Fintechs Are Outperforming Banks in Driving Financial Inclusion
by Fintech News Singapore June 26, 2023In Southeast Asia, digitalization and technology are playing an important role in expanding access to financial services and fintech companies are spearheading the movement, a new research by the Centre for Impact Investing and Practices (CIIP), a non-profit established by Temasek Trust, in partnership with the United Nations Capital Development Fund (UNCDF) and Helicap, found.
The Financial Inclusion in Post-COVID Southeast Asia: Accelerating Impact Beyond Access report draws on an extensive study of Southeast Asian financial services providers and their clientele to assess the impact of financial access on customers’ business and livelihoods, quality of life, and household well-being.
Findings of a survey of 6,500+ end-customers and insights drawn from enterprise data from 20+ finance providers as well as industry interviews, revealed that fintech companies in Southeast Asia are reaching underserved segments at a higher rate than their traditional counterparts.
63% of fintech customers are first-time borrowers and 57% do not have access to alternatives, proportions that surpass those of traditional financial services providers at 46% and 40% respectively.
These findings show that overall, fintech companies are not only successfully reaching underserved communities, they are also delivering products and services that are oftentimes lacking in the market.
Across both incumbents and new digital challengers, the report notes that financial services providers in Southeast Asia are actively innovating in the design of their products and business models to reach new customer segments and address the key pain points customers face in accessing credit.
These players leverage digitalization to expand the availability and reach of their services, using, notably, mobile wallets systems as a form of distribution architecture that removes frictions for money transfers and the delivery of credit.
Providers are also relying on so-called “phygital” delivering methods to respond to local customer habits and preferences for cash and face-to-face interactions. This is evident for loan repayments where 29% of fintech players have customers who repay their loans using cash at bank branches or ATMs, while 21% pay to agents who visit their homes.
Channels used for customers to repay loans, N=23 (14 fintechs, 9 traditional), Source: Financial Inclusion in Post-COVID Southeast Asia: Accelerating Impact Beyond Access, CIIP, UNCDF and Helicap, June 2023
Digital financial services providers and traditional players are also partnering up to expand the reach of financial services to underserved communities. For example, in Indonesia, peer-to-peer (P2P) lender Komunal is teaming up with rural banks through its digital platform, helping them digitize their processes and provide their customers with the ability to make deposits and apply for loans entirely remotely.
Some providers are offering specialized, customer-centric products that are tailored to the specific needs and levels of financial and digital literacy of their customer segments.
For example, regional small and medium-sized enterprise (SME) platform Validus has developed a small ticket, unsecured digital lending offering for the micro-SME segment that can be understood easily and disbursed quickly. The end-to-end digital product allows microentrepreneurs come onto the platform, make an application and receive a decision within minutes based on Validus’ proprietary credit and risk model.
Efforts to develop customer-centric products and services are also manifesting in the form of embedded finance propositions. These solutions integrate financial services into the platform of a non-financial company and focus on delivering a superior and frictionless user experience. These models of credit can be used for both individuals and businesses, taking the forms of products such as buy now, pay later (BNPL) for e-commerce customers, inventory BNPL or earned wave access (EWA) for employees.
In Vietnam, for example, Vui App is a EWA provider which focuses on helping the low-income segment in the garment, leather, shows and electronic sectors.
In the Philippines, EWA leader SAVii targets employees in the business process outsourcing, food and beverage, manufacturing, and construction sectors. And in Indonesia, MSME neobank KoinWorks partners with companies to facilitate tech-enabled salary advances.
Efforts from governments and private companies to improve access to financial services in Southeast Asia have so far been fructuous. Between 2017 and 2021, account ownership rose from 48% to 55%, an improvement that has been in part attributed to increasing digital adoption.
Since COVID-19 began, 100 million new internet users in Southeast Asia came online, bringing the total number of internet users in the region to 516 million in 2022, or 75% of the region’s population.
Percentage of adults (aged 15 years and above) in Southeast Asia with a financial institution or mobile money account in 2017 and 2021, Source: Financial Inclusion in Post-COVID Southeast Asia: Accelerating Impact Beyond Access, CIIP, UNCDF and Helicap, June 2023
Increased access to financial services has led to positive outcomes. For nine in ten (89%) finance customers in Southeast Asia, credit access has improved the quality of life.
About eight in ten customers benefited from income increases (78%), improved ability to face major expenses (76%), and increased confidence in themselves and their abilities (80%).
Most customers also reported improved financial agency, with 86% seeing an improvement in their ability to achieve financial goals and 58% reported improved financial decision-making abilities.
Customer impact outcomes based on financial services providers with and without formal impact management and measurement systems, Source: Financial Inclusion in Post-COVID Southeast Asia: Accelerating Impact Beyond Access, CIIP, UNCDF and Helicap, June 2023
Despite positive strides, the study found that some 225 million people in Southeast Asia are still lacking banking account access and 350 million don’t have access to formal credit. Additionally, 39 million MSMEs face a funding gap of up to US$300 billion. These massive markets represent a notable opportunity for financial services provider and fintech companies alike, making financial inclusion one of the biggest investment opportunities in the region that promises both impact and returns, the report says.
Featured image credit: Edited from freepik
