Southeast Asia's fintechs: Target the underbanked

by Morgan Davis

Traditional banks and fintech companies are the ultimate frenemies. The long-established traditional finance firms have carved up southeast Asia like a Risk board, staking their claim to service the affluent classes in developed areas, while the fintech companies reach out to the underbanked. But in between, the borders are blurred. 

Innovation has spilled into southeast Asia from tech-heavy China, while Singapore has become an established fintech centre for the region. But Singapore isn’t the land of opportunity for non-traditional finance companies. The real attraction of entering southeast Asia is not to compete with the existing banks in well-serviced Singapore, but to reach the underbanked populations in nearby emerging markets who have never dealt with banks, says Chia Tek Yew, head of financial services advisory for KPMG in Singapore. 

Alibaba’s Alipay and Ant Financial are obvious examples of a non-traditional finance company making waves in the region. Alibaba took China by storm, and it made sense to everyone when the e-commerce giant decided to expand its business through financial platforms. Alibaba dealt with Chinese clients who lacked credit cards and who had little or no experience of electronic payments.

But southeast Asia isn’t China. While Ant Financial knows China like the back of its hand, and vice versa, the company recognizes the limits in its abilities outside the country. Because of that, Ant Financial and Alipay’s work in southeast Asia is done through local partners. 

“You don’t see Alibaba coming in and saying ‘OK we’re going to set up an identical Alibaba platform here’,” says Yew. “You need to understand the market.” Local partners provide practical ways to adhere to regulations and meet local demands,” he says.

It’s the Facebooks and Googles of the world that really keep the banks up at night, not the explicit fintech companies, says Yew. “The fear (at banks) isn’t about the fintech companies, it’s about the unknown. Ant Financial raised more funds in 12 months than DBS in its entire lifetime!” laughs Yew. “That sort of pace and that sort of impact, we couldn’t have predicted.”

But Pearlyn Phau, deputy group head of consumer banking and wealth management at DBS Bank, says fintech companies are definitely direct competitors to DBS’s business, and existing financial players have to shift their business to keep up.

“These players are demonstrating that even without physical branches, they are able to get a large number of people,” she says. “Even in our core markets like Singapore and Hong Kong, we have to develop a defensive play as we are vulnerable to attackers coming in with digital solutions,” she adds. 

“Fintechs have huge customer bases, low cost of acquisition, and can pretty much do what a bank can do – lend money, raise money, move money,” says Phau. “If we don’t lead the (digital) charge, we might die.”

Banks have adopted some of the tech functions other companies use so well, like chatbots to communicate with customers, to improve what they’re already doing, points out Yew.

CIMB, for example, launched a chatbot called CIMB EVA (enhanced virtual assistant) late last year. The company has also set up a fintech unit, poaching Oliver Crespin from DBS this spring to lead the business as chief fintech officer. CIMB says more than 90% of its total banking transactions are done through digital and self-service channels at this point.

For CIMB, fintech companies are potential partners. CIMB is working with fintech partners in Vietnam to establish a new digital-only business. They hope to replicate that business in the Philippines next year, says Samir Gupta, chief executive of CIMB Group consumer banking,

But CIMB acknowledges that its growth plan will continue to focus on the affluent classes.

Part of the reason banks have stayed away from the lower-tier customers is because of cost. It’s expensive to jump through the hurdles of opening a bank account for someone who will have little money and few transactions with the bank over the years. Technology cuts down on those costs and makes the underbanked accessible, says Phau, something that spurred DBS to change its approach in 2013 from a focus on affluent customers to a more digital and accessible platform. 

“Driven by these developments, the bank recalibrated its strategy and drew up its digital agenda as the most critical strategic initiative,” says Phau. Results have included projects such as a mobile-only bank in India called Digibank, catering to the mass retail market. It reached 1.3 million customers in India in 15 months, and the bank plans to expand to Indonesia in the coming weeks.

Maxine Ryan, co-founder of remittances start-up Bitspark, calls the fintech evolution “un-banking the banks. We really believe in the future you’re not going to need a bank account or this arduous verification to do what you need to do,” she says. “Fintech is not really competing with the traditional banks; it’s finding opportunities in places they’ve had to leave.” 

Punnamas Vichitkulwongsa, chief executive of Ascend Group, says that banks can be valuable partners for them too. 

“We see a huge complementary role of banks,” he says. Reaching the underbanked is Ascend’s speciality – Ascend is an Ant Financial partner – but eventually those customers will grow their assets and seek out additional financial services that a traditional bank can provide.

“We make recommendations for our users for the best financial products they can engage with,” says Vichitkulwongsa. “For banks, there’s finally a partner that can reach the (underbanked) population. It’s a win-win for all.”

