Everyone in payments is working toward the same goal: making crossborder payments as simple as an email or SMS. Bank of Thailand is just one actor, but it is playing an important role in realizing this ambition, by first pioneering bilateral tie-ups with neighboring countries, and now by trying figure out how to create standards for the entire world.
Two officials from BoT’s payments system policy department spoke with DigFin on the sidelines of the recent Money20/20 conference, hosted in Bangkok.
For Pariwat Kanithasen, deputy director (pictured right), the goal is to create multiple competitive systems for making small-value payments as simple as possible. “Systems thrive on competition,” he said. One competitor he’s helping build is Project Nexus, an agreement among five Southeast Asian nations to knit their domestic payments infrastructure into a single operable standard.
“It’s hard to manage all of these bilateral relationships,” Pariwat said. “The question is how do we multilateralize?”
Bilateral beginnings
Bank of Thailand is among the first central banks to create a bilateral agreement with a peer to connect domestic rails. The Thai QR-based payments standard, PromptPay, is now synced with Singapore’s PayNow. Residents in either country can use their own mobile payment app to pay in the other.
Since then, Thailand has built similar connectivity to eight other Asia Pacific systems, and its central bank is in talks with India’s. Other regional countries are forging their own bilateral deals.
These are strong beginnings, but no agreement can scale. Each deal involves specifics around laws, foreign-exchange regulations, IT and operational specifications, choice of settlement bank, how to qualify participating banks and fintechs, and compliance screens.
Each agreement takes about two years to hammer out, involving plenty of human, IT and financial resources. Such deals are worth it for neighbors with a high volume of travel and remittances, but can quickly spin out of control.
“An agreement between two countries involves just one link,” Pariwat said. “But agreements among five countries would require 20 links. And if there’s 20 countries, you need 190 links.”
Lesson 1: China
BoT has a long history of trying to balance competition and integration, and its officials are both excited about the prospects for Project Nexus and wary of too many corporate ‘walled gardens’ emerging.
“We learned a lot from China,” Pariwat said, both in terms of China’s fintech and QR-led prowess, and also the pitfalls of allowing two private companies to dominate electronic payment flows on their servers, with no interoperability between them.
Customer money effectively became trapped in either an Alibaba or a Tencent ecosystem, one reason why Beijing has been promoting a retail e-RBM.
BoT would rather head off the danger before private companies or neighboring governments raise too many barriers.
Lesson 2: ATMs
Pariwat sites the company’s experience with ATM networks as a cautionary tale. Decades ago, when commercial banks first rolled out ATMs in Thailand, they did so over proprietary networks. BoT intervened and forced the banks to standardize the networks, so that a Kasikorn Bank customer might take cash out of a Siam Commercial Bank machine.
From BoT’s perspective, though, the ATM experience was a disappointment. Pariwat notes that although BoT was able to force the banks’ networks to integrate, it failed to make the ATM machines fully interoperable.
This is costly to customers, and to the country. Customers must pay a fee if they use a rival bank’s machine. And because ATMs are run as business silos, banks have to maintain the machines and keep a lot of extra cash inside them. “The cash is just sitting there in all these machines,” Pariwat said. The cost of printing and distributing bank notes in Thailand is 0.3 percent of GDP per annum, so it’s not trivial to BoT that a lot of it gets locked away.
“There’s no economy of scale for ATMs at the national level,” Pariwat said.
This background helps explain why BoT intervened early and forced its commercial banks to standardize the QR codes, so they can be freely used by all users and merchants.
Build standards now
Domestically, PromptPay is just one of several mobile payment services. Internationally, though, BoT’s bilateral deals only apply to PromptPay – a nascent barrier, although from BoT’s perspective, this just provides a competitive edge to PromptPay.
But it won’t have the power to impose its rules internationally. If bilateral agreements lead to lots of proprietary or national cross-border corridors, the region and the world will be stuck on an increasingly anti-competitive path: the Ali-versus-Ten problem writ large.
This is why the central bank is keen to base Project Nexus on international standards, such as ISO 20022, the most modern global standard for financial messages.
This leads to the question of technological choice. Messaging standards are just one aspect. Data is another. Pariwat sees Project Nexus evolving as a competitor to SWIFT or Western Union or Ripple or other networks for moving money, with a focus on small-value payments. What should those rails look like?
Testing the tech
Wijitleka Marome, director of the financial technology office (under the payments policy division, pictured left), says BoT is about to launch a regulatory sandbox to run pilots of various tech that could underpin Project Nexus. This can include blockchain-based systems.
“We’re opening our enhanced sandbox for stablecoin-type programmable payments,” she said. BoT envisages using a system that relies on smart contracts with a compliance (KYC/AML) capability.
“We want an underlying technology that boosts the efficiency of transactions so they are more accessible,” she said. In particular, BoT is keen to enable tokenization of assets, in this case, of cash. “This is for the cash leg in atomic settlement of tokenized transactions.”
She noted that BoT is not demanding such a system: “We don’t yet see the scalability or performance in blockchain.”
But the central bank is trying to keep pace with regulatory changes taking place worldwide. The sandbox is a way for the central bank to learn alongside industry participants. She expects it to open to its first batch of companies by the end of June.
“Countries want options, including a [central-bank digital currency],” she said. “Everyone has the same use case, cross-border payments. But we don’t know which approach will fly, or for what specific use cases.”
Whatever the solution, Wijitleka expects it will enable upstream services. These could include for wallet providers and the data they collect, for firms that provide risk management, and for generative AI to manage user interfaces.
Wholesale out of reach?
Ultimately, could this scale beyond low-value payments?
Pariwat says technically, it can: the payment limit could easily be changed from $1,000 to $1 billion. But this introduces new risks. “If there’s a problem in correspondent banking, SWIFT can pause a transaction, but you can’t do that with instant payment rails,” he said. Moreover, scammers are good at sniffing out cyber defenses. A bulked-up Nexus could create facilities to pause or retract transactions, but then it loses its special nature compared to existing alternatives in the wholesale space.
He expects a multilateral Project Nexus to go live within Southeast Asia in a few years. Beyond hammering out technical agreements, it would require law changes around screening for money laundering, for example.
“I don’t know if Nexus will replace our bilateral agreements,” he said, “but it wouldn’t exist without them.”
And for all the progress made in Southeast Asia regarding digital payments, it’s still a cash-based economy. Since Bank of Thailand launched PromptPay in 2016, the portion of Thais using digital payments has risen from 5 percent to about 33 percent. That’s a big jump, but two-thirds of Thais still don’t handle electronic money for daily payments. There’s still a long way to go.
