How fintech & P2P lending are driving SME growth in ASEAN

Photo: Roberto Trombetta

Despite being the backbone of the regional economy, SMEs in Southeast Asia have long suffered from a lack of financing opportunities. The advent of fintech is set to fill the credit dearth.  

By Preetam Kaushik

The rapid evolution of information technology (IT) has profoundly altered the banking and financial services industries across the world. With the rise of brash new fintech startups, many traditional banks are starting to feel the heat.

Nowhere is this phenomenon more apparent than in the developing markets of the east. In less than a decade, fintech startups in the region have metamorphosed into multi-billion-dollar enterprises with hundreds of millions of customers.

While individual consumers relish improved access to financial products and allied services, small and medium-sized enterprises (SMEs) have lagged behind. In the ASEAN market, where they form the backbone of most national economies, this is far from ideal.

The rise of fintech in the region has the power to make a difference. But it depends on how the traditional banking sector in the region responds to these technological disruptions.

SMEs are the bulwark of the ASEAN economy

In Southeast Asia, SMEs accounted for between 97% and 99% of the total number of enterprises in individual nations. Their contribution to the national gross domestic product (GDP) ranged between a whopping 85% (Cambodia), to the low to mid-30s (Malaysia, Thailand, the Philippines).  

Source: Deloitte

A recent Deloitte report pegged their overall contribution to the Southeast Asian economy at 40% of regional GDP, and 70% of all employment opportunities.

Finance remains a bridge too far for most ASEAN SMEs

The SME loan to GDP ratio remains abysmally low in most ASEAN nations, with figures ranging from a sorry 3% to 34%. The situation is particularly severe in the Philippines and Indonesia, both of which have ratios in single digits. Malaysia and Singapore fare better with 55% and 36% respectively, while Thailand leads the way with 105% of the GDP ratio in SME loans. 

In the Philippines and Indonesia, which have a higher concentration of small enterprises than their neighbours, less than 40% of SMEs have access to bank loans. ASEAN banks have traditionally been averse to providing finance to SMEs, due to the lack of adequate credit ratings, higher risks, and the absence of thorough business records.

Source: McKinsey

Fintech firms are set to fill the gap

The void left by traditional banking providers presents a lucrative opportunity for fintech startups. According to Rama Sridhar, Executive Vice President, Digital and Emerging Partnerships and New Payment Flows, at Asia-Pacific Mastercard, the growth of the alternative finance sector has been crucial for providing new sources of funding for SMEs.

Technology is acting as the go-between for investors and borrowers. New types of loan markets are emerging as regulations stifle inflows into traditional capital markets.

“Alternative lending” solutions are pouring into the SME space, with the Asia-Pacific region establishing itself as a global hub for alternative loan products. According to the Cambridge Centre of Alternative Finance estimates, lending in non-traditional markets jumped from US$11 billion to US$242 billion in just three years between 2013 and 2016.

In Southeast Asia, this trend is further reflected in the growth of P2P lending in markets like Indonesia, which has witnessed a spike from just US$20 million in 2016 to US$ 1.4 billion in 2018. And since the SME segment is so chronically underserved in these regions, a lot of the newly available cash is flowing into small and medium-sized businesses.

According to Rama Sridhar, the alternative lending products have made it easier for SMEs in the region to access money at lower interest rates, often with no collateral requirements. She told ASEAN Today: “Fintech today has made it easier than ever before to connect investors across borders to SMEs that need funding quickly.”

The impact goes beyond loan markets

Fintech is also driving SME growth in other areas. The seamless integration of payments is helping SMEs get paid on time, facilitating payments for both “their consumers’ low-value but high-volume credit-based payments and their own high-value but low-volume payments to procure supplies,” says Sridhar.

Digital payment technologies are speeding up payments and improving cash flows, providing new ways for businesses to improve their products/services.

There is also a “domino effect” on banks

The rise of alternative lending is also making a difference in traditional banking circles. According to Rama Sridhar, “the rapid growth of the alternative financing sector has now put pressure on traditional banks to innovate and find new solutions to remain competitive in the digital world.”

Banks in the region are already competing with fintech startups and e-wallets in the consumer space. Now, increasing numbers of startups are targeting the B2B lending space as well. Indonesia, for instance, has over 50 startups in the alternative loans segment, with the likes of Koinworks, Modalku, C88 Financial, and AwanTunai all offering products catered to SMEs.

Faced with this kind of competition, banks have no option but to improvise and innovate or risk losing SME custom to new arrivals. There is massive scope for collaboration between banks and startups, especially in areas like credit rating, risk assessment, and faster loan approval processes.

As these are still early days for startups, a huge gap remains in the ASEAN SME loan segment landscape. Given the vast demand for credit, which will only grow as the ASEAN economy continues to expand, there is plenty of room for both traditional banks and fintech startups to compete, collaborate and grow together.