FinTech in Southeast Asia: Understanding the Changing Landscape

In the rapidly expanding FinTech industry, Southeast Asia has emerged as a major worldwide player. The region is expected to generate over $38 billion in revenue annually within the following year and is home to some of the world's best-funded FinTech businesses.

Tech-savvy consumers who choose digital financial solutions over traditional ones are the main drivers of FinTech development in Southeast Asia. The majority of people in the area—more than 70%—don't use traditional banks.

With a sizable population of youthful, tech-savvy consumers, Southeast Asia's digital economy has tremendous room to grow. It's also important to remember that micro, small, and medium-sized businesses (MSMEs) are major engines of the Southeast Asian economy, majority of them have trouble getting bank loans since they don't match the requirements.

Particularly in the last two years, small firms and individuals have embraced FinTech exponentially. The number of startups has increased from 1,600 at the beginning of the COVID-19 pandemic to over 3,000 in Vietnam, the financial poster child of the region.

Trends Shaping the FinTech Ecosystem in Southeast Asia

1. Growth of Sustainable FinTech

Environmental, social, and governance (ESG) factors are finding their way into corporate and investment strategies as the need for sustainable financing and responsible investing keeps rising.

As a hub for all of Asia, The Lion City has made a name for itself as the largest green finance market in the region. The Central Banks and Supervisors Network for Greening the Financial System was founded by the Monetary Authority of Singapore (MAS) and seven other central banks worldwide to promote knowledge sharing and adopting best practices in green finance.

Simultaneously, the Singapore Exchange mandated that its member companies adhere rigorously to the ESG disclosures. The Central Bank of Singapore has allocated $50 million to support green technology projects.

2. Regulatory Factor

Southeast Asian governments have often viewed FinTech with pragmatism and forgiveness. Indeed, a friendly regulatory framework has been essential to the rapid expansion of regional FinTech software development companies.

The strategy has frequently resulted in creating "sandboxes," which are legal frameworks intended to improve the financial ecosystem across several industry verticals, such as P2P lending, payments, and virtual assets, as in Vietnam's case.

3. Rise of Digital Payments

Roughly 90% of clients use digital banking in the region's developed and developing economies. According to McKinsey's Personal Financial Services Survey, most consumers are inclined to receive extra services via digital channels.

Source: McKinsey

A fresh wave of regulatory intervention in the field, the ongoing adoption of 5G and the Internet, and the COVID-19 epidemic have all contributed to the sector's maturation. As markets move toward a cashless, contactless world, Statista estimates that 2.15 billion individuals in Asia used e-commerce in 2020, and by 2025, that number is expected to rise to over 3 billion.

Challenges Faced by FinTechs in Southeast Asia

1. Open banking and the fragmentation of data sources

Given the diversity and regulation of banking and financial industries in Southeast Asia, fragmenting data sources and implementing open banking might be difficult. The official authorities' data sources, commercial local services platforms, and utility networks' APIs are inferior to those in the US and European markets. Additionally, the Google Play Store has tightened its approval process for Android applications, which limits access to sensitive mobile device data used primarily for fraud signal detection and alternative credit underwriting for the underbanked population.

This is in response to growing concerns about data privacy and the implementation of the Pay with Protected Provider Act (PDPA) in many countries.

2. Lack of Tech Talent

The lack of technological resources may present challenges for firms in Southeast Asia. The region's IT industry is expanding quickly, even though some places may not have adequate infrastructure or highly qualified tech workers as others. Furthermore, there can be a fierce rivalry for IT resources, which drives up expenses and lengthens the hiring process.

Companies may need to be resourceful in their recruitment and allocation tactics to overcome these obstacles, such as outsourcing or developing internal talent. Alternatively, use low-code and no-code tools to piece together the platform with particular software as a service (SaaS) that fulfills different application requirements.

3. Privacy Issues

When it comes to sharing private information, there is less trust. For some reasons, including a lack of knowledge about the data's intended purpose, concerns about data security and privacy, and prior instances of data breaches or inappropriate use of personal information.

To give users peace of mind that they are in control of their information and are aware of the boundaries they are giving out, OCR technology is more frequently used in conjunction with APIs to read information from official documents like ID cards, passports, and utility bills.

What does the Future Hold?

Despite these obstacles, finance innovation is nevertheless flourishing in Southeast Asia. FinTech solutions can find plenty of opportunities in the region's numerous economies, each at a different stage of digital and financial development. Innovative financial services are still in great demand because of the large number of people without access to banking and the rising use of smartphones and the Internet.

Simultaneously, the FinTech ecosystem in Southeast Asia is strong due to its emphasis on inclusive and regional solutions. Startups that tackle particular regional issues like digital payments, microloans, and remittances are well-positioned for expansion. FinTech has a big chance to promote financial inclusion in the area and give marginalized groups access to financial services.

Southeast Asia has regulatory backing for FinTech. Local governments recognize FinTech's promise to advance financial inclusion and economic development. Through the creation of digital infrastructure, regulatory sandboxes, and advantageous regulations, many actively promote the industry.

Conclusion

The market's fundamentals are still solid even though Southeast Asia appears to be experiencing a FinTech bubble. Southeast Asia will remain a hotbed for FinTech innovation thanks to the region's sustained appetite for digital financial services, encouraging governmental regulations, and emphasis on localized, inclusive solutions.

Firms that are flexible and resilient in the face of market consolidation and funding difficulties can prosper and make valuable contributions to the ever-changing financial landscape of the area.

Even if these technologies fall short of the tremendous excitement around them, artificial intelligence (AI) and machine learning will continue to be major forces behind FinTech innovation in the future. For years to come, the direction of digital financial services in Southeast Asia will be shaped by the industry's ability to adopt these new technologies, the changing regulatory environment, and the emphasis on sustainable and green finance.