The explosion of financial technology (FinTech) in the West, China and India has been widely reported. Meanwhile, Europe keeps itself busy with Brexit, Open Banking Platforms and PSD2 (Revised Payment Service Directive). China commentary is dominated by the rise of payment ecosystems driven by Tencent and Ant Financial. India has achieved tremendous progress by introducing the new electronic identity systems Aadhaar, a unified payment interface and payment bank licenses.
Which region will produce the next big developments in fintech? My money is on ASEAN
ASEAN (Association of South East Asian Nations) is the next region for financial technology developments. Although fragmented, the numbers are staggering.
- ASEAN is the world’s 3rd largest economy
- Over 650 million people living across ten countries with 70% under the age of 40.
- A young, educated, increasingly wealthy middle class is driving economic growth with GDP higher 2% p.a. than the global average.
This dynamic region is ripe for technology transformation across sectors such as e-commerce, travel and hospitality and, of course, financial services. Technology unicorns Lazada, Go-Jek, SEA (formerly Garena) and Grab are just the beginning of a bigger push of ASEAN tech companies enabling connectivity, consumption and economic growth. Where 2010 saw the rise of Chinese tech giants and 2015 the re-awakening of the Indian subcontinent, the next five years will be marked by the tremendous opportunities in ASEAN. With roughly US$2.2tn in annual trade flows and over 50,000 financial institutions providing banking services to consumers and businesses, financial technology is at the core of the ASEAN growth story. Consider that only 27% of consumers and SMEs are formally banked, while an even smaller share (3%) are protected by insurance. Taking these data points into account, it should not be too difficult to imagine the real opportunities for financial technologies in the region.
Five key drivers are fundamentally enabling the growth of this sector:
The five C’s of ASEAN FinTech
While Singapore reached smart phone penetration rate of approximately 80% in recent years, mobile phone connectivity in Myanmar (93%), Cambodia (173%), Vietnam (131%) and Thailand (133%) grew rapidly over the past five years. Every month the population of Berlin (approximately 3.8m people) is being added to the internet in ASEAN as users. Data connection in the countryside of Myanmar may be better than in certain Western capital cities. Smart phones and access to Facebook and e-commerce websites are now commonplace, the same cannot be said about access to formal financial services.
A Thai consumer spends in average 4.4h per day on social media and if a millennial in Myanmar is asked whether she knows the internet, the stunning reply is simply ‘No, what is the internet? I only use Facebook.’. The use of these new channels and ecosystems means an explosion of data that offers completely new opportunities for banking services. Financial institutions have entirely missed out on capturing these types of consumers and are now struggling to own enough data for better risk underwriting and to remain trustworthy. It is not the individuals that have to be financially included, it is the bank that must be included in people’s everyday life and got to stay relevant. A shift in dynamics.
ASEAN’s middle class will increase from 190 million to over 440 million people by 2025. This will translate into growth across most consumer sectors. We expect e-commerce to increase by 18 times by 2025, travel by 4 times and hospitality by 5 times. Lazada and other home-grown e-commerce sites were here at the right time and have driven the e-commerce sector. It should not surprise anyone that Amazon (US) recently launched in Singapore and JD.com (China), is eying the Indonesian market.
Driven by higher mobile penetration, better logistics and improved infrastructure, access to online shopping is getting easier day by day. However, cash on delivery, tedious payment processes and fraud are still challenges to create better customer experiences with enhanced security. Many local payment gateways and an increasing number of global payment players have provided digital solutions, yet an improved payment infrastructure is necessary to streamline processes. Transformation of existing payment stacks are happening in Singapore, Malaysia and Thailand. Financial technology will help to provide inclusive financial services through e-commerce channels, while cross-border payment infrastructure is being built to harmonise regional payment flows.
More than 85% of companies in Asia Pacific are owned by families that cover many industries including real estate, energy, natural resources, logistics and financial services. These family businesses are in a unique position to drive innovation across their portfolio and adopt a top-down approach for faster technology adoption. A different type of decision making takes place, one that is often more efficient than the relatively complex structures found in traditional corporates. Once there is buy in from the top, the execution and implementation takes place and provides effective economies of scale. Given the reach of many of these conglomerates, tech companies can provide their products faster to more customers. FinTech is only one layer of digitisation that transforms many business lines of the conglomerate. The holistic view of the businesses helps to push various new technologies (e.g. big data, mobile customer experience) to provide better products and services.
As financial institutions are often part of these large family-owned portfolios, financial technology has experience rising levels of interest helping to upgrade banking systems and to develop additional revenue streams. Large-scale projects like Wave Money in Myanmar or Mynt in the Philippines prove that support from conglomerates is necessary to push innovation.
There are 50,000 Financial and Non-Bank Institutions and more than one million micro finance organisations in ASEAN. On the other side, we have counted more than 1,000 FinTech companies in this region – some have been operating for decades or recently joined the FinTech tent.
Global regulatory schemes, such as Basel II and Basel III), put smaller financial institutions under pressure to consolidate their balance sheets and comply with increased risk capital requirements. We have seen several smaller banks across the region merge into larger institutions to create economies of scale. As with every merger, existing technology is under review and the new leadership is looking for cutting edge infrastructure solutions. Modern FinTech products are being considered against costly legacy core systems that were used in the past. This green field approach gives space for on-boarding both B2B and B2C products that will help smaller banks leapfrog and transform themselves into significant digital players. This approach could be disruptive to traditional tech vendors that now compete with agile start up solutions.
Like other tech industries, FinTech companies will also go through a phase of mergers and acquisitions. Enterprise companies typically achieve much of their growth through acquisitions (Oracle, FiServ, FIS Global) to build out their product stack. A consolidated FinTech space is necessary to provide integrated solutions to stakeholders. It is not sustainable to have over ten FinTech companies providing the same service, such as robo-advisors orp2p lenders in one country and consolidation will promote economies of scale
Chinese tech giants are actively increasing their footprint in ASEAN. Alibaba acquiring Lazada and Tencent investing in Mynt are only a few examples how expanding to this 650 million people market is a top priority for data-hungry Chinese firms. Jack Ma is an Internet Advisor to the governments of Indonesia and Malaysia which is a clear signal how these markets are hoping to benefit from Chinese tech and growth.
The biggest impact will be felt in payment flows, asset management and trade finance. Alibaba and Tencent are actively chasing businesses with payment licenses and their own capital and data flows. Lufax recently was granted a capital market license in Singapore to offer Chinese wealth management products to retail customers. As trade flows between China and ASEAN continue to increase, technologies will emerge to enhance efficiencies to streamline trade finance.
FinTech companies should have a China strategy from day one. It is crucial to be well positioned to partner with or potentially be acquired by Chinese tech firms.
Putting it all together
These five drivers will change the face of FinTech in ASEAN and ensure the region is at the forefront of financial technology. In summary:
- The focus of emerging FinTech companies will shift from B2C to B2B as financial institutions are able to on-board faster technologies for middle and back office.
- New infrastructure platforms will be built that consolidate the market in specific verticals for the next generation technology stack for financial services
- There will be an evolving dynamic, potentially including extreme competition, between Chinese tech giants and local incumbents for tech savvy consumers.