This article first appeared in Digital Edge, The Edge Malaysia Weekly on October 23, 2023 - October 29, 2023

Carrying cash on a daily basis is a thing of the past for most Malaysians, thanks to the widespread adoption of the instantaneous contactless QR code payment (QRPay) method, where all consumers need to do is whip out their phone and scan a two-dimensional matrix barcode to make payment. Now, imagine doing this not just in Malaysia but regionally, and maybe globally someday.

Asean is on a mission to develop a cross-border payment system, called the Asean payment connectivity initiative, among its member states to deepen financial inclusivity in the region while empowering micro, small and medium enterprises (MSMEs).

The initiative is getting more eyeballs for not only being the first QR-enabled cross-border payment system, but also for seamlessly synchronising payment corridors among member states while complying with each country’s regulations and data-sharing policies.

There are two types of payment connectivity: bilateral and multilateral. The former is the typical way two countries connect payment corridors. The latter, also known as Project Nexus, is the one to watch. It involves the Bank for International Settlements (BIS) and Asean’s big five — Indonesia, Singapore, Malaysia, Thailand and the Philippines — and it is designed to standardise the way these systems connect to each other.

Rather than having a payment system operator build custom connections for every country it links to, the operator can make one connection to the Nexus platform, allowing a fast payment system to reach all other countries in the network. Nexus could significantly accelerate the growth of instant cross-border payments.

Allowing for different definitions, there are 70 million MSMEs in Southeast Asia, accounting for between 97.2% and 99.9% of the total establishments in Asean member states, according to the Asean Secretariat. Regionally, the MSMEs contribute 85% to employment, 44.8% to gross domestic product (GDP) and 18% to exports. Taking this into account, the system will allow ease of retail spending among MSMEs too.

But a cross-border payment system used across Southeast Asia would be a complex and challenging endeavour, although it is technically feasible, says Joaquin Moreno, head of Asia-Pacific at cross-border payment provider dLocal. Central banks have emphasised that the symbiotic relationship and deep respect and understanding among Asean member states have allowed for progressive steps to realise the Asean payment system.

Vietnam has just officially joined Asean’s regional payment connectivity initiative, while Brunei Darussalam, Laos and Cambodia will soon join the cross-border payment system cooperation.

Currently, Malaysia, Indonesia, Singapore and Thailand already allow cross-border payment solutions among these four nations. Bank Negara Malaysia’s director of payment services policy Qaiser Anwarudin tells Digital Edge this was done without having to synchronise regulations and policies. Local currency settlement, where pairs of countries agree to settle cross-border trade and investment transactions between themselves in their local currencies, is also enabled.

With tourism resuming and expected to reach pre-pandemic levels, Qaiser says there is a strong business case to establish cross-border payment linkages, especially in Asean, since more than 70% of Malaysia’s tourist arrivals in 2022 were from Singapore, Indonesia and Thailand. MSMEs are expected to benefit the most.

When Project Nexus was piloted, parallels were drawn between Asean and the European Union (EU), but Pariwat Kanithasen, deputy director of the payments and fintech department at the Bank of Thailand (BoT) and co-chair of the Asean Working Committee on Payment and Settlement Systems, says the two regions cannot be compared side by side as each region has a different set-up for synchronising payments.

The biggest difference is that the EU is a supranational entity while Asean is made up of independent countries that cooperate with each other. Asean is also one of the most diverse economic regions in the world.

“It’s not an apples-to-apples comparison and the majority of the EU is working under a single currency, the euro, which is not the case here. So, when we talk about Asean payment connectivity, we look at how we can use different payment rails and connect them with each other one by one at first, and then [later on] try a multilateral solution,” says Pariwat.

The purpose of the Asean payment connectivity is not for the sake of regional integration, but to address pain points seen among the people in the region. This includes tourists, migrant workers, small businesses and anyone who needs to remit payment to their home country, says Pariwat. Currently, there are 10 QR payment linkages among the Asean countries.

