Southeast Asia’s fintech industry has gained rapid consumer acceptance amid rising broadband connectivity and movement curbs due to the Covid-19 pandemic. A large, underbanked market heralds the region’s growth potential, but the industry’s viability hangs on monetising its services in the longer run.
1. What is the fintech market opportunity in Southeast Asia?
The region’s six largest economies – Singapore, Indonesia, Malaysia, Philippines, Thailand and Vietnam – comprise an aggregate GDP of close to $3 trillion and combined population of over 580 million. The fintech opportunity stems from the region’s rising internet connectivity and large, unbanked population – close to 50% of adults in the top-six economies were unbanked, according to latest World Bank data, with the largest gaps in Indonesia, Philippines and Vietnam. Meanwhile, Southeast Asia’s high international trade connectivity provides further opportunities in cross-border payments.
Bank Account Penetration and Per Capital GDP
Source: Fitch Ratings, Fitch Solutions, World Bank. Global Findex Database 2017.
2. What is the fintech industry’s current state-of-play?
The pandemic has accelerated fintech adoption in the region, as elsewhere. A survey by Worldpay by FIS found e-wallet payments jumped to 15%-20% of retail in-store and e-commerce transactions in 2020, from 5%-10% in 2019. Usership of Philippine’s leading e-wallets soared to roughly one-third of its population in 2020.
Nonetheless, the sector’s development remains nascent in general. Many fintech business models are still immature and yet to break even. Beyond payments, where margins are narrow, most fintech products have yet to become mainstream. Low household incomes and lingering infrastructure constraints will hamper fintech penetration in many markets.
The major banks are investing more heavily in digital capability and will prove to be formidable competitors to new fintech entrants. Scale will be a key advantage in this battle, and we expect greater sector consolidation over time.
3. Who are the key players?
Leading fintech challengers in the region include the financial-service arms of tech platforms such as Grab, Sea Limited and GoTo. These entities have a broad reach and good brand recognition across the region, and are broadening from payments services supporting their parent’s operations into other financial services including banking. Grab, Sea and GoTo have each secured banking licenses in one or more markets in the region, either through one of the new digital bank licenses up for grabs, or via acquisition. A plethora of other entrants focus on specific markets of sub-sectors in the region.
These challenger fintechs are likely to prioritise growth rather than profitability for now. This will not be sustainable in the longer-term, but can be disruptive for the market while it occurs.
Incumbent financial providers are alert to the risk. Major banks are boosting investment into digital services, with the Singapore banks leading the way. Larger non-bank lenders are also investing as urban customers increasingly demand mobile services.
Regional telecommunication operators (telcos) have also been prominent fintech sponsors. The likes of Malaysia’s Axiata, Philippines’ Globe Telecom and PLDT, and Thailand’s True and AIS have launched their own fintech platforms over the years. A Singtel-Grab joint-venture clinched one of Singapore’s digital bank licenses. Nonetheless, fintech will not be a core segment for most telcos.
4. How do the region’s regulators view the sector?
Regulators are generally supportive, viewing fintech as a potential tool to boost financial inclusion – a common policy goal. Governments also see the sector as a potential engine for future economic growth.
Consumer protection and systemic risk will be two key areas watched closely by regulators as the sector evolves. Aggressive risk-taking or predatory practices are likely to trigger a regulatory backlash, particularly if such entities start growing rampantly. Robust data governance and cybersecurity will also be crucial.
5. What is the regulatory framework for fintech in the region?
Regulators generally adopt an activity-based approach. Several jurisdictions have introduced or updated rules to cover e-wallets, digital tokens and digital marketplaces, while some activities are covered by existing banking, insurance, or capital-markets regulation.
Nonetheless, fintech regulatory frameworks remain incomplete. Regulatory development is uneven across the region, and legal enforcement remains a challenge. Indonesia’s repeated clampdowns on illegal fintech lenders highlight the difficulty in controlling entities that operate virtually.
Newer business models also carry risks that may not yet be captured by existing regulation. Buy now, pay later (BNPL) products are one example. They typically fall under payments rules, which leave their credit-like features unaddressed. We expect regulation to develop further as authorities better gauge the implications of emerging business models, particularly if they start to gain scale.
6. How will fintech developments impact Fitch-rated entities? How will Fitch rate fintech entities?
The impact on rated entities will be limited in the near term, but developments in technology could prompt major shifts in competitive positioning over time. Large incumbents with proactive digital strategies will be better-placed, while smaller entities with limited resources to invest may be more at risk of franchise erosion.
Fintech investments are expected to be manageable for Fitch-rated telcos.
Ratings for standalone fintech companies will depend on the specific business model, likely reflecting the evolving competitive environment, the maturity of the business model, and the historical and prospective operations.