Asia Pacific non-cash payment transactions are growing faster than anywhere else in the world, with this growth comes innovation. This episode on the Payments Podcast featuring Marcus Hughes, looks at how Open Banking is developing in the countries located in Asia Pacific, and how the UK's adoption has influenced this. This episode also looks at the difference in real-time payments between Australia, Hong Kong, and the UK as well as how China have managed to distance themselves from the SWIFT network, but also have created large and fast opportunities in the payment space.
Rich Williams: Hello and welcome to the first podcast of the New Year, 2020, and, indeed, the new decade. I’m Rich Williams, host of the Payments Podcast, and today we’re going to talk about the fast-changing payments landscape within the Asia-Pacific territory.
I’m delighted to be joined once again by my colleague Marcus Hughes, Head of Strategic Business Development at Bottomline, who’s recently returned from a tour in this region. Welcome back, Marcus, and thanks for coming in to talk with us today.
Marcus Hughes: Thank you, Rich. Good to see you; always a pleasure to share a few thoughts and experiences with yourself and our listeners. It was certainly an exciting trip to Asia-Pacific, so I’m delighted to offer some insights on the region.
Rich Williams: Could you first begin by telling us why you went to Asia-Pacific and what you find special about that region in particular?
Marcus Hughes: Some of our customers are probably unaware that Bottomline has an exciting and growing presence in Asia-Pacific. We serve hundreds of customers in about 20 countries across the region. We’re delivering cloud-based solutions, and we’re helping businesses and banks to pay, and get paid, and to manage their financial documents more efficiently.
We’ve got offices in the key countries over there: Australia, Singapore, Malaysia, Indonesia, Thailand, and China. It’s an important area of growth potential for Bottomline, and the reasons I went to Asia-Pacific were to visit our main offices over there and to carry out some on-the-ground research to support our growth strategy.
Rich Williams: We’ll dig into some more specific detail later as we look at some of the standout countries individually, but before that could we look at high level, what you can tell us about the payments market in Asia-Pacific?
Marcus Hughes: For me, the region is of massive strategic importance. Asia-Pacific has got 60% of the world’s population, and in payment terms their non-cash payment transactions are growing over 30% a year. That’s faster than anywhere else in the world.
Arguably, Asia-Pacific is the growth engine of the recent 11% increase in global payment revenues. That’s according to McKinsey’s ‘Global Payments Report’. They estimate a total of $1.9tn of global payment revenues in 2017, and that’s compared to revenues of $0.9tn in Asia-Pacific, which is already nearly half of the total, but, looking ahead, McKinsey’s forecast global payment revenues of $3tn by 2022. That compares with revenues of $1.6tn in Asia-Pacific. In other words, Asia-Pacific will soon be more than half of the total global payment revenues.
The scale and the pace of economic growth in Asia-Pacific is really impressive, to the point that we really can’t ignore the region. Their huge infrastructure projects impact not just Asia-Pacific but the whole world. For example, under the ‘Belt and Road Initiative’, China is investing in more than 60 countries around the world, so it’s a really impressive initiative.
Asia-Pacific is really an amazing kaleidoscope of diversity in terms of culture and politics, as well as extremes of wealth and poverty. Another extraordinary statistic is that there are more than 3,500 languages spoken across the region. That’s way more than any other part of the world.
Rich Williams: Thanks, Marcus. Which countries did you visit specifically, and what’s so special about them?
Marcus Hughes: I was lucky enough to visit Australia, Singapore, Hong Kong, and China – all of which were very exciting, and for different reasons. All of these countries stand out as leading centres of innovation in payments, with a fast-growing, new generation of digital banks and payment institutions.
As you explore the changes going on in these various countries, it’s striking that many of the new rules and payment systems that are being introduced over there are actually strongly influenced by the new schemes and innovations which have already been established right here in the UK.
There are many parallels with the rapidly changing payment landscape of the UK market – for example, the rise of FinTechs and the adoption of real-time payments and open banking. So, Bottomline is right to feel very much at home in Asia-Pacific. That’s despite the large distances and the time-zone differences. The reason for this is because we already have experience and expertise in a whole range of innovative payment solutions, which are now being adopted widely across Asia-Pacific.
Rich Williams: You mentioned open banking there, Marcus – something which we’ve done a specific podcast on previously in the series. Could you tell us more about the adoption of open banking in Asia-Pacific, please?