Tourists typically need a debit or credit card to pay abroad or exchange currencies, and the rates of these services may not be favourable. For merchants, a fee needs to be paid to the payment provider, which is not feasible for them as well.

These are also domestic challenges to overcome, says Pariwat, which is why Thailand created PromptPay. Singapore’s version is called NETS, Indonesia’s is QRIS and Malaysia’s, of course, is DuitNow.

“Many people have benefited from domestic P2P (peer-to-peer) and P2M (peer-to-merchant) payments and we thought we should take it a step further and connect these payment rails together,” he says, adding that Thailand worked to create bilateral linkages.

“We also have remittance linkages, which means I can send you money using my mobile phone and vice versa, and would only need your mobile phone number. This is a boon for migrant workers or tourists who need to remit money home.”

Both Qaiser and Pariwat stress that the role of the region’s central banks is not to force banks or non-bank payment service providers to be part of this initiative, but rather to be guides if and when they want to come on board. The end goal is not for all Asean member states to be connected, but to enable any Asean member state that wants to have payment connectivity with any of its member states.

“[The initiative] allows for cheaper, instantaneous and more transparent cross-border payments. It is highly beneficial not just for individuals but for businesses as well, given that the region benefits from a lot of cross-border trade and tourism flows, which will support stronger regional economic growth,” says Qaiser.

“For businesses in Malaysia or in neighbouring countries, they can expand their customer base because now, if they offer QR payments, they can tap into the tourist market that wants to pay using their mobile application as well.”

Pariwat explains that typically, a country will have a business case to be connected to another country in the region to address pain points faced by tourists, migrant workers and MSMEs. For example, Thailand’s next step is to connect its QR payments with Hong Kong because Thais love to travel to Hong Kong, and vice versa. There are also about two million Indian tourists entering Thailand each year and this is why the country will soon connect with India.

Meanwhile, Qaiser says Bank Negara is working on P2P linkages with Singapore and Thailand, where money is transferred to bank accounts in those countries using only mobile phone numbers, just like how DuitNow P2P transfers are done locally. The Malaysian central bank is also looking to create linkages with other Asian countries, provided there is a firm business case to do so.

But to create payment connectivity, it is not a “plug and play” situation.

“I wish it were that easy. In fact, the technical link-up is the easiest part of the process. The business and legal side of things are far more complex,” says Pariwat.

“We have to be mindful of the regulations of each country concerning exchange control, anti-money laundering/countering financing of terrorism (AML/CFT) and other payment regulations. As for the business case, it needs to be worthwhile for the banks to participate as they would need to take revenue from this as well.”

As regulators, they encourage banks to be part of it if it is financially viable, he says. “This is why the legal, business and technical aspects of payment connectivity have to be conducted in tandem. It’s not a political decision. It’s bilateral and based on who’s ready, which can then act as an example for the other countries that can see the benefits of these connections and join later.”

This doesn’t mean there are no challenges from a technical perspective, says Pariwat, because cybersecurity and other digital standards have to be met too. “If one country has [a higher] standard while another has a lower standard, the latter should raise its own standard to a higher level. These things are what we have in mind when we do connectivity.”

dLocal’s Moreno says several artificial intelligence (AI) operations are extensively used to ensure payment security, including detecting anomalous behaviours, assessing the risk of fraudulent transactions, verifying identity and identifying suspicious financial activities. Ensuring robust cybersecurity in cross-border payments is paramount to safeguarding financial systems, data integrity and bolstering consumer trust.

To fortify cybersecurity in this domain, nations should consider implementing a multifaceted approach, including comprehensive regulatory frameworks, fostering collaboration through public-private partnerships and mandating robust incident response plans.

“Stringent data protection standards, strong encryption protocols and multifactor authentication mechanisms must be enforced, along with continuous monitoring, threat intelligence sharing and the encouragement of cyber insurance adoption. Crucially, international coordination, legal frameworks for prosecuting cybercriminals and investment in research and development are vital components of this endeavour,” says Moreno.

