The ASEAN Economic Community: a US$2.5 Trillion Opportunity

Reasons for the importance of the AEC are clear, said Fundtech Asia Pacific president Gil Gadot in introducing last month’s
2013 Fundtech Insights Asia Conference
in Singapore.

With 10 member states – Brunei; Cambodia; Indonesia; Laos; Malaysia; Myanmar; the Philippines; Singapore; Thailand; and Vietnam – some 600 million people collectively and about US$2.5 trillion in combined gross domestic products (GDP), the AEC is a significant force. Moreover, as Singapore Management University academic director John Vong noted, ASEAN is the third engine of growth in Asia as its position in being sandwiched between the BRICS economic powerhouses of China and India will enable it to ride on their tailwinds.

Gadot singled out three key principles behind the AEC, which is scheduled to come into force by 31 December 2015: free movement of goods and services; easy movement of capital and funds; and easy movement of skilled workers. Summing up the actual progress to date, Kasikornbank executive vice president (EVP) Songpol Chevapanyaroj told conference delegates that ASEAN connectivity and easier movement of people have started, while synchronisation and standardisation are not yet finished and only two members – Singapore and Thailand – are ready for payments standardisation. He added that he is actually starting to see more non-tariff barriers in trading and capital, despite the AEC goals.

Part of the challenge for full implementation, UOB Bank managing director Bill Chua noted, is the very different levels of development across the ASEAN region. Chevapanyaroj added that differences in the dominant factors within each economy also cause challenges, as some economies are have a strong manufacturing base, while others are more reliant on trading or labour.

None of the conference panelists currently expects a common currency to emerge in the AEC. While Europe has developed the euro, Chua said the focus in the AEC is more towards interoperable platforms and harmonisation of standards, which will make it easier for the system to evolve even with many different currencies.

Asked about what else is needed for the AEC to develop effectively, Vong said that banks need to focus on small to medium-sized enterprises (SMEs) because they are the backbone of the community. He noted that 96% of enterprises are SMEs and they provide 50% of domestic employment, as well as contributing at least 30% of GDP. Chevapanyaroj added that there should also be a focus on how industry moves after the integration, since some activities will still not be conducted in every country.

Opportunities in Banking

From a banking perspective, Chevapanyaroj believes that customer needs will drive how banks support their clients. Kasikornbank partners with banks in other countries, for example, and he thinks it makes sense for banks to work together given that capital and IT implementation are both costly.

Chua agreed, suggesting that “the pie is big enough for banks to share” and the real question is how to collaborate and where to get the best return. He added that there is a consensus on the probability of there being only limited financial integration by 2015; primarily because the systems, platforms, and common standards take time.

Gadot said that cultures will be an additional barrier to faster integration, as will languages and political systems. He also expects banks to become more regional, even if it happens without explicit planning. Kasikorn Bank is following their clients and those companies’ workers to Laos, Cambodia and Myanmar, for example and is being forced to support multiple currencies.

While only one ASEAN-headquartered bank currently operates in all 10 markets, more ASEAN banks are likely to expand further, especially since some countries are below the radar for global banks. A key issue, Chua suggested, will be whether one country can give preferential treatment to its own banks.

One major opportunity for bank lies in mobile payments, because there are more people with mobile phones in ASEAN than with bank accounts. Vong said that when people can send money back home or to another country and top up their SIM card overseas, they can bypass the banks. However, Chua commented that central banks in the region are fearful because they don’t know how to control mobile payments and these payments would also mean that two key franchises of banks – loans and, payments – are under threat. He added that in today’s know your customer (KYC) environment, telecom groups and banks alike must know who their customers are because they could lose their license if they are caught transferring money inappropriately.

Payments Standards

To focus more specifically on payments and standards in the AEC,
spoke with SWIFT ASEAN initiatives director Usama Delorenzo.

He reports that at a high level, the AEC is working on institutions, policy and practices, as well as financial market architecture. Institutions includes aspects such as whether the market uses real time gross settlement (RTGS), automated clearing house (ACH), a hybrid system or other variations of payments. Policy and practices looks at solvency, asset spillover and the effects of policies or rules on other asset markets, while the financial market architecture includes hardware, software and communications standards. “Technology that banks have today is costly to replace and maintain,” he noted, so it is not often replaced.

Delorenzo stressed that overall the AEC is “eighty per cent complete on what they set out to achieve.” Even though there are logistical issues, the community has made progress on practices like zero tariffs and ASEAN could be a model for integration. He added that banks considering how to offer services from one market to customers in another market in the most standardised way possible, especially as local banks in ASEAN become more regional.

Two things are necessary for this more complete regionalization, he believes. One is taking stock of the financial market architecture, which will lead to memoranda of understanding (MOU) for market practices. The second is mapping out what exists in the financial market architecture, in order to create a common linkage.

Specifically for payments, Delorenzo said that two models are used for regionalisation and “there is no telling what is more appropriate.” One model creates inter-linkages and determines where bilateral agreements have to be in place. The second is akin to Europe, where interbank payments system TARGET2 is a shared service platform that takes care of settlement. For the AEC “it’s going to have to be a combination of indigenous banks and central banks that decide on the structure as well as currencies, licenses and services to the public.”

Delorenzo has been working especially closely with institutions in Thailand, where the Bank of Thailand (BOT) realised that it needed to standardise payments and decided to use ISO 20022. BOT set up a department to work on standardising transactions, and SWIFT is working with it on an initiative looking at the relevance of ISO 20022 for banks, trade, securities and bank-to-bank transactions. While the Electronic Transactions Development Agency (ETDA) mandate is domestic, he said that working towards AEC makes its focus more regional. Other countries in ASEAN are without a similar office or at least not with the same focus on taking care of electronic transactions.

While the core of any one ISO 20022 implementation will be similar for every market in the AEC, variances are wide and unique situations can be catered to by the standard. If there is a need for specific treatment for particular transactions, the sender can use market practice guides or previous experience to meet that requirement. The core of the message still would have relevant information. The basic form of regional cooperation will thus be a common standard, which will enable interoperability.


From payments to people, in addition to a multitude of other areas, the AEC is rapidly moving to fruition. Even if full integration takes somewhat longer than forecast, the advantages in the short term will still be tremendous and in the longer term the benefits even greater.


Related reading