Originally published in Advancing ASEAN in the Digital Age Book, 14 November 2017.

The Transformation of ASEAN’s Financial Sector

The financial services industry globally is facing one of its greatest-ever challenges with increasing competition from FinTechs and the growing use of technologies such as blockchain, the “cloud” and Artificial Intelligence (AI). In its Global FinTechs Report 2017, PwC predicts that FinTechs’ growing influence will make the industry unrecognizable within five years.

Fortunately, ASEAN has many advantages which will help us make this great leap into the future. For one, we are already well along the path to transformation, spurred by the formation of the ASEAN Economic Community (AEC) and its commitment to economic and financial integration. Moreover, our fast-growing economies, youthful population (over 50 percent of people are under 30 years of age), and the rapid adoption of technology (including smartphones) will all support the region’s transition to a digital future.

A recent report by A.T. Kearney, a management consultancy, suggests that although the AEC lags behind other economic blocs in its embrace of the digital economy, it has the potential to enter the top-five digital economies by 2025 thanks to rapid developments in areas such as cashless payments, smart cities, mobile financial services and new-generation manufacturing.

The same report estimates that transforming the AEC into a leading global digital economy would potentially generate an additional US$1 trillion in GDP over 10 years. As the transaction provider for goods and services, the enabler for wealth management and source of finance for business development, the financial sector will clearly play an essential role in this transformation. Given that new entrants are challenging traditional providers in all these areas, we must lead the way with better facilitation of goods and services settlement, and provide highly secure and affordable electronic payment systems that are widely accepted across all channels and even across national borders.

Technology can also help SMEs gain much-needed access to credit as potential lenders can more accurately assess business potential and pinpoint risks through the aggregation of digital and alternative data, and advanced analytics.

Digital financial solutions will also help with the provision of banking services to people who are currently unbanked by providing customer and verification processes which are fast, convenient and low-cost, and which use mobile applications such as e-wallets. Technology can also help SMEs gain much-needed access to credit as potential lenders can more accurately assess business potential and pinpoint risks through the aggregation of digital and alternative data, and advanced analytics.

The first step towards the digital economy is electronic connectivity. However, AEC countries are at very different stages of development in this area. At one end of the spectrum, Singapore is an advanced high-income country which already ranks in the top 10 of the United Nations ICT (Information, Communications and Technology) Index, while others such as Myanmar and Laos are emerging economies still lacking vital infrastructure. This gap is reflected in internet connectivity – Singapore, Brunei, Thailand and Malaysia have internet penetration rates of around 80 percent, while Laos, Cambodia and Myanmar have rates of less than 30 percent. However, once infrastructure is available these emerging economies can catch up very rapidly – for example, the number of internet users in Laos grew by 83 percent in 2016!

Most AEC countries are leapfrogging straight to the mobile internet, rather than connecting via PC, which is an advantage as the mobile platform is one of the most dynamic areas for the development of new FinTechs services. As we have seen in China, where people are abandoning cash for mobile payments, once people are connected to the internet via their mobile devices, their behavior changes very quickly and this opens many opportunities for different kinds of commerce and new forms of payment. Thanks to the AEC’s youthful population we can expect very fast adoption here also.

As mobile devices become the dominant channel for accessing banking services, this is stimulating demand for biometric systems of customer identification and authorization coupled with e-KYC (electronic Know Your Customer).

Aside from the requirement to provide universal internet access, another important step in the AEC’s transition to a digital economy is the establishment of comprehensive payments platforms that are fast, secure and can be easily used by everyone. Thailand is well advanced in this endeavor, with the government, the central bank (Bank of Thailand) and commercial banks working together to establish a secure and standardized e-payment platform linked to the national ID system.

The centerpiece is a system called “PromptPay” that links bank accounts to mobile phone numbers and/or Citizen ID cards to provide highly secure and extremely low-cost electronic transfers. The Bank of Thailand is also encouraging all businesses, no matter how small, to accept electronic payments as part of its mission to make Thailand a cashless society. The latest innovation is a QR Code system which is standardized across all banks, and which is now being rolled out to market vendors and marketed by banks as the most convenient, secure and easy way to receive payments using mobile devices. The Thai government is also linking the PromptPay system with electronic delivery of tax returns and welfare payments – another important step towards a digital economy.

Moves to encourage a cashless society are also taking place in other parts of the AEC, such as Indonesia, Malaysia and Singapore. The experience of these countries in providing national digital payment systems will provide useful models for others in the region and potentially a base for providing cross-border payments using technologies such as blockchain. The close cooperation between governments, central banks, regulators and private institutions within the AEC should help facilitate this. These institutions also need to work collaboratively on cyber security as the shift to digital financial services is greatly increasing the risk of cybercrime

Another major trend shaping the direction of our region’s financial services is the emergence of FinTechs startups and their innovative new services. At Bangkok Bank, we have first-hand experience of the vitality of this sector through our global FinTechs accelerator program, Bangkok Bank InnoHub. Members of the initial program come from five countries, and their services include technology solutions for wealth management, mobile security, blockchain-based transfers, SME lending, and P2P invoice trading – all of which point the way to the kinds of innovations we can expect to see in the future.

Meanwhile, commercial banks are adopting new business models. Rather than attempting to provide a full range of services as in the old “financial supermarket” model, they are forming partnerships with FinTechs companies and providing services to their customers through Application Programming Interfaces (APIs) whereby the bank connects the customer with a service through an application such as micro-finance for small businesses and robo-advisory.

This trend was reflected in the Global FinTechs survey which found 82 percent of financial providers planning to increase partnerships with FinTechs providers in the next five years. Meanwhile 77 percent expected to adopt blockchain for part of their processes by 2020, and 30 percent are investing in AI.

By forming partnerships with FinTechs, financial services providers can bring innovative products and services to the market more quickly. With Big Data and AI they can mine their customer data (richer than ever before thanks to mobile banking) to target and tailor services to individual clients, while blockchain will enable them to speed up delivery of transactions, reduce costs and better manage identity verification processes.

Here in ASEAN we could lead the way in the transformation of the financial sector but it will require close cooperation between all parties – governments, central banks, regulators, telecoms, financial institutions and FinTechs start-ups. Let’s hope we rise to the challenge!

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About Chartsiri Sophonpanich