Digital payments are at the centre of digital trade expansion and serve as a key enabling factor for digital commerce. Firms will not provide goods or services if they cannot be paid.
Payment services, therefore, are a critical component of the online services ecosystem that allows consumers to conveniently make purchases for goods and services from merchants globally and for firms to sell and buy from around the world far more easily and cheaply than ever before. Cross-border digital payments, in particular, are instrumental for the development of the regional economy and the growth and resilience of micro, small and medium sized enterprises (MSMEs) looking to thrive in a post-Covid pandemic environment.
New innovations within the e-payments space, like e-wallets and blockchain, and initiatives by governments aimed at fostering increased use of digital payments, will likely improve access and lower the costs of cross-border transactions, especially for MSMEs.
However, most of this innovation has taken place in the domestic space, where payments are experiencing improvements in terms of speed and convenience. Conversely, cross-border e-payments remain slow, costly and opaque, and difficult to manage.
A lack of access as well as regulatory and payment network interoperability means that payments remain one of the most challenging issues for MSMEs hoping to engage in cross-border e-commerce in the region.
As governments in the region continue to promote initiatives that improve access and use of digital payments, the challenges of managing cross-border transactions are often under-appreciated by policymakers. MSME merchants and financial service providers continue to struggle to develop and sell their products and services across borders.
It is not simply that Asia is remarkably diverse with stark differences between economies in technological maturity, regulations, standards, cost, digital access, and security considerations. The lack of a regional ecosystem and supportive policy framework to encourage regional payments continues to hamper large and small firms and slows economic growth and development.
Recognizing the need to provide practical and concrete information about the challenges of managing cross-border digital payments, the latest paper by the Asian Trade Centre explores the key drivers and consequences of a lack of access, competition and interoperability in the regional e-payments ecosystem. Payments are, as the first paper in the Hinrich Digital Trade Series noted, a key challenge for policymakers in 2021 and beyond.
There are many elements involved in making payments function more smoothly, efficiently, and at lowered costs. One important aspect of the equation is the retail e-payments sector. The retail e-payments space is, in part, the most visible element of the payments ecosystem for most firms and policymakers. Addressing some of the challenges in retail e-payments can contribute to resolving obstacles to creating a more integrated region and also tackle important issues in payments more broadly.
Retail digital payments are typically defined as electronic transactions between consumers and businesses, between two consumers, or between businesses for the purchasing of goods and services. The cross-border dimension of retail e-payments often involve the national payment systems of at least two jurisdictions, different currencies and specialised processes (including the execution and settlement of foreign exchange transactions).
Interviews with the smaller businesses in AMTC revealed that most firms continue to use bank and wire transfers as the primary mechanism for managing cross-border payments. They do so because, although slow and inefficient, it basically works for the business-to-business space.
However, using bank transfers also limits the ability of most AMTC firms to pivot to selling directly to consumers overseas, as no customer wants to manage the hassle of bank transfers for payment. Firms have struggled to convince customers to switch to alternative forms of payment, even at a time when digital or fintech solutions that claim to solve problems are proliferating. The use of such approaches are more challenging than might be expected for companies trying to operate across borders.
Cross-border retail payments are more complicated than purely domestic payments. They involve numerous players, currencies, time zones, jurisdictions and regulations. The payer and payee are typically located in different countries and rely on multiple intermediaries, arrangements and processes that need to be in place for the payment to be made and received.
Even what appears to be a purely “domestic” payments transaction can involve the movement of information across borders as firms, as an example, check for fraud using data located offshore. Increasing restrictions on the movement of data can choke off payment solutions or make them more cumbersome and costly.
Many of the specific obstacles to effectively managing cross-border payments stem from inconsistent or challenging government requirements. Some provisions, such as rules to prevent money laundering, have been put into place for sensible reasons, but can also serve as an impediment to the smoother flow of retail payments.
Governments in the region have recognized the important role for payments and have begun to put “cooperation” commitments into a variety of consultative mechanisms including free trade agreements. Governments should be taking more active steps to leverage such commitments on payments, which are playing an increasingly important role in the reduction of market access and data barriers to the delivery of cross-border e-payments and the interoperability of increasingly complex and divergent domestic e-payment systems.
By promoting negotiation and the effective implementation of any commitments, governments can reduce barriers to the cross-border delivery of e-payment services, work more closely in promoting the simplification and interoperability of platforms and solutions, adopt international payment standards, facilitate coordination among multiple stakeholders and drive strategies to promote adoption.
Without more effective solutions to the challenges of cross-border retail payments, firms will be unable to grow to their full potential and are at high risk being shut out of opportunities in neighbouring markets. In the post Covid recovery period, simply telling firms to get online without ensuring that they can be paid will remain an insufficient solution to future growth opportunities.
***This Talking Trade was drawn from the ATC’s latest paper on the topic. Tune in tomorrow morning at 9:00 am SGT to participate in a webinar. Register now. ***