5 minute read 22 Sep 2021
Aerial view of river by Ho Chi Minh city during sunset

RCEP: How Asia Pacific’s trade deal can reshape financial services

Authors
Duong Nguyen

EY Vietnam Consulting Chairwoman; EY Asean Financial Services Business Acceleration Leader; EY Vietnam, Laos and Cambodia Financial Service Leader

Voted in the Top 15 FinTech influencers in Vietnam. Helping organizations transform to succeed in the digital era.

Brian Thung

EY Asean Financial Services Leader

Outgoing and diligent operator. Inclusive leader who welcomes diverse thoughts and views.

5 minute read 22 Sep 2021

15 Asia-Pacific countries have signed an agreement creating the Regional Comprehensive Economic Partnership (RCEP). 

In brief
  • Homogenization of the business environment across nations and liberalization are part of RCEP's agenda.
  • Across financial services, this refers to removing regulation that discriminates against providers concerning market entry or commercial presence.
  • Three pockets of opportunity include regulatory tailwinds for FinTech, MSME growth agenda and a boost for internet economy and payments.

After almost a decade of negotiation, 15 countries – including two of the world’s three largest economies – have finally come together and agreed to create the Regional Comprehensive Economic Partnership (RCEP), a multilateral free trade pact with the aim of reducing tariffs and streamlining regulations.

The RCEP broadens and deepens engagement of 10 Southeast Asian nations' (Singapore, Brunei, Indonesia, Malaysia, Thailand, Cambodia, Laos, Myanmar, the Philippines and Vietnam) with Australia, China, Japan, Korea, and New Zealand.

This historic trade deal, signed in November 2020, has a clear and simple mission: to establish a comprehensive, high-quality and modern partnership for members to expand regional trade and investment. Given the agreement’s scope – the 15 Asia-Pacific signatory countries account for about 30% of the world’s population and gross domestic product (GDP) – few would question its potential contribution to long-term global and regional economic growth. The Peterson Institute for International Economics, for example, estimates that the deal would increase RCEP members’ real income by U$S174b, or 0.4% of their aggregate GDP, in 2030.

But the significance of this agreement goes beyond headline economic figures. From a geopolitical perspective, it will help Asia-Pacific overtake the European Union as the worlds’ biggest trading bloc. For companies and investors who will have to navigate this seismic shift in the world’s economic center of gravity, it is equally important to begin assessing how the impact may trickle down to specific industries.

Financial services will be one of the sectors benefiting significantly from this agreement because part of the RCEP agenda deals specifically with financial service liberalization. Trade policy reforms commonly implement these measures to remove regulations, either quantitative or qualitative, that discriminate against foreign financial services providers (FSPs) and domestic FSPs in the areas of market entry and commercial presence.

But why would the removal of discriminatory regulations be of such importance to Asia-Pacific’s financial services industry? To start with, some financial products and services in the region are highly localized and, in some markets, underutilized.

For example, the average banking penetration among ASEAN nations is about 50%, compared with the near 100% of the more mature RCEP bloc markets such as New Zealand and Australia. Other services, including payments, lending and insurance, face similar scenarios, underscoring potential massive market opportunities.

Financial services and technology players who want to capitalize on these prospects will need to create a broader ecosystem to offer a wide range of products and services to consumers across borders without excessive regulatory barriers. As the RCEP addresses those restrictions, three key pockets of opportunity will likely surface:

  • A regulatory tailwind for FinTech: With the trade pact ensuring market access to cross-border players and equal treatment of both local and foreign suppliers, a new wave of innovative and regional-level FinTech players should emerge in the RCEP block. The agreement mandates that member countries fully open at least 65% of the services sector and ensure transparency of regulations. Such changes will allow for cost savings in technical and regulatory processes and facilitate easier cross-border market entry and expansion for FinTech players in the region. With the RCEP presenting a better-connected regulatory landscape, this 2.2 billion population market would be "too big to be ignored" for any serious players in payments, lending, WealthTech, and InsurTech.

  • Opportunities in micro, small & medium enterprise (MSME) growth agenda and massive financing gap: RCEP members' keen interest in supporting and fostering the growth of the MSME sector can create new opportunities. This is especially the case for MSME lending players targeting the underserved emerging economies in ASEAN. Historically, despite ASEAN’s MSME development policies and several existing FTAs, there has not been much evidence to suggest an improvement in MSMEs’ access to financial products.

    According to World Bank data, East Asia and the Pacific account for about 45% of the global MSME financing gap, which stands at around US$2.37t. Such unresolved MSME financing gap requires a robust alternative financing ecosystem and financial services liberalization in the bloc could open the doors for regional MSME-focused lending providers to tap this large, underserved market.

    Since RCEP involves a mixture of high-income economies with a mature investor base, as well as upper middle-income and lower middle-income economies, it creates a promising landscape for MSMEs and investors focusing on the regional bloc. Further, RCEP could also create opportunities for new e-commerce players, crowd-funding platforms and P2P lenders in the region that would add non-traditional financing options for MSMEs.

  • A boost for internet economy and payments: Southeast Asia is home to 360 million internet users, with 90% of them connected via mobile phones. And while its internet economy market is poised to reach US$300b by 2025, the region's adoption of cashless transactions only stands at 40%, which is half of the benchmark level in the US and UK. Such under-penetration, coupled with a new flow of e-commerce activities, could create digital payment opportunities for lifestyle banking, FinTech players, and super apps. A report conducted by the European Parliament indicates that the RCEP could help boost low-income members’ light manufacturing products output, while developed countries would see an increase in the production of high-tech goods.

    It is also worth noting that RCEP members have agreed to maintain the practice of not imposing customs duties for electronic transmissions, which will strengthen digital content platforms’ prospects in the region. The agreement also includes provisions to support the development of new financial services and payment, clearing systems and strengthen cooperation in e-commerce.

Summary

Whether the RCEP can truly deliver on its promises to bring long-term business and growth opportunities to the entire region will likely take years to assess. But once the agreement comes into force, changes in regulations in various countries and their impact on financial services and other industries may happen fast. If business leaders wish to capitalize on the opportunities, they would be wise to start preparing, by investing in research and the necessary infrastructure, before their competitors catch on.

About this article

Authors
Duong Nguyen

EY Vietnam Consulting Chairwoman; EY Asean Financial Services Business Acceleration Leader; EY Vietnam, Laos and Cambodia Financial Service Leader

Voted in the Top 15 FinTech influencers in Vietnam. Helping organizations transform to succeed in the digital era.

Brian Thung

EY Asean Financial Services Leader

Outgoing and diligent operator. Inclusive leader who welcomes diverse thoughts and views.