Since the pandemic began roughly 12 months ago, distributors have reported a 20-30 per cent shift in business to online platforms across Southeast Asian countries. A 2020 study conducted by Bain & Company, monthly active users for select mobile apps have increased by 53 per cent, 43 per cent and 73 per cent in Indonesia, the Philippines and Vietnam, respectively.
The increase in acceptance of cashless payments beyond Tier One cities has been largely driven by fintech companies. Numerous fintechs offering greater inclusion, hassle-free onboarding, and affordable services have boosted both adoption and use of digital financial services in the last two to three years especially in markets such as Indonesia and the Philippines.
Today, more than 70 per cent of the new merchants being on-boarded by fintech digitalising payments are micro and small businesses (MSMEs), a segment that makes up over 99 per cent of businesses in these economies.
It is only a matter of time before mobile devices will become the default Point of Sale (POS) device for small business owners. The ubiquity of smartphones has expanded the ability to reach underserved communities easily. Today innovative embedded finance solutions offered by fintech that can leverage this mobile technology has eliminated the need for costly hardware and digitalise previously outdated payment acceptance points at a faster pace.
Fortunately, the transition is occurring at a time when moving online has never been easier. ASEAN governments have championed efforts to invest in core digital infrastructure in both rural as well as urban settings, where the vast majority of the region’s small and micro businesses are located.
The push towards improving internet speeds and bandwidth has also coincided with the rise of digital tools and technologies that can support small and micro entrepreneurs.
Beyond the development of infrastructure and proliferation of cloud-based software services, the pandemic has also served to dramatically accelerate awareness and adoption. In fact, suppliers have seen inquiries for online selling increase five times this past year.
Government agencies have also had to embrace this new normal. Governments across the world are increasingly partnering with fintech providers to better service the small and micro businesses through policy, regulation and infrastructure development. In 2020, we saw that the governments provided emergency financial assistance to millions of small business owners by using fintech services such as PayPal and Square in the US to PayMaya and Gcash in the Philippines as a reliable and secure disbursement channel.
I expect the share of the disbursement by governments through these channels to continuously grow from existing low five to 20 per cent in next five years making fintech a vital partner in facilitating the distribution of critical financial services.
Beyond government, various business groups are also starting to realise that fintech is no longer a matter of convenience but a necessity. There is an addressable market of at least 20 to 25 million retailer/consumer focused SMEs that will need digitalisation support in the next five years in countries such as Indonesia.
Fintech companies that are able to empower small business owners with the knowledge, tools, and support to help facilitate the transition from offline to online in all aspects of business, from procurement to book-keeping, and working capital financing and e-commerce will be at an advantage.
By enabling small and micro businesses to recognise, consolidate, and track their financial data, fintech mobile applications are able to provide an assortment of basic financial services digitally — such as non-collateral-based lending — by developing credit scores through alternative means. This assumes significance as most micro businesses are not able to pass basic Know Your Customer requirements of traditional financial institutions.
Fintech companies, on the other hand, are able to resolve information asymmetry that these business face, by connecting numerous data parameters from various sources to onboard business remotely, create a digital financial identity, and provide risk-based pricing for credit products to such businesses.
For small business owners, who were previously undervalued and ignored by banks, the solutions offered by fintech are a boon in an increasingly digital economy that they are now empowered to participate in.
In fact, after partnering with numerous online and offline distributors we have seen that approval rates for credit for purchases made by small and micro businesses have increased by 2-3x as compared to the low-teen percentages currently offered by traditional financial institutions. This is agnostic of the purchases made by the micro businesses through offline or online channels.
While working with distributors across industries such as telecom, consumer goods, health care in Indonesia and the Philippines, I see more of them willing to partner with fintech company that has the widest network of offline partners including chains of Indomaret, Seven Eleven, business centres, through which loan repayment channels can be easily accessed by borrowers.
This assumes significance when specific types of locations are not accessible, especially during this COVID-19 times. Such distributors keep their retailer network at the core of their strategy and offer fintech -powered solutions to their retailer network without any investment in licenses or technology It’s a win-win for all involved.
In fact, fintechs working alongside banks (large, cooperative and rural) as well as regulators are increasing transaction velocity within the digital ecosystem. Banks provide the most effective cost of capital while effective regulatory framework can help ring fence the defaults in repayments by micro businesses and instill confidence to lenders.
I believe that at least 10 new fintech solution, with valuation in excess of US$100 million, will emerge in Southeast Asia by 2025. Just as Amazon did it retail industry, the fintech addressing one or more pain points – lack of credit bureaus, access to credit, high share of cash transactions, and lack of identity cards- will do it in micro and small business industry in the region. The journey has just begun.
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