Marcus Hughes: Yes, with pleasure. Open banking is definitely gaining momentum across Asia-Pacific. There are a number of drivers for adoption over there – for example, customer expectations for faster and intuitive solutions which are delivered using smartphones and tablets; also the rise of ecosystems and the emergence of API technologies.
Finally, I’d say new regulations in some of the countries, but it’s not just a matter replicating the UK and European approach elsewhere. Instead of that, it’s Asia-Pacific countries are developing their own approach to open banking, reflecting their markets and their policy objectives. In some cases, they’re developing cross-industry approaches beyond financial services, like in Australia.
The UK, Australia, and the European Union are at the forefront of open banking, based on factors like the adoption of open APIs, regulatory requirements, standardisation initiatives, and the creation of a central regulatory body for third-party providers. So, although open-banking initiatives across Asia-Pacific are, kind of, fragmented and at different points of evolution, they’re all heading in a similar direction of travel. Many Asia-Pacific countries do already have some form of APIs in place, but in many cases, these schemes are unregulated and without common API standards.
For me, open-banking initiatives fall into two broad categories. One would be the market-driven, and the other would be the regulatory-driven categories, I would say. In some countries, like Australia, open banking is driven by the government in order to increase competition within a regulatory framework, but in other parts of Asia-Pacific, like Singapore, there you’d find open banking is primarily driven by banks and FinTechs that want to remain competitive or to grow their market share. This is backed by gentle encouragement from the regulators, but not new regulations as such.
First, let’s take a quick look at market-driven countries. There we’ve got India, Japan, Singapore, and South Korea, who don’t currently have a formal or compulsory open-banking regulation in place, but they have policymakers introducing a range of measures to promote data sharing in banking.
In Singapore, the local regulator, which is known as the Monetary Authority of Singapore, has published an API playbook to support data exchange and communication between banks and FinTechs. In this way, the Monetary Authority is encouraging organic transition to open APIs, but they’re being careful not to impose regulations at this stage.
Another example: in Japan the Financial Services Agency has established an authorisation process for banks so that they can contract with at least one third-party provider by the end of 2020. The majority of Japanese banks seem to be taking this encouragement very seriously, and they’re on track to meet this deadline, I think.
If we now look at the regulatory-driven initiatives, outside of the UK two important jurisdictions have opted for a regulatory-driven approach. That’s Hong Kong and Australia. The Hong Kong Monetary Authority issued an open-banking framework in 2018, setting out a four-phase approach to implementing open APIs.
The phases start with information sharing on products and services, and end with the sharing of transactional information and payment initiation services, but it’s important to bear in mind that a firm timeline has not yet been announced for accessing account information and payment initiation. But the standards adopted in Hong Kong are based quite closely on the UK standards.
On the other hand, contrary to the UK approach, although banks are required to develop APIs, they’ll be allowed to restrict access only to those third-party providers that they choose to work with. So, the Hong Kong’s version of open banking is not quite so open as in the UK or Europe.
Rich Williams: An interesting point. With the growing adoption of open banking in Asia-Pacific, what’s the opportunity there for Bottomline, Marcus?
Marcus Hughes: That’s really a great question, Rich. I’d say in Bottomline we’ve got an exciting opportunity to export our banking expertise from the UK to countries like Australia, Hong Kong, and Singapore. Let’s take Australia as an example. They’re launching open banking for account information sharing from July 2020, and third-party payment initiation will be enabled in 2021, using a new overlay service which the Australian Real-Time Payments System is going to launch.
Like Hong Kong, Australia’s open-banking API standards are largely based on the UK model, but in several other ways Australia’s open-banking programme really stands out for being innovative when compared to other countries. Their new ‘Consumer Data Right’ legislation, known as CDR for short, gives consumers the right to access and control data held by service providers. This means a consumer or business can give an instruction that their data be shared with any accredited third-party provider which they choose to work with.
This improves the customer’s ability to compare and switch between products and services, and it encourages greater competition between service providers. This approach also leads to better prices for customers, as well as greater innovation.
An important feature of CDR is that it’s a data policy initiative and not purely financial services related. Banking is the first industry to come under CDR, but later the regulation is going to extend across energy and telecommunications sectors. Eventually, CDR could be applied to any sector. That’s why open banking in Australia is actually sometimes called ‘open data’.
Rich Williams: Practically speaking, Marcus, how will open banking actually work in Australia?
