In 2023, digital payments accounted for 50 per cent of the total transaction value in six ASEAN Member States (i.e. Indonesia, Malaysia, Philippines, Singapore, Thailand, and Viet Nam), as reported in the e-Conomy SEA Report by Google, Bain, and Temasek. Across ASEAN, 80 per cent of financially included adults made or received digital payments in 2021. The value of gross digital payment across the six largest ASEAN economies reached 806 billion US dollars in 2022, marking a 14 per cent year-on-year increase and is estimated to rise to close to 1.2 trillion US dollars by 2025.

Additionally, account ownership or access to mobile money is now higher than 60 per cent in seven out of nine countries covered by World Bank Findex. The number of consumers holding a bank account or mobile money account has grown from 3 per cent to 60 per cent in Cambodia, from 9 per cent to 62 per cent in the Lao PDR, and from 12 per cent to 62 per cent in Indonesia by 2022. Furthermore, five ASEAN Member States (i.e. Thailand, Viet Nam, the Philippines, Malaysia, and Indonesia) are among the top 10 countries in the world in terms of digital wallet penetration (World Economic Forum, 2023). Recognising the rapid growth of digital payment across ASEAN Member States, the ASEAN Finance Ministers and Central Bank Governors’ Meeting (AFMGM) pursued the establishment of an interoperable cross-border digital payment in the region, aiming to facilitate trade and unlock the potential of cross-border e-commerce and the digital economy in ASEAN.

The growth of digital payment in ASEAN could facilitate business growth in the region, particularly for Micro, Small, and Medium Enterprises (MSMEs). Digital payment could support MSMEs, which contribute to 97 per cent of businesses in the region (UNDP Insurance and Risk Finance Facility, 2024), by improving cash flow through faster payment processes, reducing costs associated with printing, mailing, and processing checks, increasing sales by providing more payment options for customers and improving access to finance for MSMEs. Additionally, most digital payments are made to merchants, including MSMEs, underscoring the importance of MSMEs’ acceptance of digital payments to drive further the adoption and transaction value of digital payments in ASEAN. However, digital payment use among micro-merchants is inconsistent, indicated by varied levels of activity, with more micro-merchants adopting, but not necessarily sustaining, the use of digital payment.

Against this backdrop, the ASEAN Working Committee on Financial Inclusion (WC-FINC) partnered with the Better than Cash Alliance (BTCA) to develop an ASEAN Policy Toolkit to Unlock Responsible Digital Payments for Micro-merchants in ASEAN. The toolkit leverages the framework of the UN Principles for Responsible Digital Payments to shed light on micro-merchants’ conditions and experiences in broadly using digital payments and financial services. It proposes recommendations for policymakers to address the existing barriers that hinder higher adoption and sustained use of digital payments among micro-merchants. It also includes various policy measures to address trust barriers, promote digital financial inclusion, and strengthen consumer protection. The toolkit is developed through demand-side qualitative research in Cambodia, Indonesia, the Philippines, and Viet Nam, along with desk research and expert interviews with government and business stakeholders in ASEAN.

Key insights from the toolkit

The toolkit identified insights on the adoption pathways for digital payment and the existing four barriers to sustained use of digital payment.

Adoption pathways for digital payment

Many micro-merchants have adopted digital payment to provide customers with more payment options, eliminate the need to handle small change, earn fees for offering digital financial services such as cash deposits and withdrawals, and maintain a real-time account for their business transactions. However, guided assistance with digital payment remains necessary. In some countries, micro-merchants, especially women, adopted digital payment systems through government-backed merchant support or aid programmes, which assisted them during onboarding, access to a network of other merchants using digital financial services, and continued support via dedicated personnel for any arising issues during use. Meanwhile, other micro-merchants adopted digital payment with the support of the Financial Services Providers (FSPs) representatives

Barriers to sustained use of digital payment*

Loss of funds: Many micro-merchants have experienced loss of funds due to mistakes such as transfers to wrong accounts or scams, significantly eroding trust and confidence in digital payments, even if the loss is negligible. In more mature markets, loss of funds drove micro-merchants to switch to providers while continuing to use digital payments, while in nascent markets, micro-merchants preferred to revert to cash.

Data privacy and protection: Micro-merchants bear the burden of protecting themselves against scams and fraud, which have become tougher to police because of their rapid evolution and growing sophistication. Additionally, complex terms and conditions of digital financial services, including digital payments, lead to cognitive overload, particularly for time-poor micro-merchants. Some micro-merchants have experienced information leaks, blaming FSPs for data leaks and impacting trust in digital financial services.

Transparency on pricing: While some micro-merchants are willing to pay for digital payment services, transparency on pricing is essential to keep them on board. However, many micro-merchants discover fees only after being charged, leading to difficulties understanding pricing systems and eroding trust and willingness to continue using digital payments.

