Asia is the most dynamic economic region in the world, according to the IMF - nowhere else is the economy growing so rapidly. This is also because the region is a digital pioneer, as well in terms of payment: nowhere is mobile payment more widespread, with China, India and Indonesia, the top three countries worldwide are in Asia in terms of mobile payment penetration.
What are the reasons for this impressive innovative and digital spirit? What are the challenges? And what are currently the most exciting innovations and trends in payments and retail?
We talked to expert Richard Hartung who has over 20 years of experience in the payments and consumer financial services industry, primarily in the Asia Pacific region. He has worked for Citibank, Mastercard, Keppel TatLee Bank and OCBC Bank and founded the specialized consulting and research firm Transcarta.
Richard, as different as the individual countries may be – how is it that Asia is such an innovative and economically dynamic area in the world?
While there is a multitude of reasons for innovation in Asia and situations in each market are different, three factors that have driven innovation in payments stand out.
First, there is greater need for innovation in Asia than in some other regions. Financial inclusion has been relatively low in many markets in Asia, including large developing markets such as China and India as well as Indonesia, and innovative solutions have been needed to overcome those challenges in order to increase financial inclusion. What we’ve seen, then, is that some of the key innovations have come from developing markets.
Second, there is relatively little legacy payments infrastructure in many of the markets in Asia, and in particular in developing markets. Even in a developed market such as Japan, the vast majority of consumer payments had been made with cash until relatively recently. The lack of infrastructure in other countries has meant that there is more room for innovations such as mobile, mPOS and QR code payments as well as AI and other emerging solutions. While China and India moved quickly, emerging markets such as Indonesia and Vietnam are following along fast.
And third, there is a vast talent pool that was relatively unhindered by strict regulations in many markets. India and China have populations exceeding one billion and regulatory structures did not constrain solutions such as Alipay, WeChat Pay or Paytm in their early stages so there was a playing field for innovation and resources to fill the field.
And what role do the widespread digital payment solutions play in this dynamism?
Digital solutions have been the core of payments innovation in the region, and key players have been quick to shift to newer digital solutions when they become available – especially when there is a dearth of legacy payments infrastructure.
In China, for example, Alipay and WeChat Pay developed entirely digital solutions that did not require vast investment, so financial inclusion and digital payments advanced quickly. When installing POS terminals proved very expensive in Thailand, banks shifted to QR code payments. Along with developing a payments solution, Kakao in Korea also developed a digital loan solution and within about six months took a nearly 40 percent market share in the personal loan market in the country. Paytm in India was growing quickly, then received another boost from demonetization as well as licensing of its payments bank.
At these innovators as well as a multitude of other banks and fintechs, then, digital technology has been essential in developing of new payments solutions.
Similar to WeChat, the successful Kakao Bank in Korea is another example of how a messaging app has evolved into a payment solution and eventually even into a bank (source: Pulsenews / Kakao Bank)
In Western countries, some consumers are still reluctant to make cashless payments. Would you say people in the Asia-Pacific region are generally more open-minded about using digital solutions?
It may be difficult to say that Asians – more than 3 billion people in more than 60 markets – generally are more open-minded about digital solutions. In looking at consumer adoption of digital payments solutions in Asia, there is significant variation between markets, so it may be more important to look at different countries separately.
In developed markets such as Hong Kong and Singapore as well as Australia and New Zealand, for instance, consumers have used cards for years and there is a broad-based POS infrastructure. While usage of digital payments with cards has been high and consumers don’t worry significantly about the risks of card-based digital solutions, adoption of mobile payments has been slower – though due more to the ubiquity of the card infrastructure than to concern about digital.
Developing markets such as China and India, on the other hand, were largely cash-based. Alipay and WeChat Pay developed clever strategies to encourage adoption of digital payments in China, such as Alipay’s “can-pay, dare-to-pay, easy-to-pay” strategy and WeChat Pay’s lunar new year campaign. Mobile payments providers in India, Vietnam and other developing markets have similarly leveraged consumer acceptance of digital payments for growth, albeit at a slower pace. Consumers who do everything else in their lives on mobile phones and seem to have relatively few concerns about security were willing to adopt the mobile solutions.
WeChat Pay’s campaigns to digitally send the traditional small “red envelopes” for Lunar New Year is an example of how digital payment has become even more popular (source: WeChat Pay).
You mentioned the differences in digital payments adaptation in the region – what exactly are reasons for barriers?
A key barrier in many markets has simply been the lack of infrastructure. In Malaysia as well as some other markets, for example, most merchants have not had POS terminals and QR or mPOS payments have not been available.
