Vietnam should consider digital payment system

29-Oct-2020 Intellasia | Dau tu Chung khoan | 6:02 AM Print This Post

Cashless payment is a trend that has grown strongly in developed countries around the world, and it has recently been booming in many areas thanks to the development of financial technology companies (Fintechs). The benefits of cashless payment are great, not only for individuals but also for economic organisations and the economy.

For individuals, cashless payment creates convenience and safety in payment, at the same time increase access to credit from providers for immediate payments. It reduces costs of moving around, cash withdrawal, top up with banks and with other essential service providers.

For merchants and businesses, cashless payment allows them to cut the costs of fund management, cash management, and reduce risks in payment.

However, the biggest benefit of cashless payment for merchants and businesses is the large database of customers, of their shopping habits, shopping demand trends, etc., thereby facilitating them to build appropriate and personalised business and marketing policies. This is a huge advantage, particularly for business with large-scaled and diversified customer base.

For the economy, cashless payment is an essential condition to build a transparent economy, thereby reducing transaction costs (the costs to perform transactions in the economy such as risk costs, contract costs, customer evaluation costs, etc.), and promoting economic activities.

Increased transparency and accountability will make it easier for credit institutions to assess their customers and profit credit to customers, and businesses thus will also have easy access to the capital they need.

Cashless payment is an important tool to limit underground economic activities and fight corruption.

The benefits of cashless payment are huge, but the development of this form of payment is not entirely favourable both in Vietnam and in the world.

Countries with aging population often find it difficult to shift from cash payment to non-cash payment (typically Japan, Spain, Italy, Germany, etc.), while the new developed countries have made a leap in non-cash payment development thanks to the young population structure, such as China and South Korea.

Thus, developing non-cash payment is not a simple task. Japan is a country that has always been at the forefront in technology but is very loyal to cash.

There have been many analyses of these differences, such as demographics, cultural factors, interest rates and inflation, security and safety of payment systems, the development of the informal economic sector, etc.

Five favourable factors

In Vietnam, we have recognised that the development of non-cash payment is one of the key factors for the development of the digital economy and digital infrastructure.

At the same time, the development of cashless payment is also a key tool to make the economy transparent, and curb corruption in the economy.

Considering the factors to develop cashless payment, Vietnam has many advantages. Firstly, the government really wants to develop cashless payment, seen through guidelines and policies.

Specifically, on December 30th 2016, the prime minister issued Decision 2545/QD-TTg approving the project to develop non-cash payment in Vietnam for the period of 2016 2020; Decision 241/QD-TTg on February 23rd 2018 approving the Scheme to promote payment through banks for public services; Decision 149/QD-TTg on January 22nd 2020 approving the National Strategy for Comprehensive Finance to 2025, with vision to 2030.

The purpose of these decisions is to provide synchronous solutions, assign specific responsibilities to ministries, authorities and localities to create a clear change in cashless payment in the economy, change the habits of using cash to using cashless and electronic payment methods.

Secondly, Vietnam is an economy with a young population, nationwide internet coverage and nearly 44 percent of the population using smartphones (being in the Top 15 in the world).

Thirdly, the Vietnam’s economy is developing rapidly and stably, in which deposit interest rates are still high and inflation is about three to four percent. This makes the cost of holding cash high.

Fourthly, the system of banks and fintechs has developed rapidly in recent years. The vibrant competition in non-credit retail services of commercial banks, technology companies supporting payment services, and payment intermediaries.

Fifthly, the legal environment for this activity is more and more complete.

These favourable conditions have helped rapidly develop the value and number of transactions by means of non-cash payment at Points of Sale (POS). Before the Covid-19 pandemic occurred, payment by POS, ETFPOS/EDC always grew at a rate of about 30 45 percent per year in terms of both the number and value of transactions.

However, it is surprising that when the economy was affected by the Covid-19, social distancing measures were applied and online purchases increased, but the growth rate of non-cash payment declined to negative 11.7 percent in the second quarter (Q2) of 2020.

This seems to imply that payment for e-commerce (online purchases) still primarily uses cash-on-the-go (COD) method.

Cashless payment in Vietnam has not seen breakthrough.

The rate of cash usage in payment activities in Vietnam in 2019 was about 80%, according to the International Data Group (IDG), equivalent to that in Japan and Germany. The proportion of cash in the total means of payment M2 in the period from 2015 to June 2020 slowed down at a very low level of 0.003 percentage point per year.

By Q2 2020, this rate was still about 11.8 percent and much higher than the than the adjusted target of below 10 percent in Decision 2545/QD-TTg. It can be said that this goal will not be achieved in 2020.

The reason that Vietnam’s cashless payment has not been as well developed as expected may be that Vietnam’s economy has a sizable informal sector. Nevertheless, looking at the development of cashless payment in China (also an economy with a large informal sector), we can see a breakthrough. The difference between the development of cashless payment in China and other countries is that the country has moved quickly into digital payment without having to develop card payment.

Payments via bank accounts, cheque books, credit cards, debit cards have been developing for a long time in developed countries such as the US, Japan, Western Europe, etc., but no country has made such a leap like China.

Despite prohibiting international card payment companies such as Visa Card, Master Card, American Express from operating in the country, China has built its own card payment system Union Pay with up to 7.6 billion cards issued in 2018, in which 6.9 billion cards are debit cards. However, the cashless payment using cards has not developed as the whole country only had about 34 million POS as of late 2018.

The disadvantages of the card payment system have prevented the development of non-cash payments. For example, stores, supermarkets, merchants, when applying card payment, have to pay fee to the card issuing companies (at least two percent of the selling price), and this fee is charged into the selling price, affecting the revenue; (2) card payment requires fairly high investment in card reader system (POS) with connection to banks, and stores, restaurants, merchants, etc. do not like these fees.

The popularity of smartphones with internet connectivity has allowed China to develop a digital payment system with QR codes, without having to reply on card readers, without the need to use cards, with no fees and less reliance on banks (there may even be no need for a connection with banks when Fintechs can provide e-wallets to users), and the seller does not need to maintain a connection with his bank.

These are the advantages that digital payment method has compared to traditional card-based payment method. Particularly, this payment method can be applied to small business activities, street economy which are very popular in Vietnam.

With clear advantages in terms of young population, the popularity of smartphones with internet connection, the development of the banking system and fintechs, the dynamic of the economy, etc., Vietnam has full favourable conditions to develop a digital payment system that does not depend on foreign card systems.

This not only helps Vietnam create a breakthrough in the development of non-cash payment, but also enhances the autonomy of the economy in integration, protects payment data of people, and promote the development of digital economy.

Now is also the time to reassess development orientations based on card systems and card accepting machines such as Decision 2545/QD-TTg dated December 30th 2016 to have a more practical and feasible orientation.


Category: Finance, Vietnam

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