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Open for Business: Southeast Asia’s Digital Payments Revolution

For people in the world’s most developed economies, the digital payments revolution is largely a matter of convenience, steadily consigning to history the days of fishing through bags and prising open wallets.

In developing markets, meanwhile, this revolution is transforming lives. Nowhere is the transformation happening more rapidly than in Southeast Asia.

In fact, as well as being one of the most dynamic growth areas in the global economy, Association of Southeast Asian Nations (ASEAN) countries are becoming the next megamarket for digital consumer finance[1]. ASEAN is the world’s fastest-growing region for mobile wallets, with the number of active accounts among the ASEAN-5 + Vietnam countries forecast to grow more than threefold to about 440 million by 2025[2].

This explosive growth is being driven by several factors.

A Wave of Digitization

Southeast Asia is experiencing a wave of digitization. The region added 400 million new Internet users in the first year of the global pandemic, and 70% of the ASEAN population is now online[3]. The Covid-19 crisis also triggered a broad expansion of e-commerce and demand for transfers and contactless payments that hasn’t faded even as the pandemic wanes.

Conversely, despite the increase in Internet users, about 70% of Southeast Asia’s adults remain either unbanked or underbanked[4]. In addition, micro, small and medium enterprises (MSMEs), which account for 97% of the region’s enterprises and two-thirds of its workforce[5], have often been locked out of mainstream finance, and face a funding gap of US$300 billion[6].

Closing that gap is critical to the region’s future prosperity. Indeed, the Asian Development Bank[7] has identified the strengthening of MSMEs as the most important factor in Southeast Asia’s economic recovery from the pandemic. Research[8] shows that three-quarters of the region’s MSMEs want access to more digital payments, while half want to see greater digitization in lending.

“This combination of factors has created the ideal conditions for digital financial services to flourish in Southeast Asia,” said Herani Hermawan, Head of Global Liquidity & Cash Management, HSBC Indonesia. “In regional countries such as Indonesia and the Philippines that have large, highly dispersed and often remote populations, digital finance is proving to be particularly transformational.”

ASEAN is the world’s fastest-growing region for mobile wallets

ASEAN-5 + Vietnam countries forecast to grow more than threefold to about 440 million by 2025
70% of the ASEAN population is now online

Ripe for Disruption

Indonesia has emerged as the largest digital payments market in ASEAN. The volume of payments jumped almost 40% in 2020, and e-commerce platforms doubled their transactions to about 430 trillion rupiah (about US$30.1 billion)[9].

This is symptomatic of a fundamental shift in a commercial culture that formerly valued cash transactions above all others – partly because Indonesia’s scattered archipelago of 6,000 inhabited islands left many communities with no alternative option.

The change has been accelerated by Indonesia’s central bank, which has introduced a mandatory national QR code system (the Quick Response Code Indonesia Standard, or QRIS) with the purpose of stimulating interoperable digital payments among the country’s 65 million MSMEs and the many consumers who have difficulty accessing credit cards and other mainstream financial services.

This is particularly important for Indonesia’s future growth. MSMEs account for about 61% of the country’s economy but access to credit is an ongoing problem. A US$50-70 billion financing shortfall in the MSME sector has resulted in an estimated US$130 billion in lost value creation.

Banks have an important role to play in plugging these gaps and driving transformation.

“In the e-money market, banks will increasingly serve as funding conduits because growth in this market hinges on increasing the levels of card and bank account ownership,” said Winnie Yap, Head of Global Liquidity & Cash Management, HSBC Singapore. “Mobile wallets need links with bank-run infrastructure to draw funds into their proprietary systems.”

In the Philippines, it’s a similar story. While remote, rural areas of the archipelago remain cut off from the digital economy by underdeveloped infrastructure and skills shortages, digital adoption has still taken off. Among digital merchants, 97% accept digital payments and two-thirds have adopted digital lending facilities. According to one survey, about 40% of merchants say they would not have survived the pandemic without access to digital platforms.[10]

Likewise, as the region’s biggest recipient of overseas remittances, mobile wallets have partnered with banks and other service providers to offer cheaper international transfers as a primary feature.

Banks Play a Key Role

Historically, development of digital financial services has focused on individual consumers rather than small business. As more and more people in Southeast Asia adopt virtual wallets, knitting MSMEs into the emerging digital financial landscape will be an important part of the region’s economic future.

Banks are central to this goal. By improving merchant payment capabilities and integrating mobile wallet payment flows across online and offline channels[11], for example, banks can address the specific needs of MSMEs and stimulate the micro commerce that dominates much of the region’s economic activity. For cross-border transactions, as longstanding leaders in the payments sector banks are well-positioned to create integrated services for businesses as well as retail consumers.

HSBC’s digital wallet for SMEs is an example of how banks can smooth the commercial payments system and open up new avenues for businesses. The digital, multi-currency low-fee account enables rapid local transactions and real-time funds management on a single, secure platform.

As ASEAN become increasingly economically integrated, services like the digital wallet will accelerate the expansion of local companies as they explore new regional opportunities.

“The digital financial revolution is often portrayed as something that will make banks less relevant,” said Shayan Hazir, Head of Global Liquidity & Cash Management, HSBC Bank Malaysia Berhad. “In fact, banks will play a central role in shaping the future economic landscape of Southeast Asia. By merging their existing traditional expertise with emerging financial technologies, banks will be at the forefront of a new age of financial inclusion.”