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Payments in South-east Asia: A new frontier

Non-bank players and technology firms are well-positioned to grow but a price-war scenario could mean new challenges: Deloitte.

Customers today are so accustomed to quick and simple payments for most daily transactions.

WITH its high mobile penetration rates and a large underbanked population, South-east Asia is an attractive region for new entrants in the payments space to tackle.

The current environment has made it a ripe one for new entrants - such as non-bank players and technology companies - to acquire customers, said a Deloitte report.

This also comes as customers are so accustomed today to quick and simple payments for most daily transactions. Given the backdrop, said Deloitte, expectations from consumers have also risen, as they demand for more integrated and secure ways to pay for any product or service.

"Leading retailers and technology companies have set a high bar for the financial services industry to create better experiences and simple, seamless integrations that can make traditional banking, digital payments, and other related activities easier to accomplish," it said.

Deloitte noted that these players tend to provide a range of differentiated services backed by technological innovation, such as food delivery or ride-hailing. This facilitates the effort to build that ecosystem designed to function with their proprietary e-wallets or any other digital payment method.

Still, there are teething issues to be worked through.

"But while their ability to provide superior customer experiences is undeniable, the ecosystems that many of the players have built with their collaboration partners have resulted in fragmentation across the payments landscape in Southeast Asia, and interoperability between the different payment systems is quickly becoming an issue that needs to be addressed."

Deloitte also pointed out that as the volume of digital payments done outside the formal banking system may not be subjected to the same level of regulatory oversight as banks under the current structure, authorities may face challenges in mitigating the increased risks. Such threats include money laundering and financing of terrorism, cyberattacks, and personal data breaches, with such failings potentially posing harm to the overall financial system.

From speaking with industry panellists, Deloitte found that the three overarching hurdles that remain barriers to greater digital payments adoption across South-east Asia are regulation, infrastructure and talent.

Deloitte found that the region's fragmented regulatory landscape is one of the key challenges for regional players operating across multiple markets in this part of the world. For example, licensing procedures may vary "significantly".

"Without greater harmonisation, the different local regulatory requirements may result in increased costs and lengthen the amount of time required for players to roll out their regional expansion plans," it said.

Deloitte also flagged the need to level the playing field between incumbents and new entrants, as the latter may not have the same level of access to the necessary infrastructure and shared utilities that they require to compete effectively.

The third and final hurdle is finding the right talent in South-east Asia, because these roles require very specific skill sets.

Mohit Mehrotra, monitor Deloitte leader, Deloitte Asia Pacific, said that with technology disrupting all aspects of the payments value chain, a set of four distinct future scenarios emerge for markets across South-east Asia, including a winner-take-all or an all-out price war.

Over in Singapore, a Deloitte poll conducted in July 2019 found that of the four distinct scenarios presented to digital payment providers, executives considered the price-war scenario to be the most likely here in this highly developed market over the next two to three years.

This means low pricing will become a norm during a time of undercutting by all market players.

Faced with intense competition, card issuers are likely to invest heavily in marketing expenditures to attract customers and thus, to manage churn rates. Deloitte warned that with a price-war scenario, while customers benefit from lower prices and a large variety of providers to choose from, the low level of differentiation between the different providers restricts the fulfilment of niche customer needs. And even as merchants benefit from lower transaction fees, the scenario reduces service quality and innovation.

"The extent to which regulators and industry players collaborate to put in place three hygiene factors - structural incentives, risk controls and access to shared utilities - will determine the number of players and variety of customer value propositions that we will witness in the future," said Mr Mehrotra.

To flesh out structural incentives, countries in the region can integrate national identity application programming interfaces in merchant systems to help bolster customer confidence, as well as provide greater consumer education and transparency.

In the area of risk controls, regulations will need to put in place measures such as means to encrypt data, without compromising on the growing demand for frictionless payments.

Finally, with access to shared utilities, entrenched incumbents and new entrants will see a levelling of the playing field. This includes access to infrastructure, such as the credit bureau, that are currently available only to large players.

This would allow for interoperability to become a design choice in new product development, which would mean that regulators and industry players would need to collaborate to integrate systems for information sharing and seamless operations.

"Ultimately, these conditions will determine the growth trajectory of the digital payments market across South-east Asia," the Deloitte report said.


Regardless of the final landscape, there are a few undeniable trends that are likely to endure.

For one thing, companies will see the increased adoption of electronic-payment technologies by customers that will enable the growth of new networks and ecosystems.

"Adoption will move beyond the purchase or sale of products to encompass the provision of value-added services, such as spend tracking and other offline loyalty programmes. Such activity will in turn drive new revenue opportunities beyond payment transactions as access to customer data provides new avenues for monetisation, for example, in the form of loyalty programmes," the report said.

Secondly, the emergence of a centralised infrastructure will ultimately bring about greater interoperability - and so, higher transaction volumes - between the different players working along the payment chain.

"Although network providers are likely to face increased pressure on their margins, merchants will benefit from reduced fees and lower switching barriers. As a result, differentiators, such as value-added services and consumer insights, will become the key drivers of acquisition for network providers and acquirers alike," Deloitte said.

Finally, the payments landscape is likely to become more secure and less risky for companies. The higher levels of security that e-wallets offer, for example, mean that firms will be able to cut their compliance costs. Meanwhile, the introduction of newer sources of credit data will enable issuers not only to better assess their risk, but also profitably expand their customer base.

"Ultimately, in the new payments ecosystem, the ability to collaborate closely with other value chain players - and even new industry entrants - could be one of the most defining features of a successful company," the consultancy said.

"Depending on how they leverage their network effects, leading players are likely to be those who have found a way to capitalise on the abundant data that exists in distinct and disparate places along the value chain to create and own standards, and to design platforms for an improved overall customer experience."

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