SE Asia's digital financial services revenue set to soar

Singapore

REVENUE from South-east Asia's digital financial services could hit US$60 billion by 2025, but only if the region's financial players can crack barriers to lending in the SME (small and medium-sized enterprise) space.

While interest from the region's 64 million SMEs is high - around 80 per cent of small retailers need credit - they remain underserved by established players, said a report by Google, Temasek and Bain & Company on Wednesday.

More than half the SMEs surveyed noted that high interest rates pose the greatest deterrence to borrowing. Other reasons include cumbersome procedures, rejected applications and lack of knowledge on the debt options available.

Ramping up loan capabilities has a substantial economic upside - fresh figures from the report show that SME loans make up 60 per cent of SMEs' contribution to overall gross domestic product (GDP) in Singapore, Malaysia and Thailand, higher than that in the high-income OECD economies (50 per cent).

For SMEs in Indonesia, Vietnam and the Philippines, loans constitute less than 20 per cent of their overall GDP contribution. These under-penetrated markets offer a trove of untapped potential that financial players can seize.

According to the report, the base-case revenue projection from South-east Asia's digital financial services stands at US$38 billion by 2025, of which a third will come from digital lending activities.

To achieve the region's full potential of US$60 billion, more needs to be done to solve the multiple SME needs through digital means, said Aadarsh Baijal, a partner at Bain & Company.

"Many merchants want access to capital, primarily to drive growth, but do not have that as loans are perceived to be too expensive. That's really one of the things that's changing, with the advent of much better credit scoring (systems) by leveraging the different sources of data that the fintech players can offer," he told reporters at the media briefing on Wednesday. "An effective credit bureau is going to be absolutely critical if you want to fully realise the SME opportunities in the region," he added.

Credit access aside, SMEs are also at an inflection point on digital adoption, said the report.

This comes as digital payments are poised to exceed US$1 trillion in transaction value by 2025. Some 76 per cent of SMEs polled expect to use both cash and digital payment methods by 2022, up from the current 30 per cent.

But digital adoption encompasses more than just payments - SMEs prefer a one-stop shop that can address all their needs, said Mr Baijal.

He noted that the ideal digital service provider is one that can offer both online and offline payment processing solutions, as well as other value-added services such as inventory management and sales analytics.

In the name of consolidation, more partnerships between the fintech players and incumbent banks can be expected over the next six years said Rohit Sipahimalani, joint head of Temasek's investment group.

He explained that fintech firms looking to scale up will need to partner with banks to access their balance sheet, while the banks will need to tap on the fintechs to reach the under-banked in the region.

This trend is unique to South-east Asia as banks are "actively working to enter the virtual space", compared with their counterparts in China which are not as digitally enabled, said Mr Sipahimalani.

Earlier this month, regional e-commerce marketplace Shopee tied up with Thailand's KBank to provide loan facilities for its merchants.

In August, CIMB's digital-only bank in the Philippines teamed up with e-wallet operator GCash to enable seamless access to savings account services.

"The winners are those who can form ecosystems and partnerships to have multiple touch points with the customer," said Mr Sipahimalani.