The global pandemic has brought a new dimension to the digital push that ASEAN has been an early adopter of. What does the future have in store?
Much has been written and spoken about, on how the digital panacea is making its impact, especially around driving customer acquisition, transaction processing, and enabling financial transaction in the digital ecosystem in the post Covid-19 era. The ASEAN region has been in the forefront of driving some of these initiatives, well ahead of its global peers - not only in terms of the investments and innovation driven by banks, but also in terms of the policy guidelines, and active involvement from the regulators.
The profile of the region includes 10 nations (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) that are geographically clustered together. Yet, the banking penetration levels have not been at the same levels across the region, partly also driven by the distribution of population - roughly 50% of the 650 million population are urbanised. Markets such as Indonesia and the Philippines have a relatively larger under-banked segment than Singapore for example, which is also an interesting opportunity for some of these countries, that digital adoption may potentially address. The total unbanked adults in South East Asia is reportedly more than 150 million, and this is particularly critical given that the median age of this market is less than 30.
The region is also expected to see a much higher proliferation of digital only banks, with the Monetary Authority of Singapore (MAS) having declared 9 digital wholesale banks and 5 full digital banks as being eligible to present their proposals for further scrutiny. Tonik, the first digital bank of Philippines has already received a good response. Malaysia has also declared its virtual banking licencing framework, and licences are expected to be awarded in 2021, with Thailand also expected to be defining this shortly. Considering that the region has an internet penetration of 60%, this is not surprising.
The Monetary Authority of Singapore (MAS) has been recognised for its commitment to promoting and building the FinTech industry, as has been demonstrated by the promotion of the Smart Financial Center. While Singapore has always been perceived to be the FinTech hotspot of Asia, it is pertinent to note that a regulatory sandbox is available across multiple markets including Malaysia, Indonesia and Thailand. This is also augmented by the disparity in the cost of living, which naturally gravitates startups to look for low-cost locations but with availability of talent. The cross- jurisdictional sandbox promoted by the ASEAN Financial Innovation Network (AFIN) is seen to help augment innovation in a regulated environment.
Emerging focus areas
The three areas that are highly sought after by the Fintech community are:
1. Payments & remittances
2. Alternative digital lending
3. Security & Regtech
This is not surprising, considering that these are also in line with international preferences. Interestingly, the VC investments in FinTech have reportedly grown over 15 times between 2014 to 2018 in the ASEAN region alone - reflecting the appetite and the demand.
1. Payments & remittances
Right from e-wallets, P2P payments, money transfers, retail mobile POS as well as aggregators of payments, this is a space that has seen a significant thrust. Indonesia, for example, is reported to have about 0.4 POS terminals for every 1000 people (the figure for China, by comparison, is at 24), making for huge latent demand. Furthermore, considering many of these countries also include a large diaspora of working population, the adoption of international money transfers is not surprising. Ayannah in the Philippines and Instarem of Singapore are interesting examples of emerging FinTechs in this space.
2. Alternative digital lending
The increase in adoption levels of digital lending - spanning across both consumer and business, both from peer-to.peer as well as balance sheet-based lending platforms, is reflective of the relatively under-banked market, and also the appetite for low-ticket credit. GoBear Is an interesting example of a multi-country player operating across the region. This area has also seen support from regional development institutions such as the Asian Development Bank. with the push for micro.lending and financial inclusion. This has also gained significance given the context of a high SME proliferation in markets such as Singapore, where the sector accounts for more than 95% of businesses. Almost 68% of the FinTech funding in 2018 was reportedly towards alternative lending players. Aligned technology areas that are key for this include analytics driven alternative credit scoring.
3. Security & Regtech
Also seen to be part of security and compliance, the areas of biometrics, fraud management. KYC and AML have seen increased thrust from the FinTech community. An Interesting example of this is Tookitaki, a Singapore FinTech that has been focused on surveillance of AML and has been adopted as an innovation accelerator by United Overseas Bank (UOB).
Besides the investment funds that many of the ASEAN banks have set up, active collaboration of banking institutions with FinTechs is seeing a healthy trend as well. More than 100 incubators and innovation labs are reportedly operating in collaboration with financial institutions around the region, helping to drive accelerated adoption into mainstream applications.
More importantly, the advent of open banking enabled by APIs has brought in fresh impetus to integrate point solutions from FinTechs as part of the Enterprise Architecture of banks. DBS, for instance has its RAPID instant payment programme which offers an API based solution to help its corporate clients automate processes, with a large API library.
The region has also seen the adoption of artificial intelligence, machine learning (Al/ML), big data & predictive analytics, cloud computing. and cybersecurity at much higher levels over the last 5 years. Blockchain has also seen a higher adoption, as evidenced by the initiatives run by the MAS across eKYC, securities payment and settlement, the trade finance corridor with Hongkong as well as in domestic and cross-border payments.
The iconic IBSI Sales League Table reported a 50% increase in the number of banking technology deals from the ASEAN region in 2019, across all banking investment categories. Interestingly, 25% of these were In pure digital banking products, over and above other categories that include universal, ovasury, risk and retail banking systems. Deal traction has also been quite significant in markets such as the Philippines and Vietnam. reflecting a higher degree of technology investments - an indication of the larger focus to driving technology lead innovation
Post-Covid: what's in store?
The global pandemic has clearly accelerated digital adoption and, therefore, the need to drive many of the FinTech initiatives, as it has only helped to accentuate trends already seen as the way forward:
The existence of a large unbanked segment, complemented with high mobile per-capita and increasing internet penetration, has already set the tone for a latent demand for digital banking the new normal, driven by social distancing norms has now made the need more acute. A huge upsurge in demand for digital only banking, digital payments, digital lending, InsureTech and personal finance management is more likely and hence the development of investments with a wider market outreach in this segment is expected.
Given the high density of SME clusters, the region is also poised for significant traction and innovation, especially in the areas of alternative lending, blockchain stabled trade finance. digital transaction banking including payments, collection and liquidity management, as well as a Methanol API enabled new-age applications.
While none of these are exclusively an ASEAN phenomenon and have been witnessing global adoption, the barriers to adoption are seen to be much lower in the region given the increased regulatory engagement. The homogenous nature of the need and access to technology within the region is expected to have a more pronounced impact now, than ever before. The one message that the Covid-19 pandemic has announced quite loud and clear is this: the world is more flat than we ever thought!