Marcus Hughes: The first banks that are going to be affected by open banking in Australia are the ‘Big Four’ banks. That’s Australia and New Zealand Banking Corporation, Westpac, Commonwealth Bank, and National Australia Bank. There have been a few delays – and I guess some resistance – to open banking in Australia, but under the latest and revised deadlines, from July 2020, consumers and businesses will be able to give an instruction to any of those ‘Big Four’ banks to share data with accredited third-party providers. That relates to their credit and debit cards, as well as deposit accounts and current accounts.
From November 2020, consumers’ mortgages and personal loan data can also be shared with third parties. All other domestic banks in Australia are going to be required to implement open banking twelve months after the timeline supplied to those ‘Big Four’ banks. The Australian regulators want to bring on another hundred banks into the regime over the following year, as part of their controlled launch.
Open banking requires banks to securely open up data via APIs. Data61 is the Australian data standards body that’s been developing API standards on how to securely open up access to customer data. These new standards are largely based on the UK’s open-banking API standards. This gives Bottomline a natural advantage, as we’re experts with fresh experience from the UK’s introduction of open banking. It’ll be directly relevant in Australia, of course, in a short time.
The Australian Competition and Consumer Commission, better known as ACCC, has developed rules for accrediting data recipients. These are the Australian equivalent of third-party providers. Again, the rules here have similarities with the UK’s open-banking model.
Once APIs are connected to third-party providers’ applications, consumers or businesses provide their banks with their consent regarding which data should be shared with which third-party provider, and for what purpose and for what period. Once the bank receives explicit consent to share the customer’s data, the bank then issues a unique access token to the data recipient on behalf of the customer, so that the relevant customer data can then be consumed through an API.
Rich Williams: There were a few mentions there about the similarities of the way that Australia’s open-banking API standards and approach is largely based on the UK model, but what differences or unique qualities are Australia taking in their open-banking approach?
Marcus Hughes: In particular, I’d say that Australia’s ‘Consumer Data Right’ is the first open-banking legislation which introduces the concept of reciprocity. Following PSD2, some banks have been quite vociferous about the lack of reciprocity between banks and third-party providers, especially the big techs. Banks argue that this amounts to an unfair situation, with a regulatory competitive disadvantage against the banks.
In fairness, the European Union’s ‘General Data Protection Regulation’ does include a right to data portability, which could be leveraged to ensure reciprocity, but in practice, GDPR doesn’t make it obligatory to respond in real-time to data portability requests.
GDPR doesn’t specify any technical communication standard for the transfer of that data between organisations. But in Australia, the concept of reciprocity was introduced mainly because regulators felt that a system in which all eligible entities participate fully, as both data holders and data recipients, would be much more vibrant and dynamic and that such a level playing field would, therefore, promote more competition.
What all this means is that Australia’s CDR requires an accredited data recipient to provide account and transaction data to a bank if a customer gives them an instruction to share this information. So, although the implementation of this reciprocity will undoubtedly present challenges, it’s a major step forward in a new – and probably controversial – direction. I do expect that other markets will follow this innovative approach in future refinements of open banking.
Rich Williams: We know that the Australian New Payment Platform is introducing a payment initiation service, a bit like the UK’s role of payment initiation service under open banking. Could you explain this a little further for us, please?
Marcus Hughes: Yes, of course, no problem. Australia’s ‘New Payment Platform’, or NPP, plays an important role in the country’s plans for open banking. In a tighter interdependence with open banking than we’ve seen in the UK, it’s Australia’s new real-time payments platform, NPP, which is going to develop and manage a third-party payment initiation service. That’s instead of the open-banking regime itself managing the scheme.
That’s because, as mentioned earlier, Australian open banking does not specifically cover payment initiation services, but, as part of their own roadmap planning, NPP is developing something they call ‘Mandated Payments Services’. This will support recurring or subscription-type payments, so, in other words, debit-like e-commerce payments and on-behalf-of payments. This functionality is close to the ‘Payment Initiation Service Provider’ model, which has been developed in UK open banking.
Key to this proposition is the accountholder’s authorisation or consent for payments to be initiated on their accounts, with the creation of a digital payment mandate in advance of those payments being made. This functionality is really going to increase the visibility and control that account holders have over their payments. NPP do expect a significant percentage of existing direct debits in Australia will quickly migrate across to the new Mandated Payments Services.
