The internet is coming – with risks and benefits – to new areas in APAC
New digitized financial services are coming to previously poorly connected areas in Southeast Asia and the Pacific. It should be inclusive and cost effective, and serve the interests of people at large.
As new investments in cables and satellites look set to bear fruit, central banks in remote and island regions of Southeast Asia and the Pacific—running from Indonesia through Papua New Guinea and to Samoa—need to prepare for the changes and challenges to financial supervision and regulation that broader internet has brought to economies throughout the developed world.
As internet access reaches remote, poorly connected areas, governments and communities must adapt to new opportunities and problems. Photo: Chris Tagupa
For now, over two billion people in Asia and the Pacific (APAC) have no access to internet either because they live in areas not connected at all or it is too expensive. At the end of 2018, mobile internet penetration in the Pacific Islands was the lowest of any region in the world, at just 18% of the population.
Yet numerous initiatives promise to make the internet affordable and available. The Manatua cable for example has landing points in Cook Islands, Niue, Samoa, and French Polynesia, and the Coral Sea cable in Solomon Islands, Papua New Guinea, and Australia. The December 2019 launch of the Asia-Pacific Remote Broadband Internet Satellite Project with Kacific Broadband Satellites International Limited, a next-generation broadband satellite operator, is expected to lower data connectivity costs and broaden international bandwidth for regions that have previously been lagging. The satellite—which will serve 25 nations across Asia and the Pacific—is one of several developments committed to high-quality, low-cost satellite broadband.
As experience elsewhere attests, greater data connectivity will enable digitization and efficient means of distribution of innovative products and services, that fuel socio-economical transformations, and upend traditional industries.
The anticipated innovations in connectivity are expected to transform financial technology (fintech) in particular. This has become particularly urgent amid the upheaval, financial and otherwise, that has accompanied the response to the Covid-19 pandemic. From mobile money, to sending remittances and bringing in electronic payment systems, we’ve seen the use of digital technology help people in the Pacific overcome the disadvantages of distance. Policy makers need to prepare for several implications:
Better policy should precede the technologies. If countries are to adapt and fully benefit from digitization, central banks will need forward-looking policy agendas. Such policies should concentrate on the main areas that will be most affected by the new investments: legal and regulatory frameworks, a need for focus on consumer needs and protection, financial and digital literacy, cybersecurity, cyber safety, and measuring and modelling impact.
The policies must likewise concentrate on technologies that have proven most disruptive in more advanced regions. These include artificial intelligence, distributed ledger technology, big data and analytics, digital financial services, and new ID technologies based on biological recognition that establishes digital identity.
Regulators can also leverage innovative technology solutions. Central banks must monitor structural transformation of financial markets, maintain financial stability, and help make digital financial services safe, transparent and reliable.
To support promising innovations, several countries are developing regulatory sandboxes to live-test new products, services, or business models and determine appropriate regulatory treatment before full market release.
The Bank of Papua New Guinea, for example, has launched a regulatory sandbox that will allow small-scale, live testing of innovations by private firms, including fintech startup companies, in a controlled environment under the regulator's supervision. One such example is a Digital Access Tool developed to provide people access to finance in a pilot project with two microfinance banks in Papua New Guinea. And the Pacific Islands Regional Initiative has developed a regional regulatory sandbox allowing members to access information via an electronic portal on applications, status, and jurisdictions in which new innovations may be trialled.
Digital payments must be stable and secure. For the individual consumer, digital transformation will be most evident in the nature of payments. Payment methods have proliferated as a variety of mobile applications have joined the ranks of card payment and cash. New forms of payment instruments continue to surface. Even national central banks—including in Cambodia, Canada, the People’s Republic of China, Japan, Sweden, Thailand, as well as the European Central Bank—are considering whether to introduce digital payment instruments alongside, but similar to, cash for use by the general public, although this is not imminent.
Know-your-customer procedures need to be clearly defined and strengthened to enable financial institutions and money service providers to better understand customers, to manage risks prudently, and to avoid being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. It is also important for maintaining or establishing correspondent banking relationships essential to connecting local economies with the international financial system, for making payments across borders for international trade and remittances, and for financing humanitarian work.
Over the last decade, global banks have been limiting correspondent banking relationships with local banks in a number of Pacific Island countries, as well as in other regions with sometimes unintentional and costly consequences. Those most affected are likely to include the families of migrant workers, small businesses that need to access working capital or trade finance, and recipients of life-saving aid in active-conflict, post-conflict, or after disasters.
Yet underpinning know-your-customer policies is a well-disseminated personal ID system that can verify customers biometrically and perform electronically. ADB is supporting a pilot project in Samoa to establish know-your-customer procedures and customer due diligence among money transfer operators, for example. This is in line with anti-money laundering and counter terrorism financing measures to facilitate opening and maintaining bank accounts in Australia and New Zealand and to address the high cost of remittances.
Systemic risk and cyber threats must be addressed. New technologies will place greater demands on cyber resilience. Information security has traditionally focused on measures such as antivirus protection, software updates, and data backups. More attention is needed on containing systemic threats to entire financial systems arising from new technologies, products, and services.
Robust data protection and data management is also required to protect against leaks and tampering. New digital financial products and services must be designed with data protection and cybersecurity integrated from the outset and central banks and relevant authorities must establish clear legal and regulatory standards and guidelines. Internet safety and security mechanisms should protect customers from a loss of money or identity and systems from hacks that can reverberate across entire sectors.
Finally, central banks need to develop better modelling for explaining or predicting digital finance impacts in several areas. These include newly-included individuals, new credit, new deposits, annual reduction in government leakage, new jobs, and economic growth, among others.
In short, new digitized financial services are coming to previously poorly connected areas in Southeast Asia and the Pacific. Central banks and governments need to make this connectivity inclusive and cost effective, to ensure the right regulation is introduced and competition enhanced, and to help emerging financial technologies add value to industry and serve the interests of people at large.
Lotte Schou-Zibell is Regional Director, Pacific Liaison and Coordination Office (PLCO), ADB.
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