Can SEPA-style work in Asia-Pacific?

Regulators in the Asia-pacific region are looking at rolling out a SEPA-style single payment area, but what will be the challenges of such a project in one of the most fragmented payments markets in the world?

Increased trade flow between Asia-Pacific and Europe is driving payment activities between financial institutions within these two regions. But while the SEPA project is now firmly established in Europe, the Asia-Pacific region is only just embarking on economic integration and it will be some time before a SEPA-style scheme is established.

In the EU, various legislations including the Payments Services Directive provide a single legal regulatory framework for payments within Europe. The EU also has bodies such as the European Payments Council to help oversee activity within SEPA.

Asia-Pacific – unique challenges

However, the Asia-Pacific region faces a number of unique challenges in regulating and harmonising payments. The region is highly fragmented, including a mix of developed markets with high smartphone penetration and card use, and several developing economies where there is a greater reliance on cash and less access to technology and formal banking services.

Worldwide payments market projected share 2020

The Association of Southeast Asian Nations (ASEAN), including Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, is rapidly approaching a new milestone – the implementation of the ASEAN Economic Community (AEC) at the end of 2015.Also, unlike the EU, the Asia-Pacific region has separate jurisdictions with separate governments, operating with different agendas, and in some of these jurisdictions, multiple regulators have oversight responsibilities over individual aspects of payments regulation.

The cornerstone of the AEC’s plan is regional economic integration by 2015, encompassing: a single market and production base; a highly competitive economic region; a region of equitable economic development; and a region fully integrated into the global economy. Areas of cooperation include closer consultation on macroeconomic and financial policies; trade financing measures; and development of electronic transactions through e-ASEAN.

Progress to date has been slow but steady, according to Singapore’s senior minister of state for trade and industry Lee Yi Shyan, who told the Singapore parliament in June 2014 that the AEC is enhancing trade facilitation initiatives, as well as eliminating tariffs and addressing some non-tariff measures to facilitate and increase trade in goods.

However, others monitoring its progress have poured scorn on these claims, stating that the December 2015 deadline is unrealistic. Meanwhile, a raft of surveys across the region indicate that half of businesses in the region have not even heard of the AEC nor its plans. A survey by the Institute of Southeast Asian Studies found that 55% of some 380 firms polled across the region were not aware of the AEC, with Singapore companies having the highest level of ignorance at 86%.

The Asia Foundation, in partnership with the E-saan Center for Business and Economic Research (ECBER) of Khon Kaen University, conducted a study: “Trade Facilitation and the Cost of Non-Cooperation to Consumers in the AEC”, released in March 2014. The study examines past and present trade structures of Thailand, Cambodia, Vietnam, Laos, Malaysia, and Myanmar. The most common problems identified in the report are clearance, documentation, and processing procedures, as well as informal payments and low skill levels among trade officials.

Steps for payment harmonisation

In a paper for the Asian Development Bank Institute, Tanai Khiaonarong, a senior expert in the Payment Systems Policy Department of the Financial Institutions Policy Group of the Bank of Thailand, outlines the main challenges of establishing payment harmonisation across the region.

“ASEAN is expected to benefit from the significant growth in the Asia-Pacific payments market. Growth in economic activity would increase the size, scale, and scope of payment transactions. Enabling the scale and scope of payments would in turn increase economic activity. This would also require national payment systems to be regionalised and operate with cross-border and multi-currency capabilities.

“Promoting the use of cashless payments would require increased private sector involvement in improving accessibility to basic payment infrastructure, increasing their interoperability, and creating a competitive cross-border retail payment scheme. Second, creating cross-border and multi-currency payment systems could possibly proceed with the interlinking of existing real-time gross settlement systems within the region, and later enlarged, but this would need to be supportive of the broader goals of sequencing financial services liberalisation.

“Third, legal harmonisation would need to keep pace with rapid technological and regulatory changes where the introduction of settlement finality legislation is seen as an important precondition to support cross-border payments. And fourth, enhancing cooperation would involve the creation of regional oversight frameworks and cross-border collateral arrangements as systems become increasingly interconnected and interdependent in the long run.”

A report from online payment giant PayPal outlines that in order for the Asia-Pacific region to maintain recent levels of growth in e-commerce, a concerted and focused effort is required to create a consistent regional approach to regulation of e-payments. It suggests that regulators across the region should actively engage in dialogue focusing on reconciling differing interests and objectives of regional legislation within the e-payments sector.

PayPal has called for the establishment of a specific e-payments subgroup within the APEC Electronic Commerce Steering Group with the goal of establishing a detailed and consistent framework that individual regulators within each jurisdiction could use to tailor local regulations.

It proposes that this group should be charged with the agenda to promote the development and use of e-payments within Asia-Pacific by creating legal, regulatory, and policy environments that are predictable, transparent, and consistent.

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