For me, Australian direct debits currently have a weakness in terms of operational risks. This is because a mandate is not currently lodged at the paying bank, so banks tend to pay away any direct debits that are presented.
Anecdotally, this can result in quite a high level of direct debits being rejected by debtors after they’ve already been paid. This causes quite a significant number of reimbursements, so the NPP’s Mandated Payments Service is really expected to improve on that system and reduce the risk.
It’s going to be launched in 2021. This will be an exciting opportunity for organisations like Bottomline to offer innovative payment services in Australia, based on the expertise we’ve already gained in the UK.
Rich Williams: Thank you. It’s impressive to see the convergence which many payment systems are undergoing around the world. Another major trend that we see and hear discussed quite frequently these days is the trend and the widespread adoption of real-time payments. What’s happening in Asia-Pacific in relation to this?
Marcus Hughes: Yes, a lot is happening in real-time payments in Asia-Pacific. Sticking with Australia for a little longer, their new payment platform was launched in February 2018, and today 85 banks, credit unions, and building societies – and some FinTechs also – are all connected to the NPP. That’s either directly or indirectly.
The NPP made quite a slow start in the first year of operation, but it processed 1.1 million transactions a day in November 2019. That equates to AU$1.1bn a day, so adoption has, therefore, been way faster than the UK’s Faster Payments Service or any other real-time payments system around the world.
Six non-banks are already using NPP as indirect participants, so again that’s more than the UK, quite frankly. Impressively, the largest single transaction on the platform in Australia so far was for AU$500m, as there’s no transaction limit for NPP payments. That’s another big difference from the UK’s Faster Payments Service.
If we turn to Hong Kong, their Faster Payments System is one of the youngest Asia-Pacific real-time payment systems. Faster Payments Systems was launched just September 2018, and it’s overseen by the Hong Kong Monetary Authority. It’s available 24/7 for payments, in both renminbi and Hong Kong dollars. Payments can be made using the beneficiary’s phone number, email, or QR codes – as well as their name, and account number and bank code, of course.
All banks and e-wallet operators in Hong Kong can, in theory, participate in this FPS. It’s also attracted 38 banks, such as Bank of China, DBS, HSBC and OCBC. Membership includes 11 stored value facilities, which are effectively non-bank payment institutions or e-wallet providers, like Alipay, WeChat Pay, and Octopus. Although the statistics indicate that a Faster Payments System is already gaining traction, it is curious to note that the use of cash in Hong Kong is also still increasing.
Looking at Singapore, then, for a moment, Australia’s got four times as many banks connected to NPP, compared to the 20 banks using Singapore’s real-time payments system, which is known as ‘FAST’. This payment system has been running since 2014, but it’s worth mentioning that the country’s 125 or so wholesale and merchant banks, which are mainly foreign banks, don’t provide Singapore-dollar retail services, so they’re not really candidates for FAST in the short term.
They’re also probably discouraged by the system’s low transaction limit of only SDG50,000, but Singapore is about to allow a new generation of non-bank payment institutions to access FAST without needing to hold an account at the central bank, which is the Monetary Authority of Singapore, as I mentioned. This important change is likely to drive further growth in membership of FAST, so it’s again another growth area and an opportunity, I’d say, for Bottomline.
Rich Williams: What can you tell us about the China mainland market?
Marcus Hughes: China’s a large and complex market, and not as open as many of the other markets in Asia-Pacific. However, at Bottomline we do have some Chinese bank customers, and we serve them through our Shanghai office. China’s too big and fast-moving to be ignored now, so we’re keeping a watchful eye on new developments and opportunities.
I would say that at present China’s got a clear preference to avoid using the SWIFT networks for its payment systems. It has, therefore, created Chinese-controlled payment systems on proprietary networks not only for renminbi globally – around the world, I mean by that – but also for payments in major foreign currencies being used inside China. This is quite unique, and no other country has done anything quite like that.
Likewise, China’s domestic renminbi real-time gross payment system, and their automated clearinghouse, they both run on proprietary networks, again using SWIFT, but a point of interest, I’d say, is that ISO 20022 is already widely used in Chinese payment systems. That’s due to the ability to use Mandarin characters, which don’t work on SWIFT MT FIN messages, for example. This puts China way ahead of most of the world, which is only now embarking on a very ambitious plan to migrate to ISO 20022, which is going to take place between 2020 and 2025.
