With a population of 570 million and a booming GDP expected to reach US$4.7 trillion by 2025, the six largest markets in South-east Asia – Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam – represent one of the world’s fastest-growing regions.
This article originally appeared on The Business Times. You can view the original article here: https://www.businesstimes.com.sg/opinion/bringing-digital-financial-services-to-s-e-asia
With a population of 570 million and a booming GDP expected to reach US$4.7 trillion by 2025, the six largest markets in South-east Asia – Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam – represent one of the world’s fastest-growing regions. Within the region, the digital financial services industry holds big potential that could be unleashed if fundamental underlying challenges are addressed.
By 2025, we expect digital financial services to generate US$38 billion in revenue, with Singapore accounting for US$9 billion of that sum. Based on research conducted by Bain & Company in collaboration with Google and Temasek, Singapore’s digital financial services industry is likely to grow by 14 per cent annually through 2025. However, the industry could become substantially larger, reaching US$60 billion in revenue throughout the region, if certain conditions are met.
It is well known that throughout much of South-east Asia, consumers have more limited access to financial services than their peers in developed markets. Across the region, seven out of 10 adults are either “underbanked” – meaning they have no access to credit cards or have no long-term savings product, for example – or “unbanked”, without access to a basic bank account. In addition, millions of the region’s small and mid-sized enterprises (SMEs) face large funding gaps.
Now all eyes are on digital financial services – including payments, remittances, lending, investments and insurance – to overcome these and other challenges.
Four factors have stymied the growth of digital financial services in the region. First, consumers and merchants alike have been slow to abandon cash and make the move to digital. Another obstacle has been the lack of a reliable digitised identification system in most South-east Asian markets. In addition, regulators have taken a cautious approach. A final issue: Outside of Singapore, the region’s financial infrastructure remains largely underdeveloped, with an absence of robust credit bureaus, for example.
Despite these impediments, the market is poised to grow fast. High smartphone penetration and engagement will speed customer adoption of services like e-commerce and ride hailing, while paving the way for embedded financial services. Also, regulatory policies are becoming more open. Consider the Monetary Authority of Singapore’s regulatory sandbox, which allows companies to test innovations in a controlled environment under regulators’ supervision. Both Singapore and Thailand have established standardised QR codes for mobile payments to increase the efficiency of transactions. Another example: Singapore’s online identification system, which enables citizens to store, view and manage personal data that has been provided to the government.
Among the five services we studied, digital payments and remittances are the most advanced, with payments expected to exceed US$1 trillion in transaction value by 2025. The other services – lending, investments and insurance – are still emerging, but each should grow by more than 20 per cent annually through 2025. At that point, lending will make up half of all digital financial services, led by innovations in consumer lending and SME working capital financing. We expect digital lending to achieve 17 per cent annual growth in Singapore through 2025.
Today the industry is a free-for-all among four major types of players, none of which has everything it will take to win. For example, established financial services players such as banks and insurance companies have broad financial services expertise, a large customer base, customer trust and access to low-cost funding. But fintechs – the new generation of independent players with innovative business models – benefit from a more flexible cost structure and cleaner technology stacks, allowing them to provide competitive pricing and better user experiences. Established consumer players such as telcos, airlines and retail companies are expanding into financial services, bolstered by broad distribution networks and massive amounts of customer data, but they may lack the digital capabilities to leverage those assets. Consumer technology platforms such as ride-hailing and gaming companies have a large online customer base for cross-selling of financial services and digital capabilities, and they offer an online-to-offline experience. We found that new entrants are gaining trust in South-east Asia, especially in Indonesia and Vietnam.
As this field of competitors quickly expands, lines are blurring between different categories of players in the ecosystem, and partnerships are becoming more common. Disruption will more likely come from consumer technology platforms than from pure-play fintechs offering niche services. We expect that more banks will partner with established consumer players or consumer tech platforms to expand their user base and build volume. Companies that are more nimble and technology-savvy will outpace competitors and gain share.
New players will emerge thanks to the introduction of digital banking licences by the Monetary Authority of Singapore, and other regulators in the region have announced similar plans. A diverse set of players are vying for the new digital banking licences, although high capital requirements will be a barrier to entry for some. We expect to see the new digital-only banks in the region targeting customers based on value and user experience, replicating what Revolut and Monzo have done in Europe and the Americas, for example. Digital-only banks in South-east Asia will play a larger role in addressing the unmet needs of the underbanked, given the lower cost to serve of this business model.
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9 January 2020