Celebrating Asia’s position as a location for banking innovation has almost become a cliche. The region is known for pioneering the use of mobile QR code payments and has seen the rise of numerous “superapps”, using so-called embedded finance to enable access to a range of consumer services, including banking, from one app.
While the British Retail Consortium announced it has seen a rise in the use of cash payments, making up just 19.9 per cent of transactions in 2023, and the US still grapples with cheques, Asia is looking to how payments and banking will serve the needs of its populace in the years to come, rather than providing the services of the past.
Yet what is often missing from the discussion of Asia’s rise in innovation is how the environment enabled these projects to thrive. Across the region, central banks had been working in siloes to facilitate domestic services to develop to meet the needs of their populations. But just as a fractured environment risked emerging, central banks began to collaborate and create cohesive plans to foster further innovation.
Anirudh Suri, a nonresident scholar in the technology and society programme at Carnegie India, part of the US-based think-tank Carnegie Endowment for International Peace, says Asian central banks are taking an enabling and strategic role for lenders, and are also themselves executing projects. He perceives this dual function of monetary authorities as close to the wider economic role offered by a development bank, with the benefits of innovation being felt across society.
“This broader vision of their own role in the economy and society is leading them to become much more innovation-focused. Moreover, they are building out both in-house teams and leveraging start-ups and private sector firms for actually driving the innovation,” he adds.
Eswar Prasad, Tolani senior professor of international trade policy at Cornell University, says Asia has been further assisted by the rising middle class demanding high-quality financial services, while the skilled manpower of the region has enabled the required technology to be developed.
They have also focused their efforts on financial innovation that serves end-users, rather than speculation, he says.
“While central banks and regulators in Asia have worked together to promote such innovations and create space for them, their conservatism has also mitigated the risks of financial engineering, which often veers into more speculative activities,” Prasad notes.
And with a flurry of projects slated to go live in the coming years, extensive opportunities exist for private sector banks to initiate plans laid out by the Asian central banks, more so than what is being seen in other regions. As an example, focused efforts of the Bank for International Settlements to collaborate with central banks across the region, the goal of creating an interlinked real-time, cross-border payments system may only be a couple of years away.
Asia’s pace of change
Collaborating at scale across a region may not come naturally, but Asia’s central banks have stepped up in recognition of their shared ambitions. The goal of enabling real-time, cross-border payments has come to the fore thanks to projects like mBridge and Project Nexus, both of which have seen central banks gather around the BIS Innovation Hub, based in Singapore.
The Bank of Thailand, the Central Bank of the United Arab Emirates, the People’s Bank of China, and the Hong Kong Monetary Authority joined multi-central bank digital currency project mBridge at inception.
Bank Negara Malaysia, Bangko Sentral ng Pilipinas, the Monetary Authority of Singapore, the BoT, and Bank of Indonesia formed the initial group of participants in Project Nexus, which seeks to bring together multiple domestic instant payments systems to allow cross-border transactions.
Subsequently, the Reserve Bank of India, Brunei Darussalam Central Bank, Bank of the Lao People’s Democratic Republic and the State Bank of Vietnam have all joined Project Nexus.
These projects are the culmination of multi-year processes begun on an individual country level, and bred of necessity. India’s implementation of the Unified Payments Interface, a digital payments platform, started with the country’s demonetisation in 2016 — which saw the removal of 86 per cent of its currency — and the issuance of ID cards, which allowed citizens to access financial services without the need for a bank account.
Since the launch of UPI in April 2016, usage has surged, with the National Payments Corporation of India, which developed the system, forecasting in October 2024 that transactions would reach 1bn a day in the coming months.
© Dhiraj Singh/Bloomberg
UPI has expanded beyond India’s borders and is now available for use in Bhutan, Mauritius, Nepal, Singapore, Sri Lanka and the United Arab Emirates. It can also be used to make payments in France, although, specifically, only at the Eiffel Tower, and at the Galeries Lafayette department store.
Meanwhile, National Bank of Cambodia introduced its Bakong digital currency in 2020, with the aim of promoting the use of the Cambodian riel and reducing dependence on the US dollar, which still accounts for 80 per cent of transactions in Cambodia. The use of Bakong has subsequently expanded to Malaysia, Laos, Thailand, Vietnam and via China’s UnionPay and Alipay+ payment systems.
While both systems have extended across the region, taking this piecemeal approach to expansion makes it slow going, and risks fragmenting payment systems further, hampering future widespread interconnectivity.
Centralised approach
Thomas Garside, head of finance and risk for Asia-Pacific at Oliver Wyman, says taking a centralised approach is essential to getting projects off the ground in a timely manner. “Asia does not have a natural central body to gather around, like the EU and the European Central Bank. Instead, they have to ensure critical mass to move projects forward, which means open co-operation is important and necessary,” he explains.
