A study late last year by Google, Singapore sovereign wealth fund Temasek, and Bain & Company, tracked five key digital financial service verticals in South East Asia: payments, remittance, lending, insurance and investments.
Conducted before the ravages of the Covid-19 pandemic, the report (covering Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) nonetheless offers some pointers to the future for New Zealand. That is especially the case given that, as is in New Zealand, parts of SE Asia have generally survived Covid-19 rather better than countries such as the UK and the US.
“Fulfilling Its Promise – The future of Southeast Asia’s digital financial services” – noted that the region, with a population of 570 million (and a growing GDP expected to reach $4.7 trillion by 2025) offered tremendous opportunities for digital banking services. In particular, it pointed to the potential size of the small and medium enterprise (SME) market in SE Asia, which faces large funding gaps. It is the SME market that dominates New Zealand business, and that tends to have been slower to pick up on the advantages offered by developments in fintech digital channels.
The report, conducted pre-Covid 19, suggested the SE Asian financial services industry had tremendous potential that could be unleashed if fundamental underlying challenges were addressed. Digital payments and remittance in SE Asia were at an inflection point, the report said. But it also noted the region’s very high smartphone penetration and engagement could make customer adoption of digital services easier, and provide more opportunities to offer embedded financial services.
According to the Google, Temasek, Bain & Co report, digital payments are now the most advanced digital service in the SE Region and were expected to exceed US$1 trillion in transaction value by 2025. Other services such as lending, investment and insurance, were still emerging, but each was expected to grow.
“Digital lending will naturally emerge as the largest revenue contributor led by innovations in consumer lending and SME working capital financing,” said the report.
And while the banked segment is a major focus for established players, the “under-banked” segment represented the biggest potential and was the true growth engine in digital financial services, said the report. “Consumer tech platforms are well-positioned to gain share in the underbanked segment given their large, expanding and engaged customer base.” The SME merchant opportunity in SE Asia remained a largely underbanked segment in most markets. The Reserve Bank of New Zealand during the Covid-19 lockdown encouraged using electronic channels wherever possible to limit the need to go into branches.
New Zealand domiciled cloud-based accounting software platform Xero, which is focused in the SME sector, in a recent media statement asserted that during lockdown, nearly three- quarters of Kiwi small businesses had to make quick changes to their technology to keep their business functioning. Xero quoted NZIER economic modelling (completed pre Covid-9) showing that a 20% uptake in cloud-based technology would deliver huge productivity gains for businesses and contribute up to $6.2 billion in annual GDP growth for New Zealand’s economy. It was clear technology is key to small business success, Xero said. But while there was a huge opportunity centered around small businesses embracing technology, that wasn’t feasible for many of them. According to Xero, half of all New Zealand SMEs have said adopting cloud technology was too expensive. The company has recently produced a report suggesting nearly half of small business decision makers would use a government subsidy to adopt cloud-based tools into their business.
It is unclear yet how deeply the pandemic will alter digital financial services in either New Zealand or SE Asia. But it is clear there are already major changes taking place in banking. In New Zealand, according to a report in the NZ Herald in July, the major banks have already closed 32 branches and reduced hours across the country.
Customers are increasing having to rely upon phone and digital internet-based services just to communicate with their banks. And some banks do not yet seem to have fully adjusted to these new needs, suggesting there are opportunities for a range of other suppliers to enter the market in digital banking and other financial services.