A related issue has been the cost of acceptance. Whereas cash is viewed as free, merchants who accept cards often pay a merchant service fee of at least 2-4 percent and as high as 7 percent in Japan. There, acceptance of digital payments and of mobile payments in particular has been relatively low.
Another issue has been a lack of financial inclusion, with usage of financial services and the percentage of consumers who have bank accounts still relatively low in developing markets such as Indonesia and the Philippines as well as Vietnam. Many people simply don’t have accounts yet, so they continue to use cash.
Over time, many of the causes of low mobile payments adoption are likely to shift and mobile payments will grow. How long that will take will likely vary significantly by market.
In many Asian countries, governments strongly promote digitization – for example the “Smart Nation” initiative in Singapore. How do you assess these programs and what effects has it had so far?
There is indeed a multitude of programs around the region, including Digital India, Smart Nation or Australia’s Digital Transformation. Regulators in some markets have propelled digitization forward. Regulators in Singapore and Hong Kong, for example, have collaborated on the Project Ubin initiative for blockchain. The Bank of Thailand and Bank Negara Malaysia have pushed for greater acceptance. Regulators in Australia have supported Open Banking.
At the same time, regulations have been slow to change in some markets and cash or check acceptance continues to be common even in many developed markets. It has taken some time for regulators in some markets to compel open banking, for example. Some payments fintechs, even in markets that promote their digital initiatives, have found it difficult to obtain regulatory approval for their solutions. Banks have been slowed in some cases by onerous requirements for mobile payments such as KYC or other security requirements.
While there are many initiatives that sound forward-looking, it is important to take a close look at what is actually allowed and happening in each market.
Go cashless, go digital – the farewell to cash is a central component of the government initiative “Digital India” (source: HappySavers)
Let’s talk about digital payment trends – what are the three most exciting Asian innovations in this field from your point of view?
While there is indeed a multitude of digital initiatives around Asia, three themes stand out.
First, data analytics and artificial intelligence are getting close to the point where they can be used to power highly disruptive changes such as customized marketing for individual consumers, real-time fraud detection and prevention, chatbot-powered customer service and more. Banks and fintechs are already using analytics and AI for more effective payments solutions, and the capabilities of the solutions are advancing rapidly.
Second, mobile payments are continuing to grow, driven by a better customer experience that makes mobile solutions easier to use and increases their value so that consumers have a reason to use them. In China, Alipay and WeChat Pay continue to innovate and deliver more and better solutions for consumers. In other markets, an increasing focus on the utility of the solution and the customer experience has the potential to drive the customer adoption of mobile for transactions that has lagged.
And third, robotic process automation is enabling faster and better services while delivering a superior customer experience. Payments providers have increased speed and accuracy in the back office while reducing costs. Voice banking through Alexa or Siri is growing. Providers use chatbots or other AI-powered solutions to “talk” with customers verbally or respond to text inquiries on the phone. Payments are gradually becoming as instant as the rest of customers’ lives.
One of the upcoming trends to look out for is the impact of real-time payments solutions such as FPS in Hong Kong, FAST and PayNow in Singapore PromptPay in Thailand, and NPP in Australia. These solutions, based on account-to-account transfers, could shift the dynamics of the payments significantly over the next three to five years.
To conclude, what are the most important trends in retail you see in Asia?
While some trends in retail are similar to the trends in payments, there are also differences.
Just as data analytics and artificial intelligence is a key trend in payments, so is it a key trend in retail. Retailers are using AI and analytics to analyze their customers in order to develop better products and sell them more effectively. AI is uncovering untapped consumer segments that can drive growth in retailing. Consumers are getting faster and better solutions as a result of these AI or analytics initiatives. And these examples barely touch the surface of the emerging use of AI and analytic.
E-commerce is another development that is changing the face of retail around the region. While volumes are still relatively small in most markets, ecommerce is growing rapidly. E-commerce is democratizing commerce in the region by enabling small merchants in remote locations and large merchants in urban areas to sell to the same customers. Costs are declining as less space is needed for shopping. The way merchants sell is changing, as leading merchants combine experiential sales in stores with online sales channels for more effective sales. While e-commerce is still at an early stage, these and other developments are resulting in a high growth trajectory with tremendous potential.
Process automation and robotics are changing retail as well. In the back of the store, online and offline retailers are digitizing their inventory, using robots for a multitude of functions, ensuring that products are more readily available and enabling faster delivery of purchases. In the front of the store at offline merchants, customers are using self-checkout, inventory is better managed through real-time tracking and customer queries are answered better – sometimes even digitally. While there is lots more to be done, automation can reduce cost, improve the customer experience and increase sales significantly.
Many thanks for sharing these insights with us, Richard!