How digital banking drives regional connectivity
It is doing so by enhancing financial inclusion, supporting cross-border trade and fostering regulatory harmonisation
DIGITAL banking has been a transformative force across the globe, but nowhere is its impact more significant than in the Asean region. According to Deloitte, Asia-Pacific leads the world in digital payment adoption, contributing two-thirds of global digital wallet spend at US$9.8 trillion.
Beyond just facilitating simple day-to-day transactions, digital banking is a vital driver of regional connectivity, creating opportunities for greater financial inclusion, cross-border trade and economic integration.
Growth of digital banking in Asean
The rapid adoption of digital banking in Asean can be attributed to several factors. First, the region’s youthful population – around half of Asean’s population are under 30 – is driving demand for digital-first banking experiences.
The region also has one of the highest rates of mobile phone penetration in the world at over 60 per cent. Countries such as Indonesia and the Philippines have more mobile connections than people, making mobile banking platforms a natural extension for millions of users.
Moreover, many of Asean’s member countries have large unbanked or underbanked populations. According to a report by Bain & Company, Google and Temasek, over 70 per cent of consumers in South-east Asia are unbanked or underbanked, with limited access to formal financial services.
With a population of more than 675 million in South-east Asia, there is huge potential in the growing Asean digital economy, which generated more than US$100 billion in revenue in 2023.
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Against this backdrop, digital banking provides an effective solution by reducing the barriers to entry for financial services, especially for segments of the Asean population who may not have easy access to traditional banks.
Enhancing financial inclusion
One of the most profound ways digital banking is driving regional connectivity is through enhancing financial inclusion.
Traditionally, financial services in Asean were concentrated in urban areas, leaving rural populations underserved. In Indonesia, rural areas house around 40 per cent of the 280 million population, yet these households are especially underserved with little or no access to banking infrastructure. This creates economic disparities and limited opportunities for regional integration.
Digital banking changes this by offering financial services that are accessible via smartphones, reducing the need for frequent, inconvenient visits to physical bank branches in city centres.
In countries such as Indonesia and Vietnam, mobile wallets have gained massive popularity, allowing users to make payments, transfer funds, and access loans directly from their mobile devices. These services help to bring millions of people into the formal financial system, enabling them to participate in the broader regional economy.
Despite greater accessibility brought forth by technological developments, customers still have substantial unmet needs. A large proportion of small and medium-sized enterprises (SMEs) in Asean remains highly underbanked.
About 80 per cent of SMEs surveyed in a study on the future of Asean’s digital financial services indicated that they need to borrow but lack access to affordable credit. This substantially limits their firm’s growth potential, which highlights the importance of digital banking, with its accessibility and range of financing options such as micro loans, to this business segment.
Facilitating cross-border payments, trade and travel
Asean is one of the most dynamic regions for trade and travel, with member countries engaging in extensive intra-regional commerce. According to a Mastercard Economics Institute study, 2024’s top trending summer destinations for travellers from Singapore were regional cities such as Bangkok and Kuala Lumpur.
However, cross-border spending has been predominantly through cash and cards, where cash is less secure and inconvenient for customers who have to bring large sums of cash overseas, and card transactions may involve fees for consumers. For businesses, cross-border transactions then increase in complexity and require much longer processing times.
Digital banking has made it easier for individuals and business to engage in cross-border trade and travel.
Cross-border transaction values for UOB PromptPay (Thailand) and UOB DuitNow QR (Malaysia) surged by over a third in the second quarter of this year compared with the first, and UOB QRIS (Indonesia) saw a jump of close to 50 per cent.
The growing popularity of cross-border QR payments is likely due to its convenience, (as it frees users from the burden of carrying cash or cards) and lower cost (as it often comes without transaction fees and at better conversion rates than traditional payment methods).
However, a limitation of current cross-border payment linkages is that they remain bilateral, with the service being exclusive to the two country signatories.
The next logical step is to create a multilateral payment network within Asean, which will enable signatories to bring real-time bank transfers beyond Asean to other regional clusters around the world.
The Monetary Authority of Singapore and the central banks of India, Malaysia, Thailand and the Philippines are working towards this goal via Project Nexus, which completed phase three in July this year, marking the next step towards live implementation and fulfilling one of the key commitments to the G20 Roadmap for Enhancing Cross-border Payments.
Driving regional integration through policy harmonisation
While digital banking is naturally conducive to connectivity, Asean’s regulatory diversity poses challenges to its full potential. Each member country has its own set of banking regulations, consumer protection laws and data privacy standards. To unlock the true potential of digital banking for regional connectivity, greater regulatory harmonisation is needed.
Asean has made progress on this front through initiatives such as the Asean Economic Community Blueprint 2025, which aims to create a more integrated and cohesive regional economy.
Part of this blueprint includes financial integration, with a focus on harmonising banking regulations and payment systems across member states. Asean also developed various frameworks that support or are related to the implementation of widespread payment connectivity across the region.
The development of a unified digital banking framework could further accelerate regional connectivity. For instance, the implementation of common standards for digital identity verification and know-your-customer procedures would make it easier for digital banks to operate across borders.
In November 2022, the central banks of Indonesia, Malaysia, the Philippines, Singapore and Thailand signed a memorandum of understanding to collaborate to achieve interoperable regional payment connectivity by 2025, paving the way for inclusive growth and better trade opportunities for companies in Asean and beyond.
Digital banking is transforming financial services in Asean, driving greater regional connectivity by enhancing financial inclusion, supporting cross-border trade and fostering regulatory harmonisation.
As the region continues to embrace digital transformation, the integration of digital banking into everyday life will become even more pronounced, creating a more interconnected, economically vibrant, and inclusive Asean community.
The future of Asean’s financial landscape is undoubtedly digital, and the benefits of this transformation will ripple across the region for years to come.
The writer is head of group retail TMRW, UOB
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