Banks aren’t the obvious winners for winning digital payments in Asia Pacific. They’ve been slow to capture B2C (business-to-consumer) and peer-to-peer flows enabled by e-commerce. E-wallets based on mobile phones dominate e-commerce payments in the region, far more than elsewhere.
Despite losing market share in B2C, bankers say they are prospering, and that now is the time to invest heavily in the business. Because the battle is now moving into the much bigger business-to-business (B2B) world, traditionally a bastion of commercial banks.
What happened in B2C? The headline data shows banks have been retreating from cross-border payments.
The Bank of International Settlements estimates that from 2013 to 2023, the volume of cross-border payments increased by 61 percent, and the value of those payments grew by 37 percent. But banks are reducing their correspondent banking relationships (down by 29 percent over that decade) and cutting the number of corridors (country pairs) they serve.
This is mainly due to regulatory, reputational and financial risks related to anti-money laundering and counter-terrorist financing. Such fears are especially pertinent in emerging markets, but the banks’ retreat is across all regions and all currency pairs, including the dollar and its competitors.
There’s also a cost issue. In the B2C world, consumers insist on payments being real-time, because that’s what they experience from platforms like Amazon or Alibaba. For banks to keep up, they need the IT infrastructure to connect to those platforms by API, which is a costly investment. So long as B2B corporate clients aren’t demanding real-time outcomes, banks aren’t spending money on building that capability.
The fight moves to B2B
Banks are now rethinking the B2B world because their corporate customers are beginning to demand change. “Platforms pioneered e-commerce,” said Kaiwan Turel, a director in HSBC’s treasury solutions group. “But legacy companies are also now going into digital commerce.” (The bankers quoted in this story spoke at a conference.)
To retain dominance in B2B requires major changes or banks risk being overtaken. The traditional bank approach is to build everything in-house. That didn’t work in the B2C world of platforms and ecosystems. Now bnaks are looking beyond APIs, to adopting artificial intelligence to provide forecasting and predictive analytics around cash flows.
“Every transaction is becoming an e-commerce transaction, which is new to banks,” said Anthony Lin, head of transaction banking for Asia at Standard Chartered Bank. “We have to invest more in tools that create value, not just provide the service itself.”
The wallets win, so far
Banks can’t compete against fintechs that are making cross-border payments practically free: what they want is the user data. What customers value is convenience. The winner in the B2C world has been e-wallets, and nowhere more than in Asia Pacific.
Whereas credit and debit cards remain the top payments methodology for e-commerce in the rest of the world, they account for only 15 percent in APAC. E-wallets on the other hand are expected to account for 73 percent of APAC e-commerce payment volumes by 2026, according to a February report by Payments & Commerce Market Intelligence.
E-commerce is now a phenomenon: the Asian Development Bank pegs the global B2C (business-to-consumer) e-commerce market at $4.1 trillion as of 2022; APAC constitutes about 61 percent of the total.
The ADB notes that B2B is three times as large, implying a wholesale opportunity of $12 trillion (it doesn’t say whether APAC’s share is as large; DigFin found a huge discrepancy in B2B market sizes among online sources).
The fruits are spread unevenly: countries with national e-payment services, such as China, Korea and Singapore, have robust e-commerce activity. Countries with a lot of unbanked, and with populations who trust cash more than phones, are behind, despite digitalization efforts during the Covid pandemic.
A rising tide
Despite this relative decline, since 2021 commercial banks have begun to make more money from B2C payments, even in areas where they have been surpassed, such as in person-to-person remittances or low-value e-commerce purchases.
That is thanks to higher interest rates: as banks pass around other people’s money, it spends a bit of time on deposit. Add up the flows, and that’s a lot of money. Banks can either earn interest on it or they can lend it out for an even higher margin. They also earn revenues on foreign-exchange transactions.
But there’s only so far this will take banks. The regulatory and other costs are too high to serve many corridors, which has opened the door to fintechs. The process of correspondent banking looks increasingly cumbersome compared to what’s now possible with digital technology: a typical cross-border payment involves multiple identity checks and reconciliation with customers, at least one central bank, and one correspondent bank.
SWIFT has updated its messaging capabilities, bringing speed and transparency, but its improvements don’t change the underlying structure of correspondent banking or lower the costs of compliance.
Those frictions explain why the World Bank reports that the average remittance still costs 6.5 percent of the transaction’s value. That has enabled fintechs to expand into payments, from Adyen to Wise.
Most of these fintech solutions work best for small-value transactions, although a few, such as Ripple’s blockchain-based network, are aiming at wholesale businesses.
Asia’s digital landscape
These B2C successes are built on top of even bigger changes that have already occurred at the domestic level. In Asia, China’s electronic payments space was revolutionized by Alipay and WeChat Pay, both of which used money movements to turbocharge digital conglomerates.
India charted a different course, led by its government, which has over the past two decades built public digital infrastructure, including for identity and mobile payments (its United Payments Interface).
