Fragmented payments landscape undermines Asean integration
While corporates are gearing up for southeast Asian trade integration, a balkanized regime for processing cross-border payments is undermining the intra-regional push.
Trade flows are accelerating across Asean through the reduction of trade tariffs and the harmonization of rules governing the flow of goods.
The same cannot be said for the financial services sector, however, with corporates still struggling to navigate a slew of divergent regulations, and infrastructures for processing cross-border payments, undermining the spirit of Asean integration.
With the target date of December 31, 2015, for the implementation of the Asean Economic Community (AEC) now only months, it runs the risk of creating a two-speed trade environment.
Melvyn Low, at Citi
“The progress made to reduce the barriers for trade of goods is moving faster than for services and capital,” says Melvyn Low, managing director, head of Asean and Singapore, Citi.
Intra-regional flows are the driving force behind the growth of the community, and the overseas appetite to trade with the member states is strong.
Asean recorded a combined GDP of $2.4 trillion in 2013, and reduced tariffs meant 70% of trade incurred no charges. As these standards have been implemented to free up the movement of trade, the next step is for the vital financing side of the transactions to become as liberalized.
The process has to begin by finding a standard way to do business, and make payments more efficient in terms of cost and time to clear, say bankers.
Manoj Dugar, managing director, treasury services at JPMorgan, says: “They need to start somewhere in setting up clearing infrastructure in each country, and then try to standardize these processes. Some of the countries in the region are moving in that direction – it is the stepping stone towards the homogenization of cross-border payments."
If a recognizable standard for payments comes into play, it will unlikely be through a region-wide regulatory push. The private sector will lead the effort to establish a common platform that will be operable between the global powerhouses of Singapore and Hong Kong, and workable for more challenging climates of Cambodia and Myanmar.
Getting a clear standard in place is vital for the corporates to be able to work seamlessly across the various jurisdictions. While the removal of barriers to trade flows makes working with neighbouring markets more attractive, the cost of doing this and the potential risk of operating between a number of niche, illiquid and non-convertible currencies is still prohibitive.
“Homogenization is important for the corporates, given the underlying costs associated with FX and cross-border payments,” Dugar says.
“Some headway is being made as far as clearing infrastructure is concerned. Developments are being made in the standardization of processes through the implementation of next-generation platforms and the ISO standard, which is now being worked on in Indonesia and Malaysia.”
The impact should resemble the positives
Citi's Low adds: “The ideal end state would be to have a single payment and settlement infrastructure that would allow for funds to move seamlessly across the Asean region.”
Inspiration for this is being sought from other geographies that have been able to create a common market. The ultimate goal of working towards something similar to that seen in Europe is still a way off.
JPMorgan's Dugar says: “When you look at what Sepa has achieved there is clearly a significant financial case with reduced bank fees and unlocking of idle cash trapped in locations. The rationalization of bank accounts across these jurisdictions would help to drive efficiency.”
Enrico Camerinelli, senior analyst at Aite Group, agrees, adding that “the impact should resemble the positives that Sepa brought to European treasurers: reduced cross-border trade barriers; possibility to centralize treasury operations; justification to establish payments and collections centres.”
The appeal of closer integration still remains strong, and the corporates are eager to take advantage of the liberalized trade flows.
Low says: “The AEC is advising corporates that whilst there are 10 markets in reality today, there is a strong common impetus to harmonize standards and remove barriers to move products and people across borders.”
As shifts take place in the banking network, it is creating opportunities for the corporates to step forward to ensure what is being developed fits in with their requirements. The changes will put more power into the hands of the treasures to make their own decisions.
Camerinelli says: “Treasurers will have more options to select bank services. This will also force them, however, to be accountable for the decision to choose, or not to choose, new bank partners.”