WITH a population of 570 million and a booming GDP expected to reach over $5 trillion by 2026, 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 significant potential that could be unlocked if underlying challenges are addressed.
However, more than 70 percent 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.
“Fulfilling Its Promise — The Future of Southeast Asia’s Digital Financial Services,” a study conducted by Google, Temasek and Bain & Company, sheds light on the outlook for digital financial services in Southeast Asia amid a rapidly growing and highly competitive environment.
The report tracks five key verticals of digital financial services: payments, remittances, lending, insurance and investments. Its major findings include:
– Digital payments and remittances at an inflection point. Among various services, key inflection points will occur over the next five years, and both digital payments and digital remittances are at or approaching inflection points. Digital payments are the most advanced and will exceed $1 trillion in transaction value. The other services — lending, investment and insurance — are still emerging, but each is expected to grow by more than 20 percent annually. Digital lending is expected to emerge as the largest revenue contributor, driven 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 competition expands, lines are blurring and partnerships are becoming more common. Disruption at scale is more likely to come from consumer technology platforms, while subscale banks may evolve into regulated deposit utilities.
– The ultimate battle for the customer-gatekeeper relationship. Companies that emerge as leaders will be those that position themselves as gatekeepers for consumers and merchants. They will earn that role by capturing customer mindshare and trust while building multiple touchpoints with relevant use cases, either independently or through partnerships and alliances. Leaders will also continue to increase their value by broadening service offerings to meet evolving customer needs.
– Established players maintain a stronghold on the banked. The development of digital financial services will vary across three distinct customer segments: the banked, underbanked and unbanked. The banked segment already has adequate access to a full range of financial services and remains a primary focus for established players, who are likely to retain their leadership. More nimble and technology-driven companies may outpace competitors and gain market share.
– Underbanked: the true growth engine. Underbanked consumers lack full access to traditional financial services. Technology-enabled business models offer a more effective way to serve this segment, creating new market opportunities. This segment represents the largest potential and serves as the primary growth engine for digital financial services.
– No panacea for the unbanked. Digital financial services will not fully address the needs of the unbanked population. Contrary to common perception, pure-play fintechs and consumer technology platforms have not made a meaningful impact on this segment. Governments and telecommunications companies will need to play a key role in accelerating its development by combining access with strong product design and underwriting capabilities from partners.
– The SME merchant opportunity: waiting to be tapped. SMEs remain largely underbanked across most markets. Approximately 80 percent of surveyed SMEs report needing credit but lacking access to affordable financing. However, digital technology and increased data availability have enabled new models to serve SME merchants, who are on the cusp of broader digitization.
– Established players are now vulnerable to losing this segment to new entrants that can use nontraditional data to expand access, enhance underwriting, and offer a broader suite of products and delivery models (such as offline-to-online platforms) tailored to SME needs. Players that establish themselves as merchant gatekeepers will have a distinct advantage.
– Strong balance sheets will keep banks relevant. Despite the entry of new players, customers are unlikely to move away from banks entirely. Banks retain advantages in capital access and regulated deposit structures. Pure-play fintechs face ongoing risks related to balance sheet funding as they scale. Increased data portability through open banking could accelerate shifts in business models and expand opportunities for innovation.
– Supportive regulations critical to meeting full potential. The key determining factor will be supportive regulations and government policies. This includes regulatory support for digitization and financial inclusion, electronic know-your-customer (KYC) systems, and licensing frameworks for virtual banks. It also requires critical infrastructure such as digitized national ID systems, real-time payment systems, standardized QR codes, and effective credit bureaus. These elements are essential for Southeast Asia’s digital financial services industry to reach its full potential.
The study forms part of the 2019 e-Conomy SEA report, covering the six largest markets in the region: Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.