Fintech’s next big inflection point in Southeast Asia may come beyond 2020

Fintech has been one of the ASEAN region’s major economic success stories. But 2020 might not hold the sector’s next digital breakthrough.

By Preetam Kaushik

The digital economy in Southeast Asia has been one of the region’s economic success stories. In 2019, the region’s internet economy crossed the US$100 billion valuation mark, posting three-fold growth in barely four years.

Transactions are the lifeblood of any industry, and the development and adoption of digital payments, in particular, has been a major driver of long-term growth. As more of ASEAN’s 198 million unbanked citizens gain access to financial service products, the region is tipped for enormous growth and is considered one of the major global fintech hotspots.

Barchart showing the cumulative investments in ASEAN fintech by sub-sector

The ASEAN online economy reached an inflection point in 2017

The sector’s phenomenal pace of growth led Google-Temasek to declare that the region’s internet economy reached a turning point at the end of 2017.

In four years 100 million citizens from Singapore, Indonesia, Thailand, the Philippines, Malaysia, and Vietnam came online, bringing the total digital population residing in these six countries to 360 million.

Increased demand for ride-hailing, e-commerce, online media, travel, and fintech products established a solid base from which the Southeast Asian digital economy has been able to expand and flourish.

Fintech is riding on the digital payments wave

Cashless transactions are hastily expanding in all major ASEAN markets. Driven by the explosion of demand in ride-hailing, food delivery, and digital media, more and more Southeast Asians are moving to cards, online bank payments, and e-wallets for their daily spending needs.

Mobile payment growth year-on-year

In 2019, digital payments transactions reached US$600 billion in consumer spending, with e-wallets accounting for US$22 billion. In the next six years, Google-Temasek projects payments will double to U$1.1 trillion, with e-wallets accounting for a five-fold growth to US$114 billion.

Other sub-sectors have potential but cannot match digital payments as a growth driver

The ASEAN fintech landscape is a breeding ground for startups and experiments in other emerging sectors including insurtech, digital lending, online remittances, and assorted financial services. However, none have seen the same explosive growth as digital payments.

Digital lending has massive potential in a region where nearly two-thirds of the population do not have access to basic banking services, and the vast majority of small and medium enterprises (SMEs) have no access to credit. If any fintech sector can follow in the footsteps of digital payments, it is the online lending industry, powered by innovative new models like peer-to-peer (P2P) lending.

Southeast Asia is widely considered to be the next big frontier for P2P lending. With US$23 billion worth of loans disbursed in 2019, the sector is still in its nascent stages and Singapore is leading the P2P charge. In 2017, the city-state was responsible for US$83.8 million of P2P loans, over 58% of Southeast Asia’s total volume. If it can overcome the various obstacles, the industry can expect to post strong growth in the coming years.

But challenges await

Uneven growth was always bound to be a problem in a diverse market like Southeast Asia, with its many languages, cultures, and individual markets. The region is also still some way short of the establishment of an EU-like common market.

Photo: Richard Tanzer Fotografie/Wikimedia Commons

Singapore has led the region in terms of fintech growth and adoption, due to its small size, high gross domestic product (GDP) per capita, and access to skilled manpower. But in recent years, Indonesia and Vietnam have gained ground due to the sheer size of their markets.

The highly fragmented fintech markets present a conundrum. Fintech startups looking to upend the established order face the challenge of building a userbase from nothing in a market where user trust and familiarity is everything. Meanwhile, traditional service providers like banks and telcos have a userbase but lack the technology and agility to offer creative and personalised financial products.

In other major markets like the US and EU, growth has come with consolidation of the market into a few major players. This trend has yet to materialize in the ASEAN region. Established banking and telecom behemoths are instead simultaneously competing and collaborating with brash new startups.

Regulations will have a crucial role to play in the future of fintech

A fragmented market with an abundance of small players can be detrimental to the industry. For instance, it makes life harder for regulators when trying to shut down illegal operators. This was on display in the Chinese P2P lending market, where rampant unregulated growth led to a highly publicised implosion.

A patchwork of domestic regulations also prevents fintech players from rapidly scaling up across regional markets. Digital lending and other financial services providers have to navigate an intricate web of data protection, credit, interest, foreign ownership and consumer protection laws.

Domestic regulatory agencies like the Monetary Authority Singapore (MAS) and the Financial Services Authority (OJK) in Indonesia are finetuning the fintech legal framework to promote growth. Indonesia, in particular, has been cracking down on illegal P2P lenders to bolster industry trust and protect legitimate platforms and consumers.  

Increased stability and closer regulatory alignment are necessary for the arrival of another inflection point in the ASEAN fintech scene. However, the sluggish pace at which the ASEAN Economic Community (AEC) is moving forward with integration efforts leaves observers with little hope.

There is no doubting the tremendous potential of new technologies in the regional fintech sector, but hopes are being tempered by realism. The online economy and digital payments landscape will continue to expand, with the latter maintaining its role as the chief engine of growth across Southeast Asia’s fintech sector for the next two to three years at the very least.

Other fintech markets like online credit will need time to reach their individual milestones and inflection points. It would be overly optimistic to expect that to happen in the next 12 months given the current market adoption rates and regulatory landscape. For now, ride-hailing, e-commerce, and e-wallets will remain the standout success stories in the region.