Bridging the Financial Inclusion Gap in Southeast Asia
- As Southeast Asia seeks a way out of the pandemic, it will require greater access to capital and other financial services to lay the foundations for a sustainable economic recovery.
- The good news is that the digitalization of financial services has provided new tools to address persistent barriers to financial inclusion, and Southeast Asia is well positioned to benefit.
- While fintech players can do their part to spur innovation and experimentation, closer cooperation between governments and businesses is also essential.
While Southeast Asia’s economy has come a long way over the past decade, more than six in 10 Southeast Asians today remain underbanked or unbanked.
Micro, small and medium-sized enterprises (MSMEs) are a key driver of Southeast Asian economies, accounting for 69% of the national workforce from 2010 to 2019, according to a report by the Asian Development Bank. However, the lack of a formal credit history and onerous requirements hamper their ability to access capital, limiting their growth potential. In a 2021 study by the Tech for Good Institute, more than 60% of MSMEs surveyed were unable to get a loan when they needed finance.
Informal workers, who are estimated to make up more than 70% of Southeast Asia’s workforce, also remain financially underserved. Many do not have bank accounts, are in debt and primarily transact in cash, making it difficult to establish a credit history that would give them access to formal financial tools.
Even among consumers who have access to formal financial services, many are limited to first-tier services such as savings accounts. For some, a lack of awareness, fear of hidden fees and high prices deter them from buying insurance and investment products that are essential to protect against unexpected scenarios and keep their financial goals on track. . Others may require more affordable and small insurance plans, instead of large payments.
As Southeast Asia seeks a way out of the pandemic, enabling greater access to capital and other financial services will be critical to laying the foundations for a sustainable economic recovery.
Bridging the Gap in Southeast Asia
The good news is that the digitalization of financial services has provided new tools to address these persistent barriers to financial inclusion, and Southeast Asia is well positioned to benefit.
Mobile phone penetration in most Southeast Asian countries has far exceeded credit card or bank account penetration. In Indonesia, for example, around 75% of the population owns a mobile phone, while credit card ownership is negligible and only half of the population has a bank account. Additionally, about half of Southeast Asia’s population is under 30 and tech-savvy; the region has embraced online payments faster than its western counterparts.
Meanwhile, COVID-19 has accelerated the adoption of financial services and digital payments. Lockdowns and social distancing rules have encouraged users to embrace online transactions for their daily needs, from groceries to paying bills.
From 2018 to 2021, all countries saw the growing adoption of cashless payments (see infographic below), and businesses followed suit by providing digital services.
Digital financial service (DFS) providers use big data such as online purchase histories and informal worker earnings to develop customer risk profiles for people who don’t have a credit score. For example, in Indonesia, Grab collaborated with JULO, a digital credit provider, to provide same-day micro-loans to drivers and delivery partners.
The data is also useful for granting loans to MSMEs. Grab, for example, can assess data on their company’s revenue made through the Grab app, customer reviews, and other transactions to determine creditworthiness, before lending to them.
There are new opportunities to “split” big expenses. DFS providers divide large payments for financial services into small payments spread over time and integrate the purchase of these into intuitive and relevant touchpoints.
In Singapore, some insurers have started offering usage-based personal accident insurance for the self-employed. Workers pay hourly micro-premiums based on the type of assignment and are only covered for the period they engage in that work. This increases affordability and access to insurance. Grab’s PayLater solutions also allow consumers to split payment for goods into interest-free installments to better manage their cash flow. These services provide options for people who don’t have a credit card and steer them away from riskier or unregulated credit.
Partnerships with governments are vital
These are exciting opportunities, but businesses won’t be able to go it alone. There are still barriers to greater financial inclusion that require closer collaboration between the public and private sectors. There are several areas where such collaboration can lead to win-win results.
1. Digital adoption: Accessing and adopting digital payments is the first step, but in 2020 more than 80% of all consumer-to-business transactions in Southeast Asia were cash. DFS providers can work with governments to design outreach programs for specific groups who are reluctant to go cashless, including traditional small businesses, older people or rural citizens, and provide nudges and critical incentives to drive national adoption. For example, in 2020, the Malaysian government introduced a nationwide stimulus program that employed select e-wallet service providers, including GrabPay, to deliver government funding to 15 million eligible Malaysians and incentivize spending. safe and convenient consumption amid the pandemic.
COVID-19 has exposed digital inequalities globally and exacerbated the digital divide. Most of the world lives in areas covered by a mobile broadband network, but more than a third (2.9 billion people) are still offline. Cost, not coverage, is the barrier to connectivity.
At Davos Agenda 2021, the World Economic Forum launched the EDISON Alliance, the first cross-industry alliance to accelerate digital inclusion and connect critical sectors of the economy.
Through the 1 Billion Lives Challenge, the EDISON Alliance aims to improve 1 billion lives worldwide through affordable and accessible digital solutions in healthcare, financial services and education by 2025.
Learn more about the work of the EDISON Alliance in our Impact Story.
2. Awareness and trust: There also remain gaps in understanding the potential benefits and risks of DFS. Fintech companies, educational institutions, and government agencies can work together to foster financial literacy, which is important as more financial products become accessible to people who previously had little exposure to them. New adopters will need to be educated on how to manage their money using digital financial products, and how to manage data privacy and guard against cybersecurity risks.
3. Governance: It is equally important that government and DFS providers come together to jointly develop regulatory frameworks that promote the safe use and adoption of new financial services, including on topics such as the responsible use of personal data. . This will be key to building trust and addressing concerns that online financial transactions are less secure.
We live in exciting times where we have new digital tools that can help address the universal challenge of financial inclusion. Addressing this issue will be critical to fostering more sustainable socio-economic progress in Southeast Asia and supporting Southeast Asians on a daily basis.
But success cannot be achieved in silos and the mission is great. While fintech players can do their part to spur innovation and experimentation, closer cooperation between governments and businesses is also essential. If we can do this, the future of Southeast Asia will shine brightly.