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The rise of fintech in Southeast Asia

Written by Deloitte Southeast Asia Innovation Team Published on   8 mins read

By combining digital payments and e-commerce, fintechs look set to become the banks of tomorrow in the region.

Financial technology (fintech) is booming in Southeast Asia (SEA). Fintech funding in the region more than tripled to hit a record USD 3.5 billion in the first nine months of 2021, compared to USD 1.1 billion for all of 2020.

The fastest-growing fintech categories are digital payments and digital lending. In 2021, the digital payments segment saw record funding of USD 1.9 billion, a 244% compound annual growth rate (CAGR) from USD 562 million in 2020. Digital lending also recorded a sizable 78% CAGR to USD 314 million.

In 2022, while tech companies all over the world grapple with a funding winter, fintech companies in SEA are continuing to raise huge capital. Let’s find out why.

The unbanked and underbanked

In SEA, individuals who are underbanked and unbanked make up more than 70% of the population. In addition, informal workers make up the majority of the workforce, and they remain financially under-served. Many lack bank accounts, are in debt, and transact mostly in cash, which makes it difficult for them to build credit histories and have access to credit from traditional financial institutions.

Similarly, micro, small and medium enterprises (MSMEs), a driving force of SEA’s economies, lack not just credit histories but formal business transactions that financial institutions look at to process and approve loan applications. At the same time, MSMEs experience difficulty in securing loans from traditional banks due to their high collateral requirements. According to a 2021 report by the Tech for Good Institute (TFGI), over 60% of MSMEs surveyed were unable to secure a bank loan when in need of financing.

Yet before fintech firms first appeared on the scene, informal workers and MSMEs had access to other forms of financial services.

Across SEA, many unbanked individuals engage in informal financial transactions through groups such as Rotating Savings and Credit Associations (ROSCAs). For example, millions of Indonesians obtain funds through “arisan” meetings, a type of ROSCA, which allow borrowers to raise small loans at monthly group meetings, and are usually repaid without interest after a year.

Unbanked individuals and businesses also transact with mobile money, which is the transfer, storage, and withdrawal of money through a mobile phone. This method does not require an Internet connection, and operates through a telecommunications protocol—Unstructured Supplementary Service Data (USSD)—which enables mobile phone users to access remote services, providing low-cost mobile financial services to anyone with a mobile phone. Indonesians, prior to the introduction of fintech and mobile wallets, have been tapping phone credit to borrow and lend money by transferring airtime to family or friends, and making money through mobile transfers of credit. Examples of mobile money services include WING in Cambodia, and TCash in Indonesia.

Despite the availability of alternative financial services for the unbanked and underbanked in SEA, fintech firms can still play an important role by introducing them to new, innovative financial solutions.

Behind the digital payment infrastructure in SEA

The payment options offered by fintech companies have changed the way consumers and businesses transact. An example of such financial technology is mobile money, also known as the e-wallet. With SEA’s soaring smartphone penetration, e-wallets are now one of the most popular payment methods in the region. Mobile transaction volume in the region reached USD 62.59 billion in 2020 and is expected to rise more than four-fold to USD 268.07 billion by 2025.

The payment landscape across SEA is localized and fragmented, and each country has a preferred e-wallet. Singapore has PayLah! and GrabPay, Philippines has GCash, Indonesia has GoPay, OVO and DANA, Vietnam has MoMo and VNPAY, and Malaysia has Boost and Touch ‘n Go. These e-wallets all utilize QR payments, with some offering card options, like GrabPay Mastercard. Using QR codes is the most popular way to make digital payments in SEA, largely due to their low operating costs, versatility, and convenience for consumers and merchants.

Another reason why e-wallets are popular in the region is that the majority of residents in SEA do not use credit cards. More than 174 million adults in SEA do not have a bank account or credit card. In Thailand, Vietnam, and Indonesia, the number of residents who hold a credit card are about 30%, 11%, and 6% of the population, respectively. QR payments-based e-wallets allow SEA users to make digital payments with only a smartphone and Internet connection.

The highly localized digital payments landscape, coupled with the reliance on QR-based payments, would explain why many international players in the payments sector, such as Stripe and PayPal, have not gained traction in SEA.

Founded and developed in countries reliant on card payments such as the US, the payment infrastructures of companies like Stripe and PayPal are built with a primary focus on credit and debit card payments. While these firms have recently included widely used global e-wallets, such as Alipay, their payment infrastructures have compatibility issues with the payments landscape in SEA, and require localization integration. This challenge is exacerbated by the complicated bureaucratic processes and differing regulations on financial services across the region.

On top of these challenges, there is intense local competition in the digital payments sector. In SEA countries, Stripe and PayPal compete with local rivals which are able to provide localized service offerings. For example, Indonesian fintech unicorn Xendit works with popular e-wallets in Indonesia, and even offers offline payment solutions at local convenience store chains, Indomaret and Alfamart.

The interdependence of digital payments and e-commerce

Notably, the players in SEA’s payments sector are not just payment companies—many of them are also e-commerce firms. It is no coincidence that SEA is experiencing an exponential growth in digital payments alongside an e-commerce boom.