Engagement with recourse: Baseline awareness of recourse mechanisms and quick response from FSPs with clear solutions and expected timelines are necessary to create a positive experience for micro-merchants. However, many micro-merchants perceive existing recourse processes as inefficient because they necessitate taking time out of their day to complain and seek solutions in person or long waiting times and processes before speaking with live agents for those who prefer a hotline.

Policy recommendations

The ASEAN WC-FINC is committed to developing and enhancing national financial inclusion strategies and initiatives across ASEAN Member States. WC-FINC has published several guidance notes on Digital Financial Literacy and Advancing Digital Financial Inclusion in ASEAN. At the national level, many ASEAN Member States have also enacted legislation for consumer protection.

The ASEAN Policy Toolkit to Unlock Responsible Digital Payments for Micro-merchants in ASEAN aims to inform and shape the ongoing development of regulations in ASEAN Member States. The toolkit proposes five policy recommendations based on the insights to enhance the adoption and sustained use of digital financial services, including digital wallets, among micro-merchants:

Enabling seamless recourse, especially for disputes involving small amounts

The toolkit proposes that ASEAN Member States provide industry guidance on the timeline and simplified resolution procedures for common small-value disputes. Instruction for FSPs to establish internal customer complaints could also support small value disputes efficiently. ASEAN Member States must also work with industry to create automated, multi-modal recourse systems such as chatbots to be set up by FSPs. ASEAN Member States must provide direction on the average response times on a public database by dispute type and monetary value for FSPs.

Shift the burden of data privacy away from users

The toolkit suggests that ASEAN Member States’ regulators consider simplifying and standardising data privacy messaging to users for ease of comprehension. It also suggests the visualisation of data protection compliance through privacy seals to enable instant recognition of compliance and FSPs’ education of consumers on types of data collected and data privacy risks through government-backed communication on social channels.

Encourage user-centric pricing communication

The toolkit suggests supplementing existing regulations for fee disclosures with guidelines for fee communications designed for user comprehension to ensure fair and transparent pricing. ASEAN Member States could also partner with industry leaders to disseminate good practice guidelines on communicating fees, communication formats, timing, timeframe, and behavioural biases that impact user decision-making.

Use data to identify gendered barriers

The toolkit recommends collecting sex-disaggregated data by financial institutions, including on data protection challenges and redressal rates to improve the service for female micro-merchants, who make up the majority of micro-enterprises. The data metrics could consist of the number and types of products held, penalty fees and losses incurred by users, rate of non-face-to-face confirmation of consent, waiting time for recourse, number of fraud and scam reports, and resolution, etc.

Embed digital financial services support in existing empowerment programmes

The toolkit suggests that ASEAN Member States embed financial literacy training in existing micro-enterprise programmes, partnering with FSPs to provide ongoing support to micro-merchants. ASEAN Member States could also consider partnering with FSPs to expose micro-merchants to digital financial services-specific education and support micro-merchants’ continued use of digital financial services.

Business looking ahead

Over the past decade, ASEAN Member States have put foundational investments in policy frameworks and infrastructure to accommodate the industry innovation that propelled digital financial services to the fore. The next decade is crucial for deepening the adoption and realising the full promise of a digital economy and digital financial services. This toolkit was presented at the 11th ASEAN Finance Ministers and Central Governors Meeting (AFMGM) for their consideration, with the aim to further shape the governance of digital financial services in the region.

As the driver of innovation and one of the main stakeholders in digital financial services, businesses could continue to stay ahead of the curve by delivering the best digital financial services experience and staying relevant to the needs of micro-merchants as the driver of growth in the sector. Businesses could start by addressing the current pain points such as setting the best practices on enabling seamless recourse for disputes involving small amounts, simplifying data privacy messaging to ensure ease of comprehension among micro-merchants, enhancing the fee disclosure and communication to micro-merchants, and partnering with the government agency to support user adoption and comprehension on digital financial services. Addressing the pain points also potentially benefits digital financial services providers through the increase of user base as micro-merchants represent a significant portion of business in the region, and the enhancement of customer loyalty as the providers deliver an excellent digital financial services experience, which both will lead to higher transaction volume in the digital financial services with more micro-merchant engage in frequent transactions utilising digital financial services. Finally, focusing on micro-merchants’ needs will allow digital financial services providers to understand and comply with local regulations better, which will not only build trust with users but also mitigate the legal risks and ensure the long-term sustainability of the business.

*The emerging barriers were analysed through the lens of 5 principles under the UN Principles of Responsible Digital Payments: #2 ensure funds are protected and accessible, #3 prioritise women, #4 safeguard client data, #6 be transparent, particularly on pricing, and #8 make recourse, clear, quick, and responsive.

The full version of the Toolkit is available at: https://btca-production-site.s3.amazonaws.com/document_files/752/document_files/241022_BTC_TTQ_Policy_Toolkit_ASEAN.pdf?1729596843

This article was first published in the April 2024 ASEAN Business Bulletin. It has been slightly edited for this edition.