Chinese banks are beginning to adopt the cloud, but these initiatives, I would say, are generally concentrated on bank-owned, private FinTech subsidiaries who are creating their own private clouds – always within China. This does limit the ability of independent FinTech providers to provide cloud-tech-based solutions from outside of China.
Then, of course, we’ve got the mobile payment giants Alipay and WeChat Pay. They’ve really leapfrogged credit cards and debit cards, and they’re outstripping their Western rivals in terms of integrating with ecosystems, their user-friendliness, and the number of users they have, and their ubiquity.
To put their scale into perspective, each organisation of those, so WeChat Pay and Alipay, handle more payments in a single month than PayPal does in an entire year. Their user networks are now expanding fast in other parts of Asia-Pacific outside of China itself.
Rich Williams: You mentioned earlier about the growth of digital banks in Asia-Pacific. Can you explain what’s been happening in that region?
Marcus Hughes: Yes, of course. As we know, challenger banks, or digital banks, have been achieving a lot of growth in markets like the UK in recent years, but there’s now also dynamic activity in China and South-East Asia. Hong Kong and Singapore are focused on trying to maintain their leading position as international financial centres, so they’ve developed regulatory sandbox to support FinTech innovation. They’re both issuing new banking licences to encourage new entrants, and to drive competition, and to create new digital banks.
Historically in Asia-Pacific, hundreds of millions of people have been underserved, I’d say, by traditional institutions. In China, India and elsewhere, e-wallets, such as Alipay, and WeChat Pay, and Paytm, have grown really exponentially. They’re really quite ubiquitous now, offering hundreds of millions of people an easy way to store and spend their money via mobile phone.
The big advantage of digital banks in Asia-Pacific is that more people can gain access to financial services in underserved markets. Already, increased competition is leading to lower service charges and high interest on savings accounts offered by banks.
From a traditional bank’s perspective, operating only digitally avoids the cost of brick-and-mortar branches, and employees – although they would, of course, still need back-office and support staff. It’s striking that Hong Kong and Singapore are really crowded with bank branches on every high street, but, strangely, both cities are among the most cash-reliant economies in the world. Surprising but true: in Hong Kong, taxis still only accept cash. So, this kind of, steadfast attachment to cash and high bank charges does leave plenty of opportunity for new entrants to disrupt the incumbent banks.
In Hong Kong, new regulations are driving the emergence of these virtual banks. In May 2018, the Hong Kong Monetary Authority introduced legislation which invited new banks to apply for retail bank licences, with a particular focus on non-traditional players. To date the Hong Kong Securities and Futures Commission has granted eight virtual bank licences as part of their ‘Smart Banking Initiative’.
This Hong Kong programme, I’d say, is particularly important when you take into account the city’s status as a major international financial centre, the availability in Hong Kong of large amounts of capital, and, probably most important of all, Hong Kong’s position to access the enormous mainland China market.
The Hong Kong Monetary Authority defines virtual banks as: ‘A bank that delivers services through the Internet or electronic channels, instead of physical branches.’ That means not only facilitating payments but also accepting deposits and making loans, just like traditional banks.
By contrast, e-wallets, such as Apple Pay, PayPal, or Google Pay, serve as payment intermediaries between a consumer’s traditional account, or credit card, and a merchant, so usually via a smartphone or tablet. But it’s highly significant that Ant Financial – that’s Alibaba’s affiliate, which runs Alipay and MYbank – and then also the Tencent, the gaming platform behind WeBank and WeChat Pay, they’ve both obtained virtual bank licences in Hong Kong. Their new operations are expected to start in these coming months during 2020.
Although banks in Hong Kong are required to have a minimum paid-up capital of HK$300m – that’s about US$40m – the new entrants are actually lining up with an average of 1.9m – 1bn, I should say – Hong Kong dollars each. That’s way above the minimum requirement. So, the virtual banks that are appearing in Hong Kong tend to be much larger than the UK challenger banks that we’re seeing over here.
Rich Williams: How does Hong Kong compare with Singaporean banking?
Marcus Hughes: Again a good question. In August 2019, the Monetary Authority of Singapore, they invited applications for new digital bank licences, offering up to two full bank licences and three digital wholesale bank licences. The full licences will be permitted to provide retail and wholesale segments, while digital wholesale banks will only serve small and medium enterprises.
