Regional Financial Integration: An Exciting Beginning in Asia
According to a May 2014 McKinsey report,
‘Understanding ASEAN: Seven things you need to know’
, if the 10-member Association of Southeast Asian Nations (ASEAN) were a single country it would already be the seventh-largest economy in the world. Moreover, it is projected to become the fourth-largest by 2050. ASEAN – home to almost seven hundred million people – and its new economic community are positioned to be a significant player in the global economy.
In 2014, the financial services industry was reported to be the fifth-largest sector in the world, as a portion of global gross domestic product (GDP). The top four sectors (or any other sectors for that matter) could not operate or grow without the infrastructure that the financial services sector provides. The more this infrastructure is shared between organisations and nations, the more accessible international commerce becomes. Ultimately, the banks are what comprise this infrastructure. Successful regional economic integration, as envisaged in the AEC, is underpinned by financial integration built on international standards and a common platform, creating access for global companies and investors into the region and vice versa.
Europe often comes to mind first when one thinks of financial integration. Europe instituted the single euro payment area (SEPA) that utilises the new ISO 20022 standard and enables better and faster transfer of funds that are transparent and efficient. The migration of the banks to the new standard was a systematic series of events managed by the European Payments Council (EPC), an independent private sector-led initiative. The EPC is the body responsible for maintaining rulebooks to do with credits, debits and the like, and for maintaining migration toolkits, making it easier for banks to comply with the SEPA scheme.
What is perhaps most important, however, is that the EPC is also the organisation that manages the requests, queries and concerns of the large multi-stakeholder environment comprised of banks, corporations and payment providers – to name only a few – related to five separate streams of interest: cards, cash, credit, direct debit and mobile.
Financial integration might be a crucial element of regionalisation, but it too has its challenges. A multitude of existing processes, rules, currencies and mechanisms makes unifying payments systems far from straightforward. While the ASEAN region is expecting strong growth, one of the biggest challenges is the investment needed to harmonise domestic payment clearing and settlement systems across the many jurisdictions – for the purpose of interoperability at the very least.
For regions with a looser form of integration that establish voluntary links between independent national payment systems, success can be measured by the implementation of common standards that enhance automation or full straight through processing (STP) between payment system stakeholders in different countries. In ASEAN simple interoperability is not a success but rather a beginning – the ultimate goal being interoperability in a manner that satisfies the STP requirements for efficient transacting while also assisting ASEAN regulators in managing exchange rates and the supervision of cross-border transactions.
The Ultimate Goal
The good news is that ASEAN is seeing convergence on a common data standard to underpin regional payments systems integration. The ISO 20022 standard has been endorsed for use in the region by the region’s grouping of central banks, the Working Committee on Payment and Settlement Systems (WCPSS). ISO 20022, an eXtensible mark-up language (XML)-based standard for financial messaging, will allow for a single standardisation approach for all financial messaging standards initiatives in the region and will cater to global connectivity, while also solving for growing corporate demand for STP.
As the AEC moves toward AEC 2015, a comprehensive set of open market message standards and a highly secure and standardised platform of communication are of utmost importance to make investors and counterparties from around the world feel safe transacting in the new global norm, peppered with varying compliance requirements.
In ASEAN, SWIFT has been working closely with the financial industry and government authorities to internationalise and standardise financial messaging and connectivity. Brunei, Thailand, Malaysia, Singapore and the Philippines are all utilising SWIFT and international standards in domestic systems to clear and settle payments. This arrangement makes it easier for their participant banks to manage the cost of IT and promotes connectivity, both regional and global.
Payments systems integration is only one aspect of the financial market infrastructure integration needed to support regional economic integration; it is, however, the beginning. Corporations, including large multinationals and small and medium-sized enterprises (SMEs), and securities markets will also need to be integrated at some stage for the increased benefit of connectivity across the value chains that the financial sector serves.
Regional integration is a vital mechanism to bring prosperity to ASEAN, as without integration, it is merely a collection of 10 disparate countries with varying political, legal and business regimes. True integration for ASEAN, however, requires harmonisation at multiple levels; political, economic and infrastructural.
Financial integration is not the end goal. It is, instead, a necessary means to enable a freer flow of capital, to make transacting for businesses and for people cheaper, more manageable and predictable and to assist the regulators of the region in their decisions on risk and governance to ensure a fair and transparent environment for the benefit of all ASEAN citizens.
The end goal must be the empowerment of people, businesses and their economies as a part of ASEAN. Whether it is an SME or a multinational corporation (MNC) wishing to do business, that business must be facilitated by a system that allows equal access in a manner that is safe, efficient and sustainable. The financial system in any given financial area should be facilitative of real economic progress, serving real people and real businesses.