SINGAPORE (Nov 4): The digital financial services industry in Southeast Asia is poised to triple in annual revenue generation by 2025 to reach an estimated US$38 billion ($52 billion), a new study has found.
The “Fulfilling its Promise — The Future of Southeast Asia’s Digital Financial Services” study by Temasek Holdings, Google and Bain & Co also says the upside estimate of potential revenue generation could reach US$60 billion in the next six years.
In addition, the study expects the total transaction value of digital payments within the region to reach US$1 trillion in 2025.
However, the nature of the highly fragmented and diverse ecosystem means there are still underlying challenges to be addressed to achieve the full potential of digital financial services in the region, the study finds.
It also highlights that more than 70% of the adult population in the region are either “underbanked” — they have bank accounts but no access to other financial services such as credit cards or lending — or “unbanked”.
The study notes that the underbanked segment of 98 million people across the six Southeast Asian countries surveyed — Singapore, Malaysia, Indonesia, Thailand, Vietnam and the Philippines — could be the growth engine of the digital financial services market.
“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,” the study says. “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.”
The unbanked segment presents a far more pressing challenge to the ecosystem, however — especially if it were to reach its true potential for growth — and to promoting financial inclusion.
The study noted that digital financial services will not be a panacea for reaching the unbanked population; and, contrary to common perception, fintech and consumer tech platforms have yet to make a meaningful impact on the unbanked segment.
“We anticipate growing consumer acceptance of fintechs and consumer tech platforms in Southeast Asia, with new entrants meeting established players in the trust gap, particularly in the fast-growing markets such as Indonesia and Vietnam. Companies that surface as leaders will be those that make themselves the gatekeepers for consumers and merchants,” says Aadarsh Baijal, partner and leader of Bain & Co’s Digital Practice in Southeast Asia. “For Southeast Asia to realise its full potential, there must be supportive regulations, a strong financial infrastructure and scaled funding in place. We need initiatives beyond digital to meet the needs of the unbanked.”
Furthermore, small to medium-sized enterprise merchants are an opportunity waiting to be tapped. In fact, SME merchants are likely to become the main digital financial services battleground in the region in the years ahead, as they have been inadequately supported by established financial services players.
These established players are now vulnerable to losing the SME merchants segment, the study warns. New financial services players are now addressing SME needs through the use of non-traditional data sources to create access and supplement underwriting and offer a broader suite of products and new delivery models, it adds.
The study also calls for supportive regulations and government policies, which will be the main driver of growth in the digital financial services ecosystem.
The ingredients needed to reach the region’s US$60 billion potential include a concerted regulatory push for digitisation and financial inclusion, and establishing critical infrastructure such as digitised national identification systems, real-time payment systems, standardised QR codes and effective credit bureaus.
