The Impact of Technology on Financial Development in East Asia.

• Author: Yam, Joseph

Financial institutions are rapidly increasing their use of technology to streamline operations, expand trading activities, improve service and minimize risks. In similar fashion, financial markets in East Asia are rapidly developing in breadth and depth to meet this challenge. The development of these markets requires not only new products, new players and global rules, but also a robust financial infrastructure that ensures efficient, secure and timely clearing, settlement and payment of financial transactions. Technology has been a major contributor to the development of financial markets. Until recently, growth in the volume of financial transactions was constrained by the physical burden of paper-based transactions and the capacity to communicate information. However, once information could be reduced to electronic form, large amounts of financial information as well as value could be processed and transferred across markets.

By linking local markets through networks, technology has created the global market. It has flattened the hierarchy of business by cutting out inefficient layers and middlemen, so that the producer can reach the consumer directly. It has also "empowered" the individual consumer and producer by increasing his access to information, his capacity to process that information and his capacity to reach out directly to other consumers and producers almost without restraint.

Towards this end, Asian central banks are beginning to introduce Real Time Gross Settlement (RTGS) inter-bank payment systems as the cornerstone of a modern electronic financial system. At the same time, the stock exchanges, futures markets and debt markets are also adopting modern clearing and settlement systems using the latest computer and telecommunications technology As global technology standards and market practices begin to converge, technology has become available to link domestic markets together to facilitate seamless trading in financial instruments.

Yet many cross-border links between Asian financial markets are indirect and often inefficient. An Asian Monetary Network--a "system of systems" that links market participants internationally--is needed to build the intra-regional market infrastructure of the 21st century. This innovation would greatly enhance central and commercial bankers' efforts to eliminate systemic risk--the risk that failure of one party in a payment system will cause the failure of other parties to meet payments. It will also reduce liquidity, credit and Herstatt risks.(1)

One such emerging network within this framework is the move to link RTGS systems so that financial transactions can eventually be conducted on a payment versus payment (PvP) and delivery versus payment (DVP) basis. This would reduce and eliminate many of the payment system risks currently inherent in the existing systems. From the perspective of a central banker, the overriding policy concern is to ensure that these inter-bank crossborder exposures are fully understood and that effective steps are being taken to reduce and even eliminate them if it is possible and cost-effective to do so. The other emerging network within the Asian Monetary Network is AsiaClear, the concept of linking Asian debt clearing and settlement systems.

TECHNOLOGY INNOVATION IN EAST ASIA

Asia is still largely a cash and paper-based payments society, with Japan being very much in the vanguard of using electronic payment systems. At last count, there were roughly 150,000 Automatic Teller Machines (ATMs) and 250 million credit cards in eight East Asian economies, of which 125,000 ATMs and 225 million credit cards were in Japan. In China, the number of ATMs and credit cards has risen to 12,000 and 20 million respectively, with an additional 100 million cash dispenser cards. But transactions are still paper-based, with an average of 540,000 checks valued at U.S. $5 billion cleared daily while electronic payments amount to 12,000 transactions valued at U.S. $40 billion daily.(2)

Asia is, however, adopting electronic commerce and payment systems at great speed. Internet banking, electronic money and electronic commerce are being evaluated and considered from Tokyo to Jakarta. Virtual banking and virtual money will appear in Asia--it is only a matter of time. As incomes in Asia rise and Asians become more computer-literate, the potential for electronic commerce is being realized rapidly. According to Dataquest, the Asia Pacific information technology (IT) market between 1995 and 2000 will grow from U.S. $6.4 billion to U.S. $22 billion.(3) Asia accounts for 56 percent of the world's population, but only one-quarter of total IT spending.(4)

IT penetration in Hong Kong is a good example. Forty-one percent of adults in Hong Kong own personal computers (PCs), compared with 52 percent in the United States. Ninety-four percent of Hong Kong adults with PCs and modems access the Internet, compared with 84 percent in the United States. VisaCash(5) is live in Hong Kong and Mondex(6) which is already on trial, will be further expanded. Hong Kong also has one of the finest telecommunications infrastructures in Asia, with 200,000 kilometers of fiber optic cable linked to 1,500 buildings. In addition, PC banking and video-on-demand (VOD) technologies have already been introduced.

Asian economies have clearly identified electronic commerce as the wave of the future. Singapore has the "Singapore One" network and the "IT2000 Vision" of Singapore as an intelligent island. The concept of Singapore One is a national high-capacity network platform that will deliver multimedia services to the workplace, the home and the school at two distinct levels--an infrastructure level of networks and switches and a level of applications and multimedia services. In similar fashion, Malaysia recently announced its Multimedia Super-Corridor (MSC) project. The 15 by 40 kilometer Corridor will be constructed in a fully digital fiber optic network, stretching north from the center of Kuala Lumpur to Putrajaya, the federal government's new administrative center, and to the south to the new Kuala Lumpur International Airport in Sepang.

Japan, Korea, Taiwan and China all have National Information Infrastructure (Nil) initiatives that will encompass electronic commerce and payment systems by the early 21st century. The NII vision in Japan has two strategic goals: First, the creation of new economic activities such as the production of intellectual property, including software, information content, entertainment and information services, to complement Japan's competitive advantage in hardware technology; and second, the creation of an advanced NII to make existing industries more productive and competitive through the application of network technologies.

The Korean Government also recognizes the strategic importance of establishing an Information Superhighway network both to serve as a core element of the country's infrastructure in the new information society and to serve as the basis for strengthening national competitiveness. Like Korea, Taiwan's NII vision foresees the integration of computers and telecommunications into manufacturing processes in order to make the economy more productive and competitive.

New technologies like real-time internetworking, multimedia data digitization and transmission and mass storage will also drive the development of new products for the global market. China is placing high...