoperable, and inclusive open-source digital currency infrastructure for Singapore. Rather than creating a CBDC, the initiative has taken a user driven approach to focus on Purpose Bound Money (PBM).

PBM is an important element in the future of digital money as it enables money to be directed towards a specific purpose, without requiring the money itself to be programmed. This opens up opportunities for innovation and value creation.

Since the beginning of Project Orchid, UOB has been a key partner with MAS, from conducting research and producing whitepapers, to carrying out numerous pilots and trials. In 2023, three use cases were developed around PBM:

• Singapore Pitstop Pack: Focused on programmable rewards for inbound tourists.
• SkillsFuture Singapore PBM Prototype: Explored how government disbursements for e-learning can be improved for overseas training providers.
• Fungibility Trial for Digital Singapore Dollar: Focused on the fungibility of Digital SGD and interbank settlement using wholesale CBDC.

Project Guardian

Project Guardian is an MAS-led collaborative initiative with policymakers and leading banks and FIs in the financial industry, of which UOB is part of.

Some of the project’s notable objectives include:

• Conducting industry pilots with traditional financial institutions and FinTechs, so as to yield a better understanding of the opportunities and risks involved.
• Assessing the longer-term transformational impact with the aim of developing a responsible digital asset ecosystem.
• Establishing policy guidelines and frameworks in the shape of defining acceptable governance models or accountability, among others.

UOB was also part of a technical pilot (involving Marketnode and HSBC) that concluded late last year, on the issuance and subscription of a digitally native structured product. The pilot was successful in demonstrating the potential for lower issuance and reduced settlement times, along with a broader distribution for participants within a structured product chain.

Frameworks for establishing an integrated ASEAN payment system

In mid-2023, the ten member-states of the Association of Southeast Asian Nations (ASEAN) established a Task Force to study the feasibility, benefits and challenges of implementing the ASEAN Local Currency Transaction Framework to advance regional payment connectivity. ASEAN has also developed various frameworks that support or are related to the implementation of widespread payment connectivity across the region.

ASEAN Economic Community Blueprint 2025

The ASEAN Economic Blueprint (AEC 2025) takes off from AEC 2015. One of its areas of focus is digital technology as a means to enhance trade and investments, provide a web-based business platform, promote good governance, and facilitate the use of green technology. It aims for ASEAN to play a central role in facilitating economic integration in East Asia by creating a highly integrated and cohesive economy.

Supporting this goal are several strategic measures outlined in AEC 2025, including strengthening financial integration to facilitate intra-regional trade by highlighting ASEAN banks; integrating more insurance markets; and connecting more capital markets, supported by a robust financial infrastructure.

ASEAN Payment Connectivity Initiative

With the goal of regional economic integration firmly laid out in AEC 2025, the ASEAN Payment Connectivity Initiative is a declaration by ASEAN member-nations to fully support, commit and collaborate together to implement and advance regional payment connectivity.

The initiative recognises that robust payment linkages will make possible key goals of AEC 2025: faster, cheaper, safer, and more inclusive payment systems, and encouraging local currency use to strengthen the region’s financial resilience.

ASEAN Comprehensive Recovery Framework

Drafted in 2020, amidst the turbulence of the COVID-19 crisis, the ASEAN Comprehensive Recovery Framework was a roadmap to a post-pandemic world. The framework outlined two broad strategies that laid the foundation for a digital economy.

The first is to maximise the potential of intra-ASEAN market and broader economic integration, which sought to balance the region’s reliance on trade and vulnerability to external shocks by strengthening supply chain resilience and regional value chains. The second is to accelerate digital transformation, which capitalises on the surge of digital activity during the pandemic to promote e-commerce, digital connectivity, and the digital transformation of MSMEs.

Project Nexus

Aside from these frameworks and initiatives, there is Project Nexus, an initiative between MAS, the Central Bank of Malaysia (BNM) and the Bank of Italy, that explores the viability of multilateral instant payment systems. Currently, Project Nexus connects Singapore’s Fast and Secure Transfers (FAST) payment system, Malaysia’s Real-time Retail Payments Platform, and Eurosystem’s TARGET Instant Payment Settlement, allowing online payments between the three systems.

Project Nexus’ plans are not confined to just the ASEAN region. Project Nexus is the proving ground of payment connectivity at scale beyond the region. The end goal is to show that international payments amongst the G20 countries can not only be achieved but also be vastly improved in cost, speed, transparency and accessibility.

Opportunities presented by a connected ASEAN

As illustrated by the policy frameworks that support and pursue ASEAN cross-border payments, the benefits of payment connectivity extend beyond individual consumers, businesses, or even industries. Greater usage of local currencies stimulates cross-border trade. Small and medium-sized enterprises can access regional markets and participate in more diverse business opportunities. This strengthens economies, elevating the ASEAN bloc’s growth.

Cross-border payment connectivity can also pave the way to reducing overall dependence on the US dollar. While exchange rates are currently pegged to the US dollar, regional linkages would instead use local currency settlements between countries, eliminating the need for the US dollar as an intermediary. This would speed up and lower costs for remittances, stimulating trade and industry.

While cross-border QR code payments are proving convenient, especially for travellers within Southeast Asia, they remain bilateral. The next logical step is to create a multilateral payment network within ASEAN (currently explored by Project Nexus), and then to bring real-time bank transfers beyond the region – to other regional clusters around the world.

Finally, there is a real opportunity to invest in digital technologies and platforms, which can help develop a more seamless and secure cross-border payment connectivity. Leveraging digital currencies, blockchain and AI can hasten the interoperability and standardisation among participating countries.

Here at UOB, the Bank is ready to innovate and continue to provide cross-border fast payment solutions for customers, to make it as efficient and seamless as possible. Case in point, its expansion of cross-border QR payment services to countries such as Indonesia and Thailand, as well as being one of the participating banks in the launch of the cross-border QR code payment service between Singapore and Malaysia in 2023. Find out more about the range of payment services here.