Trading is at the core of human social interactions, allocating scarce resources from one individual to another based on who has the highest marginal benefit. And central to the role of trading is the usage of money, which facilitates trade. Even our primate cousins can be taught to use money to trade for goods and services.
So naturally, any means to reduce trading frictions across different people and regions tend to be a productive endeavor, making it easier for people to engage in more transactions. But this actually generates other indirect effects which percolate in both economies.
The linkage of PromptPay in Thailand and PayNow in Singapore serves as a great example of how trading frictions in cross-border payments can be decreased to essentially zero in the snap of a finger once financial regulators are on the same page. So, what can we expect from this tie up? There are three clear benefits to the economy, and one additional positive side effect for law enforcement.
More transactions
Around 20,000 Thais are working in Singapore, with many of them sending remittances back home to Thailand of over US$130 million. A quick transfer reduces the risk that family at home may run out of cash for necessities, and also reduces the dependence on grey market payday lenders or loansharks.
Another obvious benefit would be through greater trade in products and services between Thailand and Singapore. Total trade between Singapore and Thailand was over US$15 billion in 2019. With more access to direct importing and exporting, coupled with the availability of platforms like Lazada, Shopee, or JD Central, people may be able to more directly import and export goods or services.
Entrepreneurship
Given the increasing usage of these platforms, we can also expect more entrepreneurship. Why would the payment system directly affect whether you can start a business? The answer may not seem obvious at first, but if you consider setting up a business, a crucial part of the operations is to determine how much money to have in the bank to handle day-to-day operations.
In finance, this is known as “working capital”. For example, payments take weeks to clear, even if you make S$10,000 in a day, you may only receive it next week. So, you would also need to put a certain amount in the bank account to pay for other goods and services in the meantime. In fact, the rule-of-thumb is to hold 75% of your sales for a lean company with no inventory. This suggests you would want to hold S$7,500 in the bank just to maintain operations!
Changing settlement to several minutes can free up a big chunk of the working capital, reducing the costs for people to set up companies. In fact, within Singapore itself, my colleagues Professor Sumit Agarwal and Associate Professor Qian Wenlan, along with other co-authors, show that the introduction of DBS’ PayLah increased business registrations by almost 9% per month in business-to-consumer industries.
Financial Inclusion
Thailand is notorious for being very close to a purely cash-based society, with less than 30% of narrow money being held in depository institutions as of January 2021. This compares with almost 80% for Singapore. For transfers between PayNow and PromptPay, transactions would be directly linked to accounts in Thailand via mobile phones, incentivising people to open more bank accounts. If the model becomes successful in inducing people to access legitimate financial services on their smartphones, then other countries in Southeast Asia may follow suit to increase financial inclusion.
Future expansions of PromptPay and PayNow to permit non-bank digital wallets would increase financial market access even more. When that arrives, banks would have to become more competitive or risk losing customers to mobile-first solutions with nice user interfaces. Hopefully, gone will be the days when a bank can charge you $5 just to pull up your own previous statements.
Implications for the Black Market and Capital Controls
Although this cross-border linkage isn’t the first in the world, it is the first which allows inter-platform operability through multiple participating banks, across different currencies, using the same underlying infrastructure, and with the backing of bilateral financial regulators.
That the payment system itself was approved by both the Monetary Authority of Singapore (MAS) and Bank of Thailand (BOT) is important and has implications on capital regulations and the tracking of international flows of funds. A feature of electronic transfers is the record-keeping nature of the system, which permits both regulators to enforce flows of funds across borders as well as the black market.
I am certainly hoping that the MAS and BOT produce some data analysis on this programme after a trial period, such as the number of new accounts, growth in sales for specific industries, and flows relative to the past, so other countries will better understand the extent of the benefits to the economies.
However, users need to be careful, as more than ever, a simple fat-finger problem may result in permanent transfers to the wrong party. Given the cross-jurisdiction nature of the transfer, it is not obvious whether MAS, BOT, or the sending and receiving banks consider or issue restitutions. So, in the flurry to hire a freelance Thai web designer or business consultant from Singapore, we should be careful when filling out the phone numbers.