How to close Southeast Asia’s financial inclusion gap

While Southeast Asia’s economy has come a long way in the last decade, over six in 10 Southeast Asians remain underbanked or unbanked today.

Micro, small and medium enterprises (MSMEs) are a critical driving force in Southeast Asian economies, accounting for 69% of the national labour force from 2010 to 2019, according to a report by the Asian Development Bank. However, a lack of a formal credit history and cumbersome requirements hinder their ability to access capital, limiting their potential for growth. In a 2021 study by the Tech for Good Institute, over 60% of surveyed MSMEs were unable to get a loan when they needed financing.

Informal workers, estimated to account for over 70% of the Southeast Asian workforce, also remain financially underserved. Many lack bank accounts, are in debt, and transact predominantly in cash, making it difficult to build 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-level services such as savings accounts. For some, a lack of awareness, fear of hidden fees and high prices are deterrents against buying insurance and investment products that are critical to protect against unexpected scenarios and keep their financial goals on track. Others may require more affordable, bite-sized insurance plans, instead of large payments.

As Southeast Asia seeks a path out of the pandemic, it will be critical to enable greater access to capital and other financial services to set the foundations for a sustainable economic recovery.

The good news is that the digitalisation of financial services has provided new tools to solve these persistent barriers to financial inclusion, and Southeast Asia is well-placed to benefit.

Mobile phone penetration in most Southeast Asian countries has significantly outpaced credit card or bank account penetration. In Indonesia, for instance, around 75% of the population owns a mobile phone, while credit card ownership is negligible and only half the population has a bank account. Additionally, about half of Southeast Asia’s population is under the age of 30 and tech-savvy; the region has adopted online payments faster than their counterparts in the West.

Meanwhile, COVID-19 has accelerated the uptake of digital financial services and payments. Lockdowns and social distancing rules have encouraged users to embrace online transactions for their daily needs, from groceries to bill payments.

From 2018 to 2021, countries across the board have seen growing adoption of cashless payments (see infographic below), and companies have followed suit in providing digital financial services (DFS).

DFS providers are using big data like online purchase histories and informal worker earnings to develop customer risk profiles for people who lack credit scores. For example, in Indonesia, Grab has collaborated with JULO, a digital credit provider, to provide same-day micro loans to drivers and delivery partners.

Data is also coming handy in extending loans to MSMEs. Grab, for instance, can assess data on their business earnings made via the Grab app, customer reviews and other transactions to determine credit-worthiness, before lending to them.

There are new opportunities to “fractionalise” large expenses. DFS providers are breaking up chunky payments for financial services into smaller bite-sized payments that are spread over time and embedding the purchase of these into intuitive, relevant touchpoints.

In Singapore, some insurers have begun offering usage-based personal accident insurance for freelance workers. Workers contribute hourly micro-premiums based on gig assignment type and are covered only for the period that they engage in that work. This increases affordability and access to insurance. Grab’s PayLater solutions also enable consumers to break up the payment of goods in interest-free instalments, to better manage their cash flow. These services provide options for people who do not have credit cards and keep them away from more risky or unregulated credit.

These are exciting possibilities but companies will not 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 achieve win-win outcomes.

1. Digital Adoption: Access and adoption of digital payments is the first step, but in 2020, more than 80% of all transactions between consumers and businesses in Southeast Asia were in cash. DFS providers can work with governments to design outreach programmes for specific groups that are reluctant to go cashless, including small traditional businesses, seniors or rural citizens, and provide critical nudges and incentives to spur national adoption. For example, in 2020, the Malaysian government introduced a nationwide stimulus programme that employed selected e-wallets service providers including GrabPay to disburse government funding to 15 million eligible Malaysians and encourage secure, convenient consumer spending amidst the pandemic.

2. Awareness and trust: There also remains a gap in understanding the benefits and potential risks of DFS. Financial technology companies, educational institutions and government agencies can work together to drive financial literacy, which is important as more financial products become accessible to people who previously had limited 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: Equally important is the need for government and DFS providers to come together to co-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 critical 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 unlock the universal challenge of financial inclusion. Solving this will be critical to drive more sustainable socio-economic progress in Southeast Asia and support everyday Southeast Asians.

But success cannot be achieved in silos and the mission is big. While fintech players can do their part to drive innovation and experimentation, deeper cooperation between governments and companies is also key. If we can do this, Southeast Asia’s future will shine bright.