The inevitable and inexorable march of progress is certainly making itself felt in the area of banking and payments in Southeast Asia, perhaps more than any other area of everyday life. Societies once dominated by cash and barter are seeing more modern, digital alternatives penetrating even in ordinarily low-tech marketplaces. It’s not even that unusual to see people paying with their mobile phones in markets and convenience stores.
A major factor in this advancement is the environment that has been created. Right across the region, there is an unusually high penetration of mobile phones - particularly smartphones. With a large, mostly young population, virtually everyone has a smartphone, regardless of their economic status, resulting in some of the highest levels of internet penetration and mobile connectivity in the world. Mobile usage in Southeast Asia - and particularly using mobiles for tasks other than making calls - has even outpaced that in China and parts of Europe. With laptops and home computers being prohibitively expensive, people are used to handling their business with their phone.
The present condition of payments in Southeast Asia is that 74 per cent of Thailand’s internet users access banking services on their mobile phone. That’s already a quite astounding trend, but where does the future lie for banking and payments in the region?
With the trend of online banking, other online trends have naturally followed. Among other examples, 76 per cent of internet users in Indonesia made online purchases in a single month - well above the global average of 55 per cent. The rapid success of platforms like Lazada and Alibaba has been led by a population that wants a wide range of products at their fingertips. However, it is telling that the cash-on-delivery payment option is available in Southeast Asia while similar platforms in Europe and the US (such as Amazon) do not allow this.
Cash, it seems, is still king.
However, the regal dominance of hard currency is starting to look shaky. The Thai government is planning to move towards a cashless economy, which it hopes will help small and medium-size enterprises to secure loans while also making bribery harder, hindering human and drugs traffickers. Relatedly, use of mobile wallets in the region is rising much faster than the global average. In Thailand, 47 per cent of internet users pay for goods and services using a mobile wallet, alongside 42 per cent of Malaysians, 40 per cent in the Philippines and 39 per cent in Vietnam - all above the global average of 37 per cent.
Joel Yarbrough, APAC vice president at fintech solutions provider Rapyd and former head of product at Grab, believes an evolving economic situation is the root cause of this development. He said, “An enormous wave of Southeast Asians are moving from the working to the middle class. They used to lack access to traditional banking and credit but are now turning to new digital channels that are democratising financial access across the region.”
Deloitte similarly believes that the shift towards digital payment systems is customer led. They said, “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.” They added that the wide range of services the major players provide - from ride-hailing to food delivery, sometimes in a single app - is helping to build an ecosystem where e-wallets are a viable option for everyday purchases.
The use of digital wallets makes online purchases accessible to those who may be unable to obtain a credit card - a problem that is far more widespread in Southeast Asia than it is in western nations. While the middle class in the region may be expanding and growing in their spending power, digital payments systems that are accessible to all are likely to continue blazing the trail.
A lot of Southeast Asia has either significant overseas populations or overseas interests, necessitating smooth overseas transactions and remittance. The Philippines and China, for example, have significant numbers of their citizens working abroad - over 12 million from the Philippines alone. There is also a lot of movement within the ASEAN region, with millions of people moving to neighbouring countries seeking better wages.
Yarbrough believes that digital remittance and foreign exchange will likely be the next major step for digital wallets. “These more complex payments will help plug wallets into larger ecosystems, reduce consumer friction, and directly address stressful or emotionally painful issues – whether that’s moving funds overseas or caring for your family,” he said.
However, it’s not only digital wallets making moves in this area. It is beyond doubt that fintech is leading the way, but even commercial banks are catching up as they improve their mobile apps and online services.
The greatest hurdles for both the formal banking system and financial services outside of banking are regulations, infrastructure and available talent. Regulations are certainly being gradually worked through or around as even governments are starting to realise the spending power that digital payment systems can unlock. However, individual nations are moving at different speeds, creating significant variations between what can and cannot be achieved from one ASEAN country to the next.
Deloitte seems to believe that the whole would be significantly greater than the sum of its parts, saying, “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.”
When it comes to infrastructure, the challenge is not so much about the facilities existing as being accessible only to the well-established names in the financial field. A level playing field would allow for more rapid advancements as newer entrants to the market would have the opportunity to exploit the same infrastructure in innovative ways.
Finally, a shortage in the extremely technical and specific skills required to develop the technology for more advanced digital payments may limit the number of companies that can work in this area. This will slow down the pace of development and reduce the amount of comparable but competing options available to customers.
On the other hand, a lack of competing companies could work out for the best. Checkout areas of shops are already lined with boards showing QR codes for digital wallets and adding more options will only make that worse. Yarbrough commented that, “there is a need to expand practical use cases by creating more ways of getting people to use e-wallets, such as paying in a store and online. Wallet QR codes can be more alienating than enabling to customers.”
The extensive development of online banking and digital payment systems has led to significant advancements in biometric security systems. Alipay pioneered the use of facial recognition systems to authorise payments with their “Smile to Pay” system, which was introduced in 2017. This is one of the important barriers to development that is coming down, allowing smaller businesses to offer the option of secure and reliable online payments.
A report by Juniper Research showed that, with further development, biometric authentication could help to enact US$2.5 trillion worth of mobile payment transactions by 2024, so there is a lot of incentive to work on this technology. A big contributor to the massive potential for transactions here is the fact that a substantial number of retailers have so far been holding off adopting digital payment options because of concerns about data breaches - as many as 60 per cent across the APAC region, in fact.
The far future
In the short term, further improvements in digital payments across Southeast Asia are on their way, with ASEAN economics ministers already signing agreements to work towards this goal. However, a potential avenue for long-term development, which may help make the Thai government’s vision of a cashless economy a reality, is to expand the use of digital payment systems to include digital currencies. While blockchain technology has not been embraces in Southeast Asia with the same vigour as it has in the US, it is starting to get some attention.
The advantages of cryptocurrency make this direction of development a particularly attractive one for the region. It could potentially ease cross-border commerce, minimise fraud, bypass bureaucracy and reduce the confusion created through having 10 different currencies used across just the ASEAN region.
In particular, it opens up opportunities for those who, for whatever reason, do not have a bank account. According to a report by KPMG, that’s potentially as many as 70% of the region. Digital wallets have already been a major help for such people, enabling them to make online purchases, but there is still a heavy reliance on cash for such individuals - a reliance that blockchain technology could remove.
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