Establishing pan-regional projects is not a simple development, as it needs to take into account what each party can bring to the table in terms of financial investment, corporate governance and technological expertise, and avoid the risk of any countries or regions being left behind.
“All participants have to be happy with respective security and resilience standards,” Garside says. “There has to be an agreement that the projects will be properly funded and all parties are happy that contributions are fair and appropriate, and there is agreement of the management and governance.”
There is a consensus that certain central banks are emerging as leading players, and this is pushing forward the speed of innovation, as others seek to keep pace.
“Singapore plays a unique role in the region,” says Rachel Whelan, head of corporate cash management and global head of payments and transactional foreign exchange at Deutsche Bank. She compares the city-state to the work taking place in China and India. “The PBoC has a very strong view of what they want to achieve within China, but does not push the agenda outside its borders. India is playing well with everyone, but has its own strong agenda.”
[MAS] has conducted deep dives into all the transformational technologies shaping financial services
Jessica Renier, managing director of digital finance at the Institute of International Finance, agrees that Singapore’s MAS has been at the forefront of a number of banking innovations, largely thanks to the integrated central bank and regulatory model that has enabled it to move quickly and with coordination.
“[MAS] has conducted deep dives into all the transformational technologies shaping financial services, hosts a BIS [innovation hub], and has an advanced understanding of artificial intelligence, tokenisation, quantum and other new technologies,” she says. “This has resulted in significant influence with the guidance it issues and how it has shaped the thinking of other central banks and direction of travel for financial services in the region.”
This forward-thinking approach has seen MAS commit S$100mn ($74mn) in grant funding to support the development of artificial intelligence and quantum computing for the financial sector. These grants are specifically focused on the development of quantum technology-related pilots to safeguard company data. Regarding AI, the funds will be used to support companies establishing AI innovation centres in Singapore.
Having a strong central bank based within one of the region’s larger economies taking this steering position benefits the region overall. “MAS is taking a leading role due to its [economic] size and financial backing,” Whelan adds. “It does not have the problems of some of the less developed countries, such as financial inclusion or security of cross-border payments; [therefore] it is supporting the other central banks.”
Emerging market needs
For smaller developing market central banks in Asia, having these larger financial institutions to lean on is helping them to meet their own banking agenda. There are still inherent tensions as central banks work around their own sovereign requirements to meet the greater needs of the region.
Khanh Vu, deputy managing director at VinaCapital Fund Management, says the State Bank of Vietnam has an appetite for developing the country, and is looking to ensure the regulatory systems and know-your-customer measures are attracting international business and capital.
“Vietnam’s regulators are very progressive, as they are trying to cement Ho Chi Minh City as a financial centre in the region. They are focused on getting Vietnam upgraded to emerging market status on both the FTSE and the MSCI indexes,” Vu adds. Such an upgrade would increase the amount of investment into the country.
The central banks of nine Asian countries, including Vietnam, have joined Project Nexus © Maika Elan/Bloomberg
Melchor Plabasan, senior director in the technology risk and innovation supervision department at the BSP, says there is an understanding across Asia that working together to establish easier payments flows will likely boost tourism, investment opportunities, and improve the ease of remittances being sent and received across the region. Remittances are a significant concern across emerging market Asia, with the BSP stating the 2023 figure reached a record high of $37.2bn, a 3 per cent increase on 2022. This represented 8.5 per cent of the Philippines’ total GDP for 2023.
“Most of the regulators are realising the importance of fostering responsible innovation. That means we would not stifle innovation, but instead, there will be an open and then flexible approach in terms of innovation, provided, of course, that we would also ensure that risks are appropriately managed,” says Plabasan.
He points to the BSP’s own sandbox approach to test the trading of gold via blockchain, and the approval granted to cryptocurrency exchange Coins.ph to issue a peso stablecoin, which can be used for making remittances more secure and cost effective.
For the emerging markets, being able to leverage the support of the region’s stronger economies means a greater degree of financial inclusion. Plabasan says the BSP’s ambition is for Filipinos to have access to a universal, democratised digital economy, with innovative products and services, composed of both bank and non-bank participants.
Aside from innovation, greater collaboration is helping with mitigating some of the rising threats in the region. Transaction scams are posing a significant issue across Asia. The 2023 “LexisNexis True Cost of Fraud Study – Asia Pacific”, published in April 2024, found fraud had increased by 58 per cent across organisations in Asia-Pacific year on year. Fraud via digital channels accounted for 51 per cent of losses.
“Asia has placed priority on how it can prevent frauds and scams, both of which are prevalent in the region,” Garside says. “There is an obvious benefit to data sharing and controlled collaboration between financial institutions.”
There is an emerging contradiction in the move towards data localisation, which gives the impression that countries aren’t always aligned
Yet data sharing itself comes with its limitations. Across Asia, there are strict rules in some jurisdictions on how personal data can be used, and where it needs to be held. China, India, Indonesia and Vietnam are some of the countries which have specific rules around how data needs to be managed within the country.
