The six largest Southeast Asian countries represent one of the world’s largest and fastest-growing regions, with a population of 668 million and a thriving GDP of US$4.7 trillion by 2025. Of all industries in the region, the financial services sector holds an exceptional potential that could be released if essential underlying challenges are focused on.
With only 18 per cent of its adult population using a bank account to receive wages and only 11 per cent borrow from financial resources, the region’s 70 per cent of the adult population is either unbanked or underbanked. Apart from this, millions of Southeast Asia’s small and midsize enterprises (SMEs) lack capital funding.
Remittance and digital payments are the turning points. Everyone is looking at digital financial services as a means of controlling these challenges. The high numbers of smartphone usage in the region– even higher than the use of financial services– make customer adoption of services such as e-commerce and ride-hailing easier, which provides opportunities to offer embedded financial services.
Among all financial services, these turning points will highly occur in the next five years. Both services, digital payments, and remittances are at or approaching the turning points now.
The most advanced service, digital payments, will exceed US$1 trillion in transaction value by 2025. Other financial services such as lending, investment, and insurance are still emerging, but each is booming by more than 20 per cent annually through 2025.
Banking on technology
The effect of leveraging technology to offer the unbanked and underbanked financial services could boost the gross domestic product (GDP) in markets such as Indonesia and the Philippines by two to three per cent, and in Cambodia by six per cent.
Taking advantage of this opportunity could help shape the future of the financial services industry, specifically in smaller markets like Cambodia and Myanmar. Only a tiny percentage of the current needs for financial services of these markets are met by formal providers.
“Businesses can not compete on a global scale and citizens can not explore the possibilities of working remotely for international companies due to an inadequate cross border payment system. Financial exclusion creates many limitations,” says Philip Lim, Founder, and CEO of Skybit, a company that uses blockchain technology to provide a modern financial bridge between Myanmar and the rest of the world.
By offering digital financial services to individuals and businesses through advanced technologies, financial inclusion can open limitless possibilities for growth not just for the country’s economy but also to empower the population to avail financial services that were once limited.
“Blockchain enables monetary value to flow freely across the world over the internet, making it easier for it to enter countries like Myanmar. When blockchain is used in tandem with local mobile money platforms for domestic distribution of the country’s fiat currency, even people in rural areas without bank accounts could participate in international trade and finance,” Lim added.
How fintech can impact financial inclusion
Fintech and blockchain solutions will have the most significant impact on financial inclusions. For example, these innovative technologies can enable fast, low-cost and customer identification and verification processes such as know-your-customer (KYC) schemes.
These services can alter the economics of the supply chain by addressing last-mile distribution and servicing issues through digitally-enabled physical access points such as smartphones or point-of-sale devices.
Digital financial services can become prevalent throughout the payments ecosystem. Government-to-person payments such as employee payments, both wages and pensions, and remittance flows can create the initial push for electronic payments, thus, supporting the development of possible supply-side business cases.
Integrating blockchain in financial services can significantly enhance access to credit by using alternative sourcing data such as payment transactions. This will improve customer profiling, fraud detection and credit risk assessment.
For savings, it can be mobilized digitally through alternative distribution channels, such as mobile wallets connected to savings accounts and automatic goal-based savings products. A secure KYC will also help in providing access to savings accounts for the unbanked and the underbanked.
“Blockchain and fintech would go a long way in empowering businesses and Myanmar citizens to participate and compete on a global scale. Aid organisations can benefit immensely by being able to receive donation payments from around the world. Financial inclusion will empower locals to create online businesses, look for remote work opportunities and conduct cross-border trading,” Lim explained.
The future of digital financial services through supportive regulations
Digital financial services are expected to generate at least US$38 billion by 2025 and account for 11 per cent of the entire financial services industry. To attain the full revenue potential of US$60 billion, it requires several factors to put into places such as continued investment and incentives to stimulate mass adoption. But the most significant challenge curve will be supportive regulations and government policies.
This means that there is a need for a coordinated push in digitization and financial inclusion, licensing, and electronic KYC to allow virtual banks and other financial services. It also means that there should be an established infrastructure such as digitized national ID systems, real-time payment systems, and effective credit bureaus.
These infrastructures will help Southeast Asia’s financial inclusion through the digital financial services industry reach its full potential.