When it comes to fintech in southeast Asia, it’s impossible to hold a conversation without speaking about the underbanked. For generations, entire communities have gone underserved or completely unserved by banks that focus on the revenue-generating upper classes. But fintech companies don’t have the cost burdens of traditional financial firms, and for them the underbanked offer a huge opportunity. 

That’s exactly the case for Ascend Money, Ant Financial’s Thailand-based partner. In late 2016, Ant took a minority stake in Ascend, whose True Money business also operates in Indonesia, the Philippines, Vietnam, Myanmar and Cambodia. The company is focused on payments, but wants to expand into other financial services, Vichitkulwongsa says.

“We see there’s a huge opportunity,” he says. “We want to become the best financial services platform.” 

True Money’s business model is a franchise of sorts, recruiting mom-and-pop mobile phone shops, as well as larger convenience stores, to work as agents and transaction terminals for Ascend. The shops get Ascend’s branding, and work as in-person agents and trustworthy neighbourhood faces for customers, while completely cutting the costs of establishing bank branches. Terminal services go beyond basic banking, explains Vichitkulwongsa. Customers can work with agents to pay on e-commerce websites, for instance. “We don’t think of payments as a sustainable piece, but as part of the commerce loop,” he says.

Ant’s Alipay technology links in with Ascend, creating a mobile wallet for the region. “Our wallet users will be able to travel to other countries that use Alipay and their wallet will be accepted,” says Vichitkulwongsa. Likewise, Chinese tourists will be able to use their Alipay platform in popular holiday hubs such as Thailand and Cambodia and Chinese companies will be able to reach customers in southeast Asia. 

Ascend’s True Money estimates that it operates through about 50,000 agents for 30 million users, processing more than $2.8 billion in the year to date. Vichitkulwongsa believes that around 65% to 75% of the population in southeast Asia is underbanked or unbanked, leaving a massive market gap. 

Unlike their banking counterparts that are mired in strict regulations and the bulk of their institutions, fintech companies can play somewhat fast and loose in their approach to finance. The fintech companies have all but abandoned traditional approaches to banking, and it works because the primary customer base isn’t used to dealing with traditional banks and they don’t trust them. 

“In this segment, banks really need to adapt to what customers know,” says Isabella Carvalho Silva, fintech mentor at Hong Kong’s SuperCharger Fintech Accelerator. It’s not credit cards and bank branches “that’s the main challenge for banks,” she says. DBS’s foray into the digital world is the exception, not the rule when it comes to bank innovation, cautions Carvalho Silva. Most banks are still focused on the top tiers of clients. “There’s never been a real interest in serving the bottom of the pyramid,” she says. 

E-commerce is an easy way into non-traditional banking for both companies and customers, says Yew. For companies like Alibaba, they need customers who don’t have credit cards and bank accounts to access and pay for items digitally. “Unless there is a payment facility put in place, the growth of the platform will be stifled,” says Yew.

Payments services are the natural first for developing fintech in new markets, explains Yew. Peer-to-peer lending and crowd funding often develop next. Insurance and other services soon follow, he says. Looking at Alibaba, it’s the perfect example of an e-commerce company that developed payments, and then a broader financial platform to provide the suppliers on its platform with funding.

“It’s an evolution,” says Yew, emphasizing that Alibaba never set out to be a finance company. “It’s a way to remove the pain points in the ecosystem they are in.”

“It’s very costly to acquire customers,” adds Vichitkulwongsa. Developing a payments business will help secure customers for a company that wants to expand into lending or other areas. 

Customers who haven’t used banks are sceptical of handing over what little money they have. Known e-commerce companies can gain clients’ trust by providing them with goods first and services later. 

“The trust of millennials, in particular in technology companies, is ever-increasing,” says Yew. “The trust they have in the banks and insurance companies are declining.” Tech companies like Google are seen as independent information providers, empowering individuals, while banks are black boxes. “Anyone who has grown up during the Asian financial crisis has lost money in the banks,” says Yew. 

Middle class Filipinos, for instance, still take their paychecks to an ATM and cash out, points out Carvalho Silva. “If they’ve never been really served by the banks, how can they have loyalty?” she asks. 

Ryan agrees: “Our customers have mobile phones, but they don’t have a bank account.” Without a bank account, clients like Bitspark’s are cut off from the economic access others have, she says. 

Tech companies may not roll out perfect products, but people perceive them as quick to improve and develop to fit needs, adds Yew. “The brand reputation of some of these companies are so strong, people trust them more than traditional banks,” he says.

So while partnerships can offer opportunities, the threat of tech companies in finance is also real.

“Fintechs and non-traditional banking players like Alibaba are attacking the financial services value chain,” says Phau. “Our future success depends on our ability to innovate, harness the digital revolution and completely re-imagine the role of banks.”