The Monetary Authority of Singapore’s objective is to ensure that the Singapore banking sector continues to be resilient, and competitive, and vibrant. Successful applicants will be announced by mid-2020 and should be ready to launch by mid-2021. I actually saw in the press today that there are 21 applications for banking licences in Singapore under that scheme.
These new digital banks are going to operate alongside other digital banks, which the incumbent Singapore banks already are creating under the existing regulations. Singapore’s digital banking plans have already prompted collaboration discussions between traditional banks and non-bank newcomers.
Online taxi firm Grab, for example, is talking to the big telco company Singtel and a peer-to-peer lender, Validus Capital. They’re all looking at applying to become virtual banks in Singapore, and we know that the major local bank, OCBC, is considering a minority stake in a joint-venture digital bank venture.
Rich Williams: Sounds to me that there’s a parallel between these digital banks and the new UK challenger banks. How do they compare, Marcus?
Marcus Hughes: It’s interesting to note a few special features, really, of digital banks in Asia-Pacific when compared to UK challengers. Many of the digital banks in Asia-Pacific, they’re backed by large technology platforms and telco giants. This is not the case in the UK, but in Kakao Bank in South Korea, for example, that’s built on top of the country’s largest mobile messaging service.
Then in China we’ve got new digital banks which are owned by the tech giants WeBank, part of Tencent, and MYbank, part of Ant Financial and Alibaba Group. AiBank is actually part of the Chinese search engine Baidu. All these Chinese tech giants are able to capitalise on their huge customer bases and their ecosystems, by offering a fast-growing range of payment and financial services.
Curiously, digital banks originating from start-ups which aspire to disrupt financial services in Asia-specific, they’re still relatively rare in that region, especially compared to the number of challenger bank start-ups we’ve seen over here. In Asia-Pacific there are a few cases, like NIIT in Hong Kong, and Paytm in India, but really in general it’s the big tech companies, especially Alibaba and Tencent. They help to explain why Asia-Pacific digital banks are more likely to be an offshoot of a bank or a telco, and they look to scale really quickly, with strong capital banking.
But worth noting also that, just like in the UK with the influx of digital banks, the traditional incumbent banks in Asia-Pacific, they’re feeling pressure to update their services in order to remain relevant. They also want to retain customers and appeal to the fast-evolving demands of the younger generation of increasingly tech-savvy customers.
For this reason, a number of the incumbent banks are building their own digital-only banks, as well. These traditional banks are seeing first-hand the impact which technology-led platform players, like Tencent, and Alipay and so on, are having on customer interactions and as they expand beyond their original products from, say, gaming or messaging, and move into financial services.
In Hong Kong, Standard Chartered has a digital-only bank proposition. DBS in Singapore has launched a mobile-only proposition in the growth markets of India and Indonesia. In the same way, CIMB Bank in Malaysia and other regional banks have also digital-only or mobile-only propositions in countries like the Philippines and Vietnam.
Some of those traditional banks are also following a two-app approach to counter the new-entrant banking competitors. Singapore’s DBS Bank has its traditional banking phone app alongside another one, which is called ‘PayLah!’. This is an innovative app that’s use not just for transactions but also for lifestyle services.
There are undoubtedly huge opportunities associated, really, with building solutions unencumbered by legacy technology and old processes – and probably old-fashioned, traditional mind-sets. HSBC’s digital wallet PayMe has already got more than 1.5 million users in Hong Kong. Some incumbent banks are already finding they’re having to scrap fees on the charges they apply for low balances on accounts. This is in order to hold onto customers.
There’s been some research by Bloomberg Intelligence which found that, of the eight new-entrant digital banks going into Hong Kong, they may reach a combined profit of 7% of the HSBC Hong Kong overall profit and loss within the next five years. There are also analysts at Citi who are saying that 10% of traditional banks’ revenues is finding… Is going to be at risk over the next decade.
Rich Williams: Moving back to Australia for a moment, are digital banks growing there, too?
Marcus Hughes: Yes, that’s right. There are an increasing number of digital banks in Australia. The Australian regulators have seen the success of digital banks in other countries, like the UK, but the banking sector in Australia is really dominated by the ‘Big Four’ banks, which actually enjoy 85% of the local market, leaving very little choice regarding banking alternatives.