Amid shifting consumer spending habits and retailers implementing new technology into their offerings, coupled with the availability of diverse payment options, according to the International Data Corporation (IDC), e-commerce spending in SEA is expected to rise by 162% to USD 179.8 billion by 2025. Digital payments are expected to account for 91% of e-commerce transactions. The largest markets for e-commerce payments are expected to be Indonesia (USD 83 billion), Vietnam (USD 29 billion), and Thailand (USD 4 billion).

As a result, there is a convergence of digital payments, payments infrastructure and e-commerce in SEA, especially among the larger e-commerce players. These e-commerce companies believe they can leverage their existing customers and merchants to acquire users for their new financial offerings.

For example, Shopee has ShopeePay and SeaBank, while GoTo has GoPay and the GoTo financial ecosystem. Lazada has been strengthening its digital finance infrastructure through partnerships, such as those with AmBank in Malaysia, Finaxar in Singapore, and Asia Kredit in the Philippines. Most recently, Lazada bought a USD 304.5 million stake in Indonesian e-wallet platform DANA, which is its biggest public digital payments play to date.

Future of digital payments

The e-wallet landscape in SEA is highly competitive and appears to have reached market saturation. Many new and existing e-wallets are unable to acquire new users, as the popular digital wallets in each SEA country have already taken up a large share of the market. In SEA, there are 800 redundant e-wallets.

Hence, growth for digital payments in the region is likely to be driven by regionalization and MSMEs.

With the recent surge in travel due to easing border restrictions, digital payment companies have to look beyond national borders. Various SEA countries have been  launching standardized QR codes for bilateral cross-border payments, for example, Indonesia and Thailand, Singapore and Thailand, and Singapore and Indonesia. SEA governments are also investing in the region’s cross-border payment infrastructure, which digital payment providers can leverage for regionalization. ShopeePay is already getting in on the action, and recently announced a partnership with 2C2P to enable ShopeePay as a payment option for 2C2P’s extensive merchant network across Malaysia, Indonesia, Singapore, Thailand, and the Philippines.

Nevertheless, there is still a considerable number of MSMEs that have yet to adopt digital payments. In 2021, TFGI found that only 20% of MSMEs in SEA are currently on online-to-offline platforms, which facilitate transactions with both physical and digital components.

MSMEs: the true beneficiaries of digital lending

Often, before MSMEs can consider digitalizing their operations, they have to look into the financing aspects of their businesses. MSMEs in SEA face significant challenges when trying to secure financing from traditional financial institutions. This issue is particularly acute for the “missing middle” MSMEs—businesses that make an annual turnover of USD 100,000 to USD 1 million.

These MSMEs are not eligible for financing from microfinance institutions as their earnings are too high. At the same time, they don’t generate enough revenue to secure a bank loan from traditional banks. The International Finance Corporation (IFC) estimates that 40% of MSMEs in developing countries have an unmet financing need of USD 5.2 trillion every year, and the East Asia and Pacific region accounts for about USD 2.39 trillion (46%) of that gap.

TFGI found that 74% of the MSMEs surveyed that have received loans from digital lenders were unsuccessful in obtaining financing from banks and other lenders. Digital lending platforms can provide MSMEs, particularly the “missing middle” MSMEs, with the financing that they require by lowering the barriers for MSMEs seeking loans. These platforms can also generate alternative sources of data to develop credit risk models that can assess MSMEs appropriately, and develop more suitable loan criteria. For example, Grab can use MSMEs’ data from their Grab app, such as business earnings, customer reviews and other transactions, to determine their loan eligibility.

A downside of lending money to MSMEs is that there’s risk, given the instability of their businesses. With this in mind, digital lenders need to strike a balance between providing affordable loans and making healthy profits.

Blurring lines between fintech companies and banks

While SEA’s fintech companies might have come up with innovative financial solutions that cater to consumers and businesses in the region, a number of them are struggling to remain solvent. This explains why many fintech firms continually raise working capital through investor funding or debt facilities.

The injection of fresh funds is however not a sustainable solution. Many fintech companies are aware that the only way to become self-sustaining is by creating more business verticals and generating more revenue.

Many digital payments and lending companies are also acquiring other fintech firms to expand their range of services. For example, Singapore-based digital lender Funding Societies acquired B2B payments startup CardUp in 2022 for an undisclosed amount. In Indonesia, Investree purchased a 10.9% stake in Amar Bank for USD 29 million in August 2022. KoinWorks, a digital lending platform for MSMEs, has begun to offer virtual cards, budgeting, earned-wage access and accounting solutions for their MSME clients. In early 2022, P2P lender Amartha was in talks to acquire 70% of local Islamic bank, Bank Victoria Syariah, in a digital bank play. 

The fintech sector has deconstructed the services offered by banks, and innovated each segment for greater inclusivity. Yet, it seems that these individual segments have been experiencing difficulty in operating without the support of the other segments. If and when these segments come together to create a unified, efficient financial ecosystem, the fintech sector will likely lead to inclusive financial institutions tailored to the needs of SEA’s residents and businesses, making them the SEA banks of tomorrow. For now, there’s still a long way to go.

This article is co-authored by Richard Mackender, Tan Shuo Yan, and Teo Zhixin.

Richard Mackender leads the Deloitte Southeast Asia Innovation team, a cross-function, cross-country unit dedicated to driving innovation as a long-term value creator across Deloitte’s Southeast Asia operations. Tan Shuo Yan and Teo Zhixin are members of the team.


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