Beyond marketplaces and motorcycles: Digital banks need to formalise ASEAN’s informal economies
Over the last decade, ASEAN fintech brands were content to play at the shallow end of the digital financial services pool, dabbling in lending (P2P, crowdfunding) or simple payments services (e-wallets, mobile money).
This changed practically overnight in 2020, however, as lockdowns and social distancing measures put lending on the backburner. Instead, the focus turned to risk mitigation and sending new digital users toward growing insurance and investment products, while greatly accelerating payments and remittances.
The e-Conomy SEA 2020 report by Google found that while loan books were practically flat at US$23 billion last year, investment assets under management skyrocketed by 116 per cent, insurance by 30 per cent, and remittances by 43 per cent respectively.
Enemies at the gates
COVID-19 saw higher risk consciousness and larger demand for insurance coverage online. This was particularly true when it came to bite-sized microinsurance products offered in-platform thanks to partnerships between apps and insurers.
Remittances — already a major segment pre-pandemic thanks to the Philippines’ standing as the third-largest remittance-receiving country- got a further shot in the arm in 2020 as both regulators and employers took payments online.
Google expects these behavioural changes to last through 2025 when up to 40 per cent of the total remittance value will be transacted online.
Online platforms, namely super-apps that boasted large ecosystems of transactions, took the leap into more complex digital financial services. Grab had already launched its Pay Later scheme in Singapore in 2019.
It quickly expanded the service to other ASEAN markets in 2020 as people’s spending cash took a hit and banks tightened lending. The super-app also started offering micro-investments via a robo-advisory subsidiary and then leveraged partnerships with legacy asset managers.
Gojek (now GoTo) was not to be outdone. In December 2020, its fintech arm GoPay took a major stake in a licensed Indonesian entity to convert Bank Jago into GoPay’s very own in-house digital bank. This was just months after Gojek partnered with a local insurtech company to launch the app’s microinsurance in Indonesia.
Banks cannot rest on their laurels anymore and pretend their corporate and enterprise accounts will keep them afloat. No longer can they ignore microfinancing products due to high transaction costs. The super-apps are only a year into their digital banking war, but it won’t be long before they start sizing up bigger, more lucrative accounts.
Brick-and-mortar banks still have their legacy accounts and large, on-ground networks, as well as strong KYC experience to exploit. As licensed banks with high capital buffers to withstand economic shocks and decades of specialisation (as opposed to super-apps who roll out and shut down new verticals frequently), legacy banks have a lot of fight in them yet- if, and only if, they execute fully digital plays themselves.
Regulators have stepped up quickly, with Indonesia expected to release regulations for the establishment of digital banks in late 2021.
Financial inclusion vs economic inclusion
Micro-financing products in ASEAN have long been linked to financial inclusion, which the World Bank defined as adults having access to and the ability to use a range of appropriate financial services.
At its most basic level, formal financial inclusion starts with having a deposit or transaction account at a bank/FI or through a mobile money service provider. The account can be used to make and receive payments and to store or save money.
For banks, financial inclusion (and microfinance) has been a buzzword to trot out in the name of ‘national service’ or CSR, not really seen as a real money-making segment with deposit and transfer fees all but non-existent.
As of 2019, close to 200 million people in ASEAN were unbanked, and another 98 million underbanked (meaning they have a bank account, but nothing more). In Indonesia, there were 92 million unbanked and 47 million underbanked. But in 2021, the unbanked number is bound to be much lower, with millions of Indonesians in the super-app ecosystems using some form of e-wallet or micro-lending product.
Legacy banks should turn their focus to the underbanked, and focus on ‘economic inclusion’ instead, being banked and having real upward mobility via access to loans, investing, and insurance products.
World Bank research found that digitising social transfer payments in African countries cut down corruption, administrative costs, and most importantly, travel and wait times for beneficiaries, especially those in rural areas who had to close shop for the day.
Elsewhere, those with insurance invested in riskier, higher-return technologies. In India, index-based rainfall insurance allowed farmers to cultivate riskier cash crops that commanded higher prices.
Formalising the informal in ASEAN
There are some similarities in our neck of the woods. In addition to farmers, ASEAN’s massive and still growing gig economy is made up of ‘warung’ owners, freelancers, solopreneurs, independent service providers, and more. While the informal gig economy is by no means a monolith, banks can leverage digital partnerships to transform it, piece by piece, while simultaneously launching new, profitable product lines.
Banks have the ability to offer competitive interest rates and lower-risk structures compared to, say, P2P and crowdfunding platforms. Those with more capital heft may choose to build their digital banking arms in-house, while smaller banks can instead form strategic M&As with digital banking startups that serve to channel the unbanked and underbanked.
In early 2020, global fintech Nium launched a remittance-as-a-service (RaaS), enabling third-party companies to offer remittance services on their own platforms. Banks in remittance-heavy countries like Indonesia and the Philippines can immediately bring a cost-effective payment offering to their corporate and enterprise clients (which doubles up as an employee benefit) while catering to the millions of overseas workers who send and receive money weekly.
Banks bring their familiarity with local labour and financial regulations while offering low transaction fees. With informal workers using a bank’s RaaS frequently, it becomes easier to offer relevant products such as micro-insurance against health and workplace risks or micro-investments for children’s education.
Banks can also work with P2P lenders such as Modal Rakyat, which can serve as yet another channel for formal microfinance products. Apps like this usually already have a solid database of freelancers who trust them when it comes to getting working capital for projects. This gives banks an ‘in’ with an already diverse subset of gig workers.
For ‘warung’ or mom-and-pop shop owners, platforms like Awan Tunai have done a good job building trust and lending products while digitsing transactions that were before mostly made in cash. With access to this key segment, banks can offer competitive lending and risk management products and build credit scoring methods based on data collected by Awan Tunai.
There are many ways to make the digital banking leap, but simply rolling out a digital banking option is not enough. It is a cost and labour-intensive undertaking in a very competitive (yet lucrative) space that needs to pay off.
Therefore, legacy banks need to figure out how to penetrate the gig economy in ways that complement and leverage their existing product and consumer verticals.
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