Both the government and consumers in Australia have been quite vocal about the need for more competition in the banking sector. This drive for competition and innovation in Australia is now, yes, resulting in the emergence of a growing number of digital banks and non-bank FinTechs. Over the last 18 months, the Australian Prudential Regulation Authority has been busy granting new licences for banks.
It’s worth bearing in mind that, in Australia, banks tend to be called ‘authorised deposit-taking institutions’, or ADIs, and ‘neo-bank’ is the term usually applied in Australia to describe digital banks. Some of these neo-banks are backed by existing ADIs, like Bendigo and Adelaide Bank, which has launched a digital bank called ‘Up’. There’s also Cuscal, an Australian payments aggregator. They’ve created a new bank called ‘86400’. Amusingly, that name, ‘84600’, represents the number of seconds in a day.
On the other hand, some new digital banks are complete start-ups, which is more like the UK model, of course. It does appear that the emergence of neo-banks in Australia is close to replicating the challenger-bank situation in the UK. In addition to ADI licenses, a number of FinTechs have also launched e-wallets and alternative payment solutions, so again that’s like the UK.
Rich Williams: What’s the situation between Singapore and Hong Kong? They look to be great rivals, so that leads to the question: who’s got the upper hand?
Marcus Hughes: That’s a highly topical question at present, given the political unrest in Hong Kong, which is having a really damaging effect, unfortunately, on their reputation as an international financial centre.
It’s useful to bear in mind that in relative terms Hong Kong is less important today as a driver of the Chinese economy than it was in the past. At the time of Hong Kong’s handover from the UK to China in 1997, it was 16% of China’s total GDP, compared to just 3% today. It was one of the world’s busiest container ports until 2004, but it’s since been overtaken by Shanghai.
The decline in Hong Kong’s importance to the Chinese economy is most evident when compared to Shenzhen, which I’ve been fortunate enough to visit a couple of times recently. Three decades ago, Shenzhen was just a fishing village situated across the border from Hong Kong, but by 2018 the size of its economy had surpassed that of Hong Kong for the first time, and it’s continuing to grow, at over twice the pace of Hong Kong.
On the other hand, although there have been important financial reforms in places like Shenzhen and Shanghai, there’s no mainland Chinese city which can compete with Hong Kong’s role – global role – in raising capital and international financial transactions. About 64% of foreign direct investment into mainland China, and 65% of outward direct investment from mainland China, these all flow through Hong Kong itself.
It’s also responsible for about 70% of mainland China overseas IPOs and 60% of China’s overseas bond issues, so Hong Kong does look set to remain a gateway to mainland China, as well as a global financial centre and trade hub, for a long time to come, I’d say.
In pure economic terms, Hong Kong is the 31st – 33rd – largest economy in the world by GDP, and it’s got a population of 7.5 million. Meanwhile, Singapore is the 37th largest economy, with a population of 5.6 million. Just by way of comparison, Australia is the 14th largest economy by GDP, with a population of 25 million.
Rich Williams: In light of Hong Kong’s changing situation, Marcus, what’s the outlook for Singapore?
Marcus Hughes: Like Hong Kong, Singapore offers a transparent common-law legal system, based on the UK. They’ve also got low levels of corruption, low tax, and a very business-friendly environment. Hong Kong and Singapore’s many similarities have made them rivals, battling amongst themselves for the title of Asia’s leading financial centre. Crucially, Singapore now holds advantages in terms of political stability and its freedom from outside interference.
In response to the unrest in Hong Kong, it’s already clear that many investors have shifted billions of dollars from Hong Kong to Singapore in order to reduce their risk exposure. But it’s also important to say: Singapore is not just a useful hedge against risk in Hong Kong. Instead, it can really be convincingly argued that Singapore is closer than Hong Kong to the future growth opportunities in Asia-Pacific.
Although Hong Kong provides access to China, Singapore is actually better positioned as a springboard for accessing the rest of Asia-Pacific as a whole. Singapore is home to the regional headquarters of over 4,200 businesses, compared to 1,390 in Hong Kong. Google, Facebook, and Twitter are among the many multinationals who have their Asia-Pacific head office based in Singapore.
With China’s historically impressive economic growth showing signs of now slowing down, Singapore is actually closer to the next wave of fast-growing and young economies. Rising costs in China, and its trade war with the US, have accelerated investments in rapidly expanding South East Asian countries, like Vietnam and Indonesia.