“There is an emerging contradiction in the move towards data localisation, which gives the impression that countries aren’t always aligned, while also trying to open up connectivity across multiple countries,” says Whelan.
Developing interlinked systems could further exacerbate issues. Plabasan says with greater connectivity there is the possibility that systemic risk could also be amplified, and recommends that central banks work around these issues to ensure it is appropriately managed as part of the development processes.
Private sector engagement
While the central banks are seeking to bring about change, there is an understanding that there needs to be dialogue with the banks if the projects are to take flight.
VinaCapital’s Vu says there is an environment of mutual understanding in Vietnam: “SBV works closely with the private sector, sharing information on the development of white papers and regulatory changes across all areas of banking, providing a holistic view of any planned changes to the business environment.”
The IIF’s Renier says the Bank of Japan coordinates itself between other regulatory bodies to provide support to the private sector towards innovation, particularly regarding AI and digital assets. The Bank of Korea is also noted for calling on the private sector to collaborate on design of financial products, as seen with its ongoing CBDC project.
In order to win the support of the banks in meeting their goals, this means the central banks must be careful not to cannibalise banks’ business, especially when it comes to implementing new payment systems. Whelan says that in China “with the e-CNY, the PBoC is trying to move money more quickly in the economy, rather than trying to compete with the banks”. She adds: “Consumers holding a balance in e-CNY would move funds back into their bank account to benefit from interest rates. It’s a good example of the central bank working with the banks to facilitate their underlying agenda in relation to the local market, and ensuring consumers are supported.”
There is demonstrable progress to show for the active engagement, and in the years to come this will only scale up
Naveen Mallela, global co-head of Kinexys — formerly known as Onyx, by JPMorgan — notes the projects have been an example of more than just central bank co-operation, but also that of public-private partnerships. “Without the central banks coming together and coordinating these activities, along with commercial banks, these initiatives are incredibly hard to pull off,” he says.
Mallela says that while central banks are leading the way, they are actively engaging the private sector to seek out ways of how they can help and to propel projects forward. “There is a lot of active dialogue, active engagement and active progress,” he says. “We do not see the private sector needing to push for clarity. From that standpoint, it has been refreshing. There is also demonstrable progress to show for the active engagement, and in the years to come this will only scale up.”
MAS, for example, has convened the Cyber and Technology Resilience Experts Panel, drawing on the expertise from institutions including Citigroup, HSBC, UBS, Mastercard and Amazon Web Services to provide insight on emerging technology risks.
Asia vs Europe
However, what marks Asia apart in its approach to central bank interlinkages is that it comes into contrast to the experiences in other regions of the world that are facing similar challenges. As Garside of Oliver Wynam noted previously, Europe has the bodies of the EU and the ECB to rally around, yet does not seem to do so with the same degree of enthusiasm. “In Asia there is ambition in individual countries, but benefits of scale are recognised to accelerate progress across shared problems like anti-money-laundering or international payments,” he adds.
An Asian banker with experience of the European system says there are marked differences between how the regions operate, saying that some central banks, such as the Reserve Bank of India, can be aggressive in their expectations, but will still hold a good relationship with its banks.
“In Europe, banks are not always fully part of the dialogue, and there is not always a clear outcome for the regulatory agenda,” the banker says. “The instant payment regulation under the Single Euro Payments Area is trying to open up the flow of payments across Europe, but it is reducing controls on the amount of money that can be transacted. It is also putting a lot of pressure back on the banks to deliver outcomes that don’t always make sense, and may end up creating problems for the end consumer.”
They add: “Europe is pushing SEPA Instant Payments Regulation now quite aggressively, but there still doesn’t seem to be a clear outcome in terms of why they are pushing some requirements. There is also the political angle, with a lot of elections taking place in Europe, which is overshadowing progress.”
Comparing the approach of China and Europe in the rollout of CBDCs, the banker notes how China had the goal of the e-CNY operational in time for the 2022 Winter Olympics in Beijing. With one CBDC live in the region, this instigated the speed of discussion and decision making across the region to follow suit.
By contrast, the banker says that in Europe “discussions are ongoing, with some decisions to be made in 2025, and implementation may come by 2029. From a bank’s perspective, it would be helpful for them to reduce the overall timelines towards implementation. The whole process will go on for five years.” They say “this is an example of the drive, the speed of change and the quick decision making which is seen in Asia-Pacific versus the ongoing dialogue seen elsewhere, which doesn’t necessarily have a clear outcome. This is what I struggle with in Europe.”
As banks seek the growth opportunities provided by Asia’s push towards innovation, it may be the impetus needed for the central banks in other regions to look for commonalities and work more closely, or risk being left further behind in the race for banking innovation.