Southeast Asian countries overhauled their domestic payment infrastructure to bring in real-time capabilities, enabling mobile payments among bank accounts via QR codes. Today these countries are starting to integrate these systems, so that people can visit neighboring countries and pay using their domestic e-wallets.
Although these solutions involve money sitting in a person or small business’s bank account, the banks themselves lose out on the float, on the transaction fees (including the lucrative FX piece), and on the data that powers insights into user behavior and wants.
In these cases, the banks are just dumb pipes.
From B2C to B2B
Banks see opportunity in digitalizing the much bigger industry for wholesale cross-border payments. If they can bring that same real-time experience to large-ticket transactions, they can flourish. The retreat from low-value transactions began when interest rates were low and still going to zero (or even negative). Now they can address the wholesale market with the macro winds at their back.
Plus, there’s less competition. Wallet-based transactions are limited to small sizes. Compliance usually kicks in at a certain value threshold. Also, because these transactions are real time, there is no scope for recouping funds sent by mistake or because of fraud, so from a risk perspective it’s best to keep these small.
Those constraints favor unlicensed fintech platforms. But in the B2B world, banks are already built around compliance and risk management. And they have corporate relationships that naturally extend payments into other areas of cash management.
But there’s also a lot more to lose if banks don’t take the initiative. These corporate enterprises are lucrative customers. They pay by credit card, which generates fees. Global banks in Asia once had a big merchant acquirer presence, which they exited when low interest rates made it unprofitable, but they are piling back in.
There is also reason to be optimistic that many banks can find lucrative corners of the business. Ashutosh Kumar, head of global transaction banking for APAC at Mizuho Bank, notes that payments is by nature fragmented. Only US dollar clearing is dominated by the big money-center banks, payments is very competitive. “No one bank can hold all the cash; what would you do with it?” he noted. “Fragmentation and competition are always there.”
Tech upgrades needed
Banks are keen to leverage their advantages and new investments in technology to go after B2B business. If B2B goes digital, then fees for facilitating transactions will go to zero. The data layer becomes the prize, enabling banks to understand their customers better, and offer other services.
“AI and big data is next,” said Shekhar Bhandari, president for small and medium enterprises at Kotak Mahindra Bank. “The demand is coming now from corporations, not just from individuals. This will drive our investment.”
Banks are now putting money into core systems so they can leverage AI, machine learning, robotic process automation and other tools to make the process as efficient as possible.
They are also investing more in fraud detection and cybersecurity. There is a little more wiggle room in B2B business to allow a little friction – a time lag of, say, 30 minutes, to confirm a transaction. That delay is unacceptable at a retail level but should be fine for wholesale, as it still represents a substantial improvement, notes Terence Tan, head of sales for APAC treasury services at BNY Mellon.
The alternative, he says, is banks share more data among each other to spot potential frauds; data sovereignty laws make this difficult, but SWIFT and others are working on technology solutions such as federated AI that might overcome these problems.
New paradigms
The biggest opportunity for banks is tokenization. Moving money by tokens means the identity and the information about the transaction are baked into the token representing the money itself. That’s very different to the norm for banks, which is to keep all of that information in the customer’s account. A token provides the same information regardless of where it travels; whereas moving money among accounts requires multiple KYC, AML, and reconciliation operations.
This is why in May, the Bank of International Settlements urged banks to embrace tokenization. It has sponsored a pilot called Project Agora to help banks learn how to use blockchain-based technology for pre-screening, atomic settlement, and more effective AML checks.
“Tokenization could substantially reduce duplication and miscoordination, thereby revitalizing cross-border payments,” said the BIS report.
This means correspondent banks will need to integrate with new types of partners, or new means of communicating with other banks.
“Interoperability is not just about connecting to domestic payment schemes, but also to crypto and blockchain-related networks,” said Jody Aldridge, an executive for cross-border solutions at Visa. “Banks need to collaborate.”
Transaction banks have watched as low-value B2C payments have transformed into e-commerce B2C flows dominated by e-wallets, and facilitated by fintech competitors. Digital commerce has grown the economic pie for everyone, which also helps banks, but they are getting a smaller and smaller slice of the pie.
Banks are best positioned to adopt those innovations to the B2B market – if they have the IT architecture ready. Relying on creaky core systems won’t cut it any longer, so the first imperative is a transition strategy, to break data out of silos and enable collaboration and API connectivity. For banks that have this in place, it’s about investing in data and data governance, AI, and blockchain.
Even those things won’t be enough, though: the digitalization of large-enterprise commerce means the B2B space is up for grabs.
The deciding factor may be ditching the B2C/B2B mindset. It’s not about defining customer segments: it’s about defining use cases based on individual customer needs. It’s about using innovation to create a lifecycle of payments, intermingling wallets and credit cards, tokens and accounts. Fintechs have a more user-focused mindset, which gives them the advantage, but banks understand regulation and risk management.
Success then is likely to come from alliances between banks and tech companies, not as client-vendors but as partners. Treating fintechs as 50-50 partners might be the biggest mindset challenge of all.
