The Potential and Prerequisites for ASEAN-Japan Cross-Border Digital Payments

ASEAN is actively moving towards a regionally integrated economy. Digitalising the economies of its member states is expected to double the region’s market value from USD 1 trillion to USD 2 trillion by 2030. Negotiations for the ASEAN Digital Economic Framework Agreement (DEFA) are underway. This agreement aspires to align policy and standards, as well as to create a rules-based approach concerning digital trade, cross-border e-commerce, digital payments, digital ID and authentication, cybersecurity, cross-border data flows and data protection, and talent mobility.

This presents an immediate growth opportunity, given the significant progress in establishing cross-border payment linkages within and between ASEAN countries. ASEAN countries have established bilateral digital payment systems connectivity, beginning with successful linkages of Thailand’s PromptPay with Singapore’s PayNow, Cambodia’s KHQR with Lao PDR’s QR, Singapore’s NETS QR with Indonesia’s QRIS, and NETS QR with Malaysia’s Duitnow. A significant step towards multilateral connectivity is the 2022 MOU on Regional Payment Connectivity signed by the central banks of Indonesia, Malaysia, Thailand, Singapore, and the Philippines which will enable faster, more seamless and affordable cross-border digital transactions between and among the five ASEAN countries. This initiative could eventually expand to other countries within and beyond the region. As ASEAN’s 4^th largest trading partner, Japan can leverage the region’s expanding cross-border digital payment systems and further integrate with the ASEAN market.

Despite Japan’s relatively slow adoption of digital payments, which at 36 per cent in 2022 pales in comparison to South Korea and China at 93.6 per cent and 83 per cent respectively in 2020, e-payment systems have expanded especially with increasing need for contactless transactions during the Covid-19 pandemic. Digital payment service providers such as PayPay, Line Pay, and Rakuten Pay are becoming widely used in Japan, with PayPay dominating the QR code payments market with a 45 per cent share, followed by Rakuten Pay at 17 per cent. However, according to one Japanese blockchain developer, the lack of interoperability remains the foremost stumbling block among digital payment services in Japan, while high merchant fees further discouraging the participation of small and medium enterprises.

ASEAN is a growing market that presents immense opportunities for Japan. According to the State of Southeast Asia 2023 Survey Report, Japan remains ahead of the pack as a choice of holiday destination for tourists from ASEAN countries. Of the 1,308 participants who participated in the survey, 27.8 per cent indicated Japan as their favourite destination. In 2023, 25 million tourists visited Japan of which 2.8 million were from ASEAN countries, showing that the enthusiasm to visit Japan from the ASEAN countries regained strength post-pandemic. Similarly, Japanese tourists have overwhelmingly expressed their preference to visit countries in ASEAN, with the region estimated to have hosted over 2.7 million Japanese tourists in 2023.

The tourism and e-commerce sectors have the highest potential to benefit from integrated and interoperable digital payment systems. Experts have also pointed out that small retail businesses in both regions would stand to gain the most from cross-border digital payment agreements that reduce interbank charges and credit card transaction costs. Cross-border e-commerce transactions between Japan and ASEAN would also benefit from an increase in trade of specialty products and crafts.

Apart from tourism and e-commerce, blockchain technology may be leveraged to digitalise the supply chain in manufacturing industries such as automobiles and electronic products, facilitating greater trade activity between the regions. Cross-border payment systems may also eventually encompass other areas like credit finance and investment.

However, to achieve that level of cross-border connectivity between ASEAN and Japan, a myriad of conditions will have to be met. At the most basic level, the development of digital infrastructure including digital identities, authentication, and consent are crucial and necessary to ensure data protection. Second, interoperability and interconnectivity of the payment system infrastructure are necessary. The harmonisation of regulatory and technical standards, such as the level of identity verification between countries and compliance with anti-money laundering regulations, will be important.

Thirdly, there is a need to develop a regional dispute resolution mechanism with an independent centralised body that can represent both the public and private sectors as fairly as possible. To achieve this, collaboration between all stakeholders from ASEAN and Japan will be necessary to agree on the commercial terms, governance structures, and technical aspects that will be mutually beneficial for all parties.

At present, cross-border connections using central bank digital currencies (CBDCs) are conducted through bilateral cooperation, but multilateral country connections are also possible using public blockchains, which are independent platforms that can potentially streamline the cross-border payment system across countries. To achieve interoperability, adherence to international standards and practices in payment systems is necessary. Japan and eight ASEAN countries have already adopted the ISO20022, a standardised global language for financial messaging, in their retail payment systems – except for Indonesia and Laos which are still in the planning stage.

Japan is surely albeit slowly moving in this direction with significant developments including the signing of Memoranda of Cooperation in the Area of Unified QR Code-Based Payments with Indonesia (in December 2022) and Cambodia (in December 2023). Japan is keen to further develop and expand overseas linkages with unified QR code payments as part of ASEAN’s regional digital integration initiatives. As ASEAN moves forward in developing a regional ASEAN QR code, this could pave the way for easier integration with Japan’s and other countries’ payment systems.

Despite the promise of ease and convenience in using digital payment systems, merchants, and consumers particularly in ASEAN countries are wary of the imminent threat of scams and frauds, which are fueling mistrust in digital payment systems. Experts have pointed out that trust is the most crucial component for the wide-scale adoption of digital payment systems. Given the increasing incidences of online fraud, central banks and financial institutions must tighten oversight and strengthen consumer protection. Regulatory measures to oversee data protection, cybersecurity, anti-money laundering, anti-counterfeiting, and prevention of financing of terrorism will be vital. Equally important are digital literacy and consumer education on cybersecurity and responsible use of digital finance, which are essential to protect consumers and merchants against misuse.

Establishing cross-border payment systems is by no means an easy feat, but a cross-border digital payment arrangement between ASEAN and Japan should make for a strong case of mutual benefits. As the DEFA negotiations continue, it is high time to look beyond the present, and anticipate how countries in the region and beyond can be a part of this ambitious initiative. Having celebrated the 50^th anniversary of ASEAN-Japan relations, concrete headway in this direction will mark a strong start to Japan’s economic co-creation vision for the region in the next five decades. 

Editor’s Note:
ASEANFocus+ articles are timely critical insight pieces published by the ASEAN Studies Centre.