Fearing loss of revenue as their business customers push to go paperless, Asia’s banking giants are forging new partnerships.
Asia seems set to remain the global leader in payments disruption, as entrepreneurs defy traditional models and aggressively innovate. Such is the pace of change—aided by high technology adoption and sympathetic policymaking, at both local and regional levels—that the region can almost be said to have shifted from a steady state to one of steady disruption.
Traditional banks, alternative payment providers and telecommunications operators are all pushing the boundaries of digital payments in a scramble to stay ahead of the pack. Some banks, worrying that key sources of revenue are disappearing and that they could lose out in the resulting shake-up, are aggressively partnering with fintech luminaries to hang on to market share.
The prize is significant. Noncash transactions in Asia are expected to reach nearly $280 billion annually by 2020. Global noncash transactions will hit 12.7% CAGR in the period 2016-2021, boosted by developing market CAGR of 21.6% in the same period.
Banks face critical challenges: not only their competitors, but also regulatory gaps, their own legacy systems, and a lack of enabling infrastructure and security. Innovate they must, however, given the demands of their increasingly globalized and cost-sensitive corporate client base.
“The ‘friction cost’ of moving payments around through legacy banking channels is just way too high,” says Bhavesh Shah, Singapore-based chief purchasing officer of Firmenich, the world’s largest privately held fragrance and flavor company. “Naturally we keep an eye out for creative, lower-cost alternatives.”
Shah procures from more than 50 countries worldwide and makes a clear case for moving away from traditional banking channels in pursuit of greater service and reduced transaction costs. “Payment innovations are driven mostly by alternative payment providers rather than banks,” Shah says. “Innovators, attracted by opportunity, constantly test the boundaries of digital payment and provide commercial users like Firmenich—and consumers—with creative new features. So we are watching developments carefully.”
Explosive Growth Anticipated
Traditional banks profess to be energized as much as challenged by the new competitive environment. “This is exciting for us,” says Ankur Kanwar, Standard Chartered Bank’s head of cash-management products for Asean and South Asia.
While the digital landscape varies tremendously by market and region, digital payment transactions will grow rapidly over the next few years, he predicts: “While contactless payments are the new norm in Europe, digital payments in general are expected to rise faster in the emerging Asian markets than in the rest of the world, making this region the place to be.”
The fact that many Asian businesses still consider business-to-business (B2B) digital payments to be expensive and complex, and are concerned about hefty setup costs and a tedious implementation process, is in itself an opportunity to win business by providing better service. “Some 90% of Asia’s B2B transaction volume is still in cash!” says Kanwar.
That’s bound to change rapidly in coming years. While worldwide retail e-commerce sales totaled $2.3 trillion in 2017, B2B online sales came in at a whopping $7.66 trillion in gross merchandise volume, according to Statista. Looking forward, “the number of noncash transactions is expected to grow about 29% annually in emerging Asia and 1% in mature Asia-Pacific through 2021,” Kanwar says.
“The factors that enable the rapid adoption of digital payments are visible everywhere,” he adds, noting widespread smartphone use and companies eager to find new markets as well as the existence of many SMEs that are unbanked and highly sensitive to costs. “But nowhere more than here.”
At the same time, most central banks in Asia have been progressing rapidly on their digitization agenda—including the launch of their own instant-payment infrastructures. “Practical applications of this infrastructure—once you have it—are diverse,” says Kanwar.
“For instance,” he explains, “with the launch of unified payment interface in India, banks can scan a QR code at payment counters and execute instant payments from linked bank accounts using the merchant’s virtual payment address, which is nothing but their email ID linked to the bank account.”
Looking For The Right Partners
Way back in 2015, in anticipation of the inevitable regulatory and taxonomy challenges, the global payments network RippleNet and an advisory team made up of leading transaction bankers, including Standard Chartered and Mitsubishi UFJ Financial Group, began to build the Rulebook, a common framework for ensuring operational consistency and legal clarity for every transaction. Since then it has enabled a number of key partnerships.
Last June, Standard Chartered and Alibaba Group’s Ant Financial affiliate launched a new blockchain cross-border remittance solution, initially to be available in Hong Kong and the Philippines. This is the first blockchain-based cross-digital wallet remittance service in Southeast Asia, offered through AlipayHK in Hong Kong and GCash in the Philippines, with Stanchart serving as core partner bank. Stanchart has also partnered with Zoho Books to offer B2B customers its online accounting application, which supports a range of digital services including cross-border payments and electronic invoicing and collection.
As this suggests, the Asian giants are not the only locus of innovation. “We are accustomed to reading about the immense digital opportunities in India or China,” says Firmenich’s Shah, “but it was Asean that in August 2018 inked an agreement on e-commerce endorsed by all 10 Asean nations, comprising nearly 700 million in population, with detailed provisions encouraging member states to promote paperless trade, cross-border data flows and electronic payments laid out very clearly.”
“Asean regulators are actively taking steps to boost electronic B2B payments,” he adds. “These measures include enhancement of the e-payments infrastructure, waivers of transaction fees for domestic online transactions and an increase in check-processing fees.”
Despite challenges from disruptive technologies and new players, Ernst and Young reports that since the global financial crisis, leading APAC-based banks have actually outperformed the global banking sector.
Forecasts indicate that APAC is likely to remain a leading growth region for banking—albeit at a more modest rate—despite the challenges of market volatility, recent capital outflows and slowing growth in China.
Moreover, as some international players downsize and withdraw from the region, regional banks from Japan, Australia and Asean in particular are moving to build their presence. Mostly strong and well-capitalized, these local institutions have spent five years expanding their regional footprints, tracking intraregional trade flows, infrastructure developments and the geographic expansion of their customers.
Kanwar agrees that banks can sometimes be resistant to change. At the same time, he believes that partnerships—provided they are thoughtful and strategic partnerships—can alleviate this weakness. “To capitalize on the potential of B2B digital payments, we need a concerted approach to bring about a new mindset towards regular corporate payments practice and a change to businesses’ reliance on paper,” he says. “We continue to partner with fintechs where it makes sense. However, given the rise in the number of players, we do need to be selective and understand the actual problem that we are trying to solve for our clients. We learn as we go.”