As a leading member of the ASEAN economic bloc, Singapore has special access to these markets and is ideally suited as a regional hub. As you probably know, ‘ASEAN’ stands for ‘Association of South East Asian Nations’. It’s an important intergovernmental organisation for the cooperation between 10 nations in South East Asia.
Singapore’s geographical proximity to ASEAN, and all 10 ASEAN nations are situated within easy reach by 4 hours’ flying, this all makes ASEAN a natural focal point for Singapore, with a huge market of 640 million people.
Compared to Hong Kong, Singapore also has closer geographical and cultural ties with India, which is, of course, another Indian – sorry, Asian – giant, which is predicted to overtake China in the coming years, driven by its young population, and thriving middle class, and strong economic growth. India is going to be a significant market for Singapore for years to come.
Hong Kong clearly outranks Singapore for its proximity to China, and the size and scope of its financial services industry, but, with the political risks now facing Hong Kong, it may be that this former UK [conoly 0:41:30] – sorry, colony – will soon be considered more as a financial centre for China and a gateway to China, rather than as a gateway to Asia-Pacific as a whole.
The Monetary Authority of Singapore recognises that the growth of the FinTech industry is key for Singapore’s ability to continue as a major international financial centre. So, the regulator has been providing strong support for the development of a local FinTech community. They stand to benefit enormously from the current troubles in Hong Kong, and it’s seen as really a safe haven in the whole region, even by Hongkongers and Chinese investors.
Singapore is already attracting major new money flows, and many analysts recognise Singapore’s strengths as a safe and easy place to do business across the whole of the region. They already enjoy a leadership role in ASEAN, and even across Asia-Pacific in general.
Singapore’s lead is often followed by other countries in terms of regulations and payment innovations, such as real-time payments and APIs. In turn, Singapore is influenced by the UK’s leadership in payments, which ironically ensures that Bottomline gets a really friendly welcome in Singapore, given our pioneering role in the UK payments. Bottomline is, therefore, really extremely well placed in Singapore, where our principal cloud-based platform in Asia-Pacific is actually located.
Rich Williams: That’s all looking very positive for Bottomline, then. Are there any other initiatives in Asia-Pacific which have parallels with the UK and Europe?
Marcus Hughes: The payment industry’s migration to ISO 20022 is a major initiative in Asia-Pacific, just as it is in other regions across the world. The opportunity here in Asia-Pacific is complicated, though, by the massive scale of the region in geographical terms, and the modest size of many of the local banks. This means there’s often a lack of understanding of what’s required and what are the deadlines.
Bottomline is fortunate to have great experience in ISO 20022 migrations. We’ve worked efficiently through the challenging adoption of SEPA, and also the more recent migration of ISO 20022 for the domestic payments systems in Switzerland, which was over a year ago or so. So, I’d say we’re really well placed to help Asia-Pacific banks and corporates with this migration.
The adoption of this new international messaging standard is going to bring major benefits. The new standard carries richer data and many older than many of those older payment formats. Therefore, it makes anti-money-laundering, compliance, and payment reconciliation so much easier, so a really important initiative across Asia-Pacific.
Rich Williams: As we draw this podcast to a close now, Marcus, do you have any concluding statements about Asia-Pacific?
Marcus Hughes: Yes, certainly. Looking back over my recent trip, despite the rich diversity of the many exciting countries of Asia-Pacific, I couldn’t help but feel very much at home in the region. I was struck by the growing convergence in the way businesses there pay and get paid, compared with the UK.
I think this trend spans hot topics such as real-time payments, open banking, the emergence of digital banks, and the adoption of ISO 20022. Each country I’ve visited in Asia-Pacific is creating its own particular flavour for these initiatives.
Although digital transformation is not as well coordinated across the region as it could be, since each nation is applying its own particular stamp to these programmes, nevertheless I feel that in a few years’ time the payments landscape across Asia-Pacific is really likely to be much more homogenous than the disparate payment systems that are in place there today.
I also believe it will look even more like the UK payments landscape, the one that we’re building here with our customers today. We undoubtedly have exciting times ahead for Bottomline, I’d say.
Rich Williams: Thanks, Marcus. That’s all for us today. Great to have you here with us again, and thanks for sharing the themes from your travels across Asia. Unfortunately, that’s all we have time for. We’ll be back with some more podcasts very soon. In the meantime, you can listen to more episodes on all things payments at the touch of a button, using your preferred provider. See you all next time.
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