You are here
A panacea for the unbanked in S-E Asia
ACROSS South-east Asia, governments, organisations and banks are increasingly trying to bring the unbanked into the global economy. It stands to benefit both people and businesses alike. Research by the Asian Development Bank estimates that addressing this opportunity could increase GDP by 9-14 per cent, even in relatively large economies such as Indonesia and the Philippines.
For banks, closing the financial inclusion gap could generate more than US$380 billion in annual revenues globally.
In South-east Asia, a vast majority of the region's estimated 650 million people remain unbanked and most are from the low- and middle-income segments. Many are trapped in a vicious circle where they cannot be considered for credit or other banking services as they have no credit history or financial identity. Their inability to access credit renders it impossible to build a credit history.
Others fall prey to loan sharks with unscrupulous business practices and exorbitant interest rates - as high as 1,095 per cent a year in Thailand, for example. Unsuspecting consumers are not only forced to repay many times more than they borrow, but failure to keep up with hidden fees plunges them into greater trouble, making the prospect of financial stability and inclusion nearly impossible. In these markets, between 40 and 70 per cent of adults rely on informal lending sources.
Next-generation technologies are being used to develop solutions across the financial services landscape, providing an opportunity for the unbanked to leapfrog inaccessible solutions such as credit cards through practical, fair and more affordable financing alternatives.
But how is technology creating a positive impact in the region? Where traditional banking models find the risks associated with lending to the masses unacceptably high, or simply can't develop a risk profile, financial technology or fintech is quickly finding ways to bridge this gap. The answer lies in smart technology and data - both of which have a vital role to play in creating a more equitable and fairer digital financial ecosystem.
To date, some new solutions have either had a niche market or have contributed to the financial exclusion of those without a suitable income stream to repay their loans. Such propositions have been short-term in their thinking - which makes them either unsustainable, unviable or unscaleable.
What has been lacking is a commitment to creating long-term value by designing an infrastructure from the ground up: one that accounts for real-world challenges such as a borrower's employment status or consumption and spending habits to build a more accurate credit profile that assesses risk using a mix of traditional and non-traditional data points.
In October last year, Luiz Awazu Pereira da Silva, deputy general manager, Bank for International Settlements, said: "Fintech has brought a new paradigm to the design and implementation strategies for financial inclusion."
What's new about this design approach is twofold. First, a new infrastructure built around smart technology that unlocks financial access for everyone. And second, the use of alternative data to create financial identities for people who have been undervalued by traditional financial institutions, and helping them participate in the global economy.
New technologies such as AI and big data are instrumental in making this happen in emerging Asia. They enable a deeper understanding of borrowers' specific circumstances and needs - and for the lender, knowing why people want to borrow and where and when they want to invest enables them to create precise credit assessments and ultimately the start of a previously 'credit-invisible' customer's new financial identity.
Today, the ubiquity of smartphones across the region allows access to a richer universe of information. It allows access to data which goes far beyond the narrow spectrum traditionally used to measure creditworthiness - and to analyse it with sophisticated algorithms which remove the biases inherent in banks' processes to unlock a fairer, more transparent and equal financial future.
Our view is that allowing people to build their own financial identity, educating them on how to use these new tools, and enabling them to take control of their financial lives, will in turn foster more responsible financial behaviour.
To execute this properly, an intelligent credit engine powered by both traditional and non-traditional data is needed to address the growing financial inclusion problem in South-east Asia.
A smart technology apparatus delivers more accurate profiles that significantly mitigate risk and more precisely predict a loan amount that individuals can safely repay.
In turn, the accuracy of their risk profile helps protect borrowers from entering into unsustainable arrangements - breaking the negative cycle that continues to trap many in the region, from China to Indonesia, and offering access to manageable loans to consumers who will use them to grow their small businesses or elevate their families' lifestyle.
Today, in markets such as Vietnam and Indonesia - where mobile penetration is high at 148 per cent and 133 per cent of the population respectively - people can use their devices to access the offline market and use their loans to make purchases, often on the spot.
New technologies that partner with leading local retailers can add a further breakthrough for emerging South-east Asia. The success of point-of-sale (POS) lending from new firms such as Affirm in the US has caught the attention of banks with their successful implementation of fixed- or low-interest loans for small purchases.
In a market like South-east Asia, where the vast majority of purchases are still made offline, being able to offer a POS-style alternate payment-via-credit option helps drive inclusivity among a large consumer base that exists and transacts without an online or formal financial footprint. Companies like Cashalo in the Philippines are helping these consumers access digital credit-on-demand and build their online financial identity while making purchases across a network of physical retail locations.
Enabling consumers to acquire goods with a simple, transparent and convenient credit arrangement for a specific purpose is now possible. This form of purpose-based lending is bringing financial inclusion to the previously unbanked - in a responsible manner.
Financial inclusion is critical to lift communities out of poverty and drive greater socio-economic benefits in South-east Asia. Technology today is making this more possible, and with a concerted effort between the private and public sectors, and a focus on long-term value and sustainability, real progress is now being made. This progress will one day result in more thriving economies across South-east Asia, where people are empowered by access to credit.
- The writer is co-founder, Oriente