APEC Working Group on Electronic Financial Transactions Systems (E-FITS) Final Report 26 July 2002 Contents Introduction..................................................................................................................3 Chapter 1 Vertical and Horizontal Case Studies.....................................................7 Overall Case Study Summary................................................................................7 Individual Case Study Summaries........................................................................9 Korea: On-line Securities Trading - Developments and Trends........................9 Malaysia: Electronic Banking in Malaysia ......................................................12 Brunei Darussalam: Environmental Scanning on Paperless Payment Channels...........................................................................................................13 Thailand: The BAHTNET Initiative................................................................17 Hong Kong: The Financial Infrastructure in Hong Kong................................19 Singapore: E-Government - The Public E-Service Infrastructure (PSi) and E-Payment Capabilities....................................................................................22 Chapter 2 Small-Scale Survey: Issues on Consumer Protection in Cross-border E-finance..........................................................................26 Chapter 3 Conclusion and Recommendations .......................................................31 (3A) Regulatory Issues ........................................................................................31 (3B) Payment Issues ............................................................................................35 (3C) Consumer Protection in Cross-border E-finance ......................................39 Annex A Full Reports of Case Studies Annex B Individual Small-Scale Surveys Annex C Glossary Annex D Members of the Working Group 2 3 INTRODUCTION 1. The rapid growth of the Internet in recent years has led to a proliferation of on-line financial services offered by both the public and private sectors. Financial institutions have rapidly expanded their range of banking, securities and insurance business in the on-line environment, while governments have begun to harness the Internet to deliver not just information, but also transactional services that require payments. While the electronic delivery of financial services and electronic payment and settlement of financial transactions (commonly referred to as “e-finance”) to consumers, businesses and financial institutions has generally lowered the costs of business operation, it has also created new risks. 2. E-finance also changes the nature of competition for financial institutions. A borderless environment that drives transaction costs to almost nil could mean footloose customers and businesses. Cyberspace blurs physical distinctions, allowing financial institutions to root themselves anywhere yet seamlessly offer the same services on-line. Jurisdictional boundaries become harder to enforce, while new business models potentially raise new operational, strategic and systemic risks. 3. E-finance is evolving so rapidly that few regulators have put in place regulatory frameworks for e-finance in areas such as prudential restrictions on financial institutions, consumer protection, data privacy, and cross-border transactions. Most governments have responded by expanding the scope of existing laws and regulatory provisions to cover electronic transactions. In a few instances, economies have enacted laws and regulations specific to electronic transactions, though some are in draft form or are non-binding yet. 4. With endorsement from APEC Finance Ministers in September 2000, the Electronic Financial Transactions Systems (E-FITS) Working Group was established to develop and implement programmes to foster and promote the use of electronic means for conducting financial transactions within the region. The Working Group submitted an interim report to Finance Ministers in September 2001 4 which provided a current status of e-finance development in the APEC economies and the relevant frameworks governing the provision of such services, and identified issues for further development of e-finance in the region. The report also gave an overview of the current state-of-play of e-finance work done by other international fora. 5. The interim report highlighted several observations in the development of e-finance in the APEC region. First, policy coordination among government ministries and agencies was identified as a key prerequisite for the development of a coherent strategy to promote and deliver e-finance services. The Internet revolution challenges our traditional notions of government and increasingly requires it to operate as a networked, “joined-up” entity, rather than just as a collection of departments. Governments must begin to think “horizontally” from the perspective of their customers, instead of only “vertically” from the perspective of their agencies. 6. Secondly, governments need to maintain flexibility in their regulation and supervision of e-finance activities, and to avoid overly burdensome regulation of new activities that may stifle the development of e-finance. There is room to encourage authorities to regulate with a light touch, to depend more on market self- regulation (to the extent possible), and to eschew one-size-fits-all solutions. They may have to move from rules to guidelines, from a positive list approach that spells out what is allowed to a negative list approach that spells out only what is prohibited. Governments should also work more closely with the private sector to develop regulations that are sensitive to evolving market conditions, and which allow new technologies to flourish. 7. Thirdly, in recognition of rising consumer demands for security in e- finance transactions, particularly those of a cross-border nature, economies should engage in closer dialogue and co-operation. E-finance is transcending borders and effective regulation of this growing sector will require an international response. 8. Fourthly, by its very nature, e-finance would benefit from straight- through processing and this can be facilitated by robust and secure domestic payment and settlement systems and also cross-system and cross-border linkages to achieve 5 payment versus payment (PVP) and delivery versus payment (DVP) settlements to reduce settlement risks. 9. In light of these observations, the Working Group members embarked on an exercise that aims to identify sound practices, prioritise among prospective improvements, and formulate sound regulatory policies in the area of e-finance. Members saw merit in undertaking case studies to share experiences and expertise in the development of e-finance in the APEC region. Several members of the Working Group (namely Brunei Darussalam, Hong Kong, Korea, Malaysia, Singapore and Thailand) contributed case studies that addressed particular horizontal and vertical policy issues in areas such as e-government, e-banking, on-line securities trading, infrastructure and regulatory approaches. These case studies are summarised in Chapter 1 and attached to the report in Annex A. 10. E-banking has developed explosively in recent years, but the accessibility and dynamism of the Internet brings both benefits and risks. Though most types of risks inherent in e-banking are not fundamentally different from traditional banking, technology risks have become more prevalent and grown in complexity and magnitude. In the new technology-driven environment, it is critical that banks have flexible and responsive internal operating processes as well as sound and robust risk management systems. Regulators should encourage adoption of sound practices by financial institutions offering e-banking. Regulators should also allow scope for industry innovations in e-finance, but they cannot do this without regard for the soundness of the institutions, the interests of the depositors and customers, as well as the potential impact on financial sector stability. 11. In the securities industry, on-line trading has empowered individual investors with access to information and markets at reduced cost. However, the importance of investor protection and reliability of on-line trading systems should not be underestimated. Investor confidence in the security and soundness of on-line trading depends on the existence of investor protection measures to prevent manipulative or fraudulent activities and their own understanding of market risks. 6 12. In the area of e-payments, the Working Group emphasised the significant roles that governments could play. At the strategic level, governments should establish the national IT vision and affirm their support for the development of e-finance. More practically, governments have a catalytic role to play in the establishment of payment architectures – both public and private – that are open, robust, scalable and that can be linked across borders to reduce settlement risks. Governments could also work with the private sector to promote the connectivity between their systems so as to foster greater consumer take-up of e-finance. Finally, governments could leverage on some of its monopolistic functions – such as the collection of taxes and charges – to generate the critical mass of e-payers that are comfortable with on-line payments. This also helps private payment gateways achieve the economies of scale they otherwise