Asian banks take the fast lane to real-time payments

Asian banks zooming towards faster and more secure transactions while navigating the region’s mounting regulatory hazards.

When the electronic interbank funds transfer service Fast and Secure Transfers (FAST) was launched in Singapore in 2014, UOB thought it would be a nice addition to its line-up. But three years after its debut in the island, FAST transactions for corporates have risen exponentially by more than 20 times — a sign that there is not only an interest, but a deep hunger for real-time payments.

Analysts point to leaps in financial technology (fintech) as one of the biggest enablers of this trend, providing banks with systems to fast-track transaction processing and screening. Related technological advances in the field have also facilitated the increased use of RMB as a global payments currency. Both developments stand to benefit Asian banks, but only if they can afford the higher compliance costs and roll with the regulatory punches.

“Innovation in financial technology has enabled banks to change the way they engage their customers as lifestyles and preferences evolve with time. One of the ways in which banks have catered to customer needs is the implementation of real-time payment systems to make fund transfers faster and more efficient,” says So Lay Hua, head of group transaction banking at UOB.

She reckons the rapid growth in the use of real-time payments can be attributed to greater collaboration among banks and the high level of participation from regulators, central banks, and industry bodies.

Faster payment schemes
Across Asia, banks are racing to ready their markets for real-time payments. Some are adopting faster payment schemes that allow for immediate availability of funds and clearing of low value transactions every 20 seconds. Thai banks are developing new payment systems that enable consumers to transfer funds by only providing identification numbers or mobile numbers.

While in Indonesia, banks are starting to study promising new digital schemes while waiting for clearer regulation, says Margaret Tjahjono, transaction banking services & implementation head at PT Bank Danamon Indonesia, Tbk.

“Digital evolution for the banking industry has progressed rapidly, and everyone in the market are so keen to see and participate in this new technology,” she adds. “For Asia, some banks have started pilot projects and invested in the new technology, with time criticality and more efficient cost as the two of major goals for market players,” she adds.

Jimmy Chan, COO & head of operation management department at ICBC (Asia), reckons 2016 was a year when faster payment schemes mushroomed in Hong Kong and throughout Asia. More electronic payment companies received licenses to offer an array of convenient payment schemes, including JETCO person-to-person funds transfer across different banks, Octopus and TNG electronic wallets for consumer payments over physical and non-physical channels, as well as Applepay and other third-party payment mobile phone applications.

He says banking customers are starting to turn to these “quicker, cheaper, and more convenient” forms of settlement. There may even come a time when a new form of financial product called a “credit phone” emerges with the rising use of convenient payment devices such as Applepay and Androidpay. Bank card issuers may think of attaching the same payment and credit functions to mobile devices with more added value functions to the credit phone holders — a shift that can slash banks’ card issuance costs.

Acknowledging that customers now demand fast service and processing, Silawat Santivisat, executive vice president at KASIKORNBANK says his bank is studying a faster payment scheme for low value transactions. But he argues that a faster payment scheme for corporate payments may not be as urgently needed because the current same-day payment service still adequately serves customer requirements.

Speed vs. security
Asian banks that adopt faster and real-time payment systems could attract more customers and reap efficiency gains, but they must not make the mistake of taking security shortcuts, analysts warn.

“With real-time payments comes the corresponding need for Asian banks to quickly authenticate and verify all information before a payment is approved. However, security cannot be compromised for speed,” says Li-May Chew, banking & capital markets Asia-Pacific associate director at EY.

Chew reckons that regulators themselves are pushing for faster payments but this is putting the pressure on central banks to expand their operational oversight, and consult payment stakeholders to gather and implement feedback on payment systems. It also falls on regulators to craft solutions for fraud risk reduction and support the adoption of relevant payment security standards such as the ISO 20022 standard for greater end-to-end efficiency for domestic and cross-border payments.

Banks, for their part, are under pressure to share what they know and work with other banks to deter cyberattacks and terrorist money laundering. These activities will hike up compliance costs and push away customers who do not want to go through a diligent screening process.

“Anti-money laundering is the important issue due to the increase of terrorism, so banks have to focus on and screen each transaction more. Meanwhile, the fintech screening process is less strict which could attract customers to use fintech instead to reduce the complicated process. This is certainly another challenging aspect for banks,” says Santivisat.

“The ability of banks to share such cyberattacks or attempts to attack with the banking community at large will be a regulatory direction for the years to come,” says Chan. “Increasing international cooperation to fight against tax evasion, money laundering, and terrorist financing pose a constant pressure for international banks to carefully monitor and follow up on all fund transfer transactions, especially for those cross the border funds movement.”

He reckons that the heavy penalties imposed on major international banks due to failure to comply with such local and international regulations have “seriously eroded” the capital base and credibility of these market players — and some banks may not get the breathing room they need. He expects the implementation of the US FATCA Ordinance two years ago and the incoming implementation of the OECD Common Reporting Standard to further test the capability of banks to inspect each transaction in the prescribed manner.

“Significant investment in system capability and manpower to inspect and clear these funds movement transactions is a challenging but critical success factor for banks,” says Chan.

Chew agrees that raised compliance expenses can be a major regulatory hurdle for banks, but he deems this “an unavoidable necessity” especially for countries that want their banking sector to move towards faster payments and keep pace with other markets that already offer that option.

RMB on the rise
Together with the proliferation of faster payment schemes in Asia, there has been a notable advancement in RMB payments, and banks in the region are preparing to pounce on this emerging opportunity. Experience in making RMB payments is improving globally because RMB payments processing has improved with efficiency gains and transparency aligned to international standards using China’s Cross-border Interbank Payment System, launched in October 2015, says Kee Joo Wong, ‎regional head of global payments and cash management at HSBC Asia-Pacific.

RMB is currently one of the top 5 global payments currencies, shooting up from its 13th position in 2013, according to SWIFT. In 2010, only 3% of mainland China’s trade was settled in 2010. But by 2020, HSBC predicts this will reach 50% on the back of accelerating integration between China and countries along the Maritime Silk Road, which will boost trade and provide exciting opportunities for banks seeking growth.

“With the significant number of trade volume between Asian countries and China, RMB settlement will also increase in terms of volume and will play an important role as one of the leading payment currencies. Most banks in Asia are ready for this,” says Tjahjono. “We’re just waiting for more buyers and sellers to use RMB as settlement currency and their operating accounts. Again, more parties need to be involved to impact the market share.” 

In photo (top row, from left to right): Jimmy Chan, Kee Joo Wong, Li-May Chew

In photo (bottom row, from left to right): Margaret Tjahjono, Silawat Santivisat, So Lay Hua