“This collective effort by governments, financial institutions, technology providers and international entities is essential for adapting and evolving cybersecurity strategies to effectively counter emerging threats in the ever-evolving landscape of cross-border payments.”

Considering the diversity of each country and potential differences in regulations, both Qaiser and Pariwat believe that regulatory harmonisation in the region is a challenge and will take time to address.

Qaiser says the foundation for this initiative is built on the understanding that robust national standards for risk management, cybersecurity and data protection are key to any payment linkages. Each payment corridor linkage has been developed with an expectation that each country’s regulatory requirements will continue to be met.

Acknowledging that differences in regulatory expectations may raise issues at times, he says this is where the project steering committee established for each linkage comes in. This committee is co-chaired by the relevant central banks and has representation from the private sector, including the payment system operator such as PayNet, he adds.

“The committee is there to steer and guide those who are involved in the development of each linkage. And if any issue crops up, the committee will find ways to resolve it,” Qaiser explains.

“As an example, in the context of sharing data, there may be instances where certain information may not be available at the start. But what would happen is that we can proceed with the development of the linkage [and work for] the information to be shared on a later date.”

To illustrate, Pariwat uses an interesting analogy of countries around the world having a variety of electrical outlets.

“Malaysia and Thailand have different electrical outlets but we can’t mandate Malaysia to adopt Thailand’s electrical outlets, and vice versa. So instead, we use an adapter. What we need now is an adapter to harmonise interoperability. So, even though we have different standards and ways of doing things, we need a way to make systems interoperable,” he explains.

“This would mean [we need] a closed loop ecosystem. Some countries use one system but don’t talk to each other. This is what we’re trying to avoid and technical solutions like application programming interface (API) can help bridge this by translating the way the system is being read from one country to another.”

Moreno says there needs to be an interoperable standard that most banks and e-wallets across these countries recognise in order for this to be successful. The QR code needs to have some information on the payer (or seller/beneficiary) that can be identifiable across borders.

A unified understanding of data sharing and data sovereignty among central banks in Asean is essential for the effective functioning of a cross-border payment system.

“It ensures security, interoperability, compliance with regulations, dispute resolution and overall trust in the system,” he says.

“Achieving such unity may require collaborative efforts and negotiations among member states to develop common policies and frameworks for data governance in the context of cross-border payments.”

However, Pariwat points out that so far, all the projects, laws and regulations have not been changed and everything is done to suit the current ones in place. “We are under the global spotlight now and other regions have been asking us for advice on how to connect their own payment systems because it has been a long-standing issue around the world.”

Cross-border payment linkages between Malaysia, Singapore, Thailand and Indonesia were initiated in 2019 and launched commercially only on March 31 this year. While growth in transactions has been encouraging, it has been from a small base, so it may be too premature to demonstrate its success, says Qaiser.

However, awareness efforts are being carried out by central banks and the financial services industry to get more people to use QR payments when travelling within these countries.

Nevertheless, he points out that there are already eight financial institutions in Malaysia, including non-banks, offering cross-border DuitNow QR payment services, which cover 85% of merchants in Malaysia who can accept cross-border payments from tourists. Bank Negara expects these numbers to rise as awareness and tourism activities increase in the coming year.

From March until July this year, BoT has seen 70,000 transactions between Thailand and Malaysia, valued at THB40 million (RM5.21 million) and while it is not a lot, Pariwat is confident that when more consumers and merchants are aware of this and momentum picks up, the benefits will be immense.

“Commercial banks and payment providers will need to play a role in creating awareness of cross-border QR payments because they deal with the people more than central banks,” he says.

Meanwhile, Bank Negara is carrying out promotional activities with industry stakeholders and has been trying to raise awareness through its social media platforms, on-the-ground engagements with the public and financial literacy programmes, says Qaiser.

“This needs to continue and this is where we get support from the private sector to bring this together, so that people are much more aware that this is an available service that benefits them and the economy as a whole.”

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