“Fulfilling Its Promise—The future of Southeast Asia’s digital financial services” is a study conducted by Google, Temasek and Bain & Company to shed light on the future of digital financial services in Southeast Asia in a rapidly growing and highly competitive environment. This study forms part of the 2019 e-Conomy SEA report, launched by Google, Temasek and Bain & Company, and covers the six largest markets in the region: Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

The report tracks five key verticals of digital financial services: payments, remittance, lending, insurance and investments. It draws on research and analysis by the three sponsor companies, including surveying more than 2,500 consumers on digital financial services usage; Bain & Company’s Loyalty in Banking survey of more than 4,000 consumers in Indonesia and Singapore; and a survey of more than 250 merchants in Indonesia. The findings were corroborated with multiple interviews with subject matter experts and secondary sources, including the online databases of the World Bank, Euromonitor, Statista and others.

“Fulfilling Its Promise—The future of Southeast Asia’s digital financial services” would not have been possible without the assistance of subject matter experts who contributed to the research. In particular, the authors would like to extend appreciation to contributors from Advance.ai, Bangkok Bank, BCA, BDO, CIMB Bank, Citibank, Credolab, DBS, Funding Societies, GIC, Golden Gate Ventures, Gojek, Grab Financial, Insignia Ventures Partners, InstaReM, Kasikornbank, KKR, Mastercard, Maybank, Monk’s Hill Ventures, OCBC, PayMaya, Ringgit Plus, SingTel, Standard Chartered, StashAway, TrustingSocial, UOB, Visa and WeCash, who shared their perspectives and time in our research and interviews.

Executive summary

Southeast Asia’s big opportunity. With a population of 570 million and a booming GDP expected to reach $4.7 trillion by 2025, the six largest countries in Southeast Asia represent one of the world’s largest and fastest-growing regions. Within the region, the financial services industry holds tremendous potential that could be unleashed if fundamental underlying challenges are addressed. For example, cash is still the primary means of transaction. More than 70% of the adult population is either “underbanked” or “unbanked,” with limited access to financial services. In addition, millions of Southeast Asia’s small and midsize enterprises (SMEs) face large funding gaps.

Digital payments and remittance at inflection point. Now all eyes turn to digital financial services as the means for overcoming these challenges. The region’s high smartphone penetration and engagement—even higher than banking penetration in most Southeast Asian countries—makes customer adoption of services like e-commerce and ride hailing easier, and provides opportunities to offer embedded financial services.

Among various services, key inflection points occur over the next five years. Both digital payments and digital remittances are at or approaching inflection points now. Digital payments is the most advanced and will exceed US$1 trillion in transaction value by 2025. The other services—lending, investment and insurance—are still emerging, but each should grow by more than 20% annually through 2025. Digital lending will naturally emerge as the largest revenue contributor led by innovations in consumer lending and SME working capital financing.

A diverse and highly fragmented landscape. The landscape includes four major archetypes of players: established financial services players, established consumer players, pure-play fintechs and consumer technology platforms. As the field of competitors quickly expands, lines are blurring between different categories of players in the ecosystem and partnerships are becoming more common. Disruption at scale will more likely come from consumer technology platforms than from pure-play fintechs offering niche services. Subscale banks will eventually become regulated deposit utilities.

The ultimate battle for all: the customer-gatekeeper relationship. Companies that surface as leaders will be those that make themselves the gatekeepers for consumers and merchants. They will earn that role by capturing customer mindshare and trust while building multiple touchpoints with the right use cases, either alone or through partnerships and alliances. Leaders also will continually increase their value by broadening service offerings to meet their customers’ evolving needs.

Established players maintain stronghold on the banked. The development of digital financial services will play out differently in three distinct customer segments: the banked, underbanked and unbanked. The banked segment already has adequate access to the full range of financial services. This segment is a major focus for established players, who are likely to maintain their leadership position. Companies that are more nimble and technology-savvy will outpace competitors and gain share.

Underbanked: the true growth engine. On the other hand, the underbanked consumer does not have full access to traditional financial services. As such, technology-enabled business models offer a more effective way to serve this segment, creating new market opportunities. This segment represents the biggest potential and the true growth engine in digital financial services. Consumer tech platforms are well positioned to gain share in the underbanked segment given their large, expanding and engaged customer base. These platforms have the ability to capture broader customer lifetime value via a fuller suite of consumer services.

No panacea for the unbanked. However, digital financial services will not be a panacea for reaching the unbanked population. Contrary to common perception, pure-play fintechs and consumer tech platforms are not making a meaningful impact on the unbanked segment. Governments and telecom companies will need to play a key role in accelerating development of this segment, combining their access with strong product and underwriting capabilities from partners.

The SME merchant opportunity: waiting to be tapped. SMEs remain a largely underbanked segment in most markets. Approximately 80% of surveyed SMEs say they need to borrow but lack access to affordable credit. However, digital technology and more readily available data have given life to new models for serving SME merchants, who are on the cusp of broader digitization. A survey of SMEs in Indonesia found that 76% already accept digital payments or are likely to accept them in the next three years.

Established players are now vulnerable to losing this customer segment to new players that can use nontraditional data sources to create access and supplement underwriting, and offer a broader suite of products and new delivery models (such as offline-to-online platforms) to address the needs of SMEs. Players that serve as a merchant gatekeeper will have a distinct advantage in the battle for SMEs. Those that offer an integrated solution to meet different SME merchants’ needs will gain share.

Strong balance sheets will keep banks relevant. Despite the march of new players entering the market, it will be difficult for customers to move away from banks completely. Banks have capital access and regulated deposit arbitrage. Pure-play fintechs will find that balance sheet funding remains a potential risk to scaling business. Increased data portability through open banking can accelerate a shift in business models with a broader array of opportunities for innovation.

Supportive regulations critical to meet full potential. By 2025, digital financial services is expected to generate revenues of about $38 billion and account for 11% of the total financial services industry. Attaining the full revenue potential of $60 billion requires several factors to fall into place, including continued investment and incentives to stimulate innovation and user adoption. But the biggest swing factor will be supportive regulations and government policies. That means a concerted regulatory push for digitization and financial inclusion, electronic know-your-customer (KYC) and licensing to further allow virtual banks. It also means establishing critical infrastructure including digitized national ID systems, realtime payment systems, standardized QR code and effective credit bureaus. Only with these ingredients will Southeast Asia’s digital financial services industry reach its full potential.

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