Are Digital Service Providers’ Financial Inclusion Efforts in Asia Bearing Fruit?

Are Digital Service Providers’ Financial Inclusion Efforts in Asia Bearing Fruit?

by June 28, 2023

In Southeast Asia, the availability of digital financial service alternatives has had a transformative impact on financial inclusion. These initiatives have empowered individuals and micro-businesses, creating opportunities for job creation, education, improved healthcare, and enhanced livelihoods. 

The positive outcomes of these initiatives are highlighted in the Financial Inclusion in Post-COVID Southeast Asia: Accelerating Impact Beyond Access report, which was developed by the Centre for Impact Investing and Practices (CIIP) in collaboration with the United Nations Capital Development Fund (UNCDF) and Helicap. Here we explore some of the key findings of the report, emphasising the role of digital financial service providers in driving financial inclusion in the region.

Addressing barriers to credit access

The prevalence of smartphones is attributed as the primary access point for many in the region, with nearly three-quarters (74%) of customers interviewed in the CIIP survey reported experiencing improved use of financial services because of tech like mobile phones and internet. Critical for sustained financial inclusion, 82% feel safe performing financial services online.

The study reveals that the financial services landscape in Southeast Asia consists of approximately 6,500 providers, including traditional finance institutions and fintech companies. These providers are actively working to overcome barriers to credit access by adopting various strategies. 

They are expanding the availability and reach of financial services through digital channels and partnerships, tailoring products to meet specific customer needs, implementing embedded financing methods, and addressing gaps in financial and digital literacy. By taking these steps, digital financial service providers are playing a crucial role in fostering financial agency among marginalised individuals and micro-businesses.

Financial Inclusion Asia Stats

Source: “Financial Inclusion in Post-COVID Southeast Asia: Accelerating Impact Beyond Access”

Southeast Asian respondents to the CIIP survey indicated that they have a good understanding of loan terms, including fees, interest rates, and penalties. 92% of customers surveyed agreed terms and conditions are easy to understand and clear, though only 53% strongly agreed.

Perhaps just as important, 86% of customers surveyed said they did not have a problem paying back their loans and did not consider them to be a burden, placing Southeast Asia far ahead of the global benchmark of 65%.

Establishing trust and ensuring positive impact

The report emphasises the importance for digital financial service providers to establish themselves as trusted actors and deepen their positive impact on customers. To achieve this, these providers have focused on reducing costs and risks, digitising backend processes, and utilising alternative data for underwriting. 

They are also investing in customer protection, improving customer retention, and lowering delinquency and default rates through continuous customer engagement. Furthermore, digital financial service providers are intentionally integrating financial inclusion impact into their business mission and strategy, aligning their operations with the goal of achieving long-term financial sustainability while serving the needs of their customers.

Leveraging digitalisation and partnerships

The COVID-19 pandemic has accelerated the digital transformation in Southeast Asia, with 100 million new internet users joining the online community since the outbreak began — bringing the total connected users in the region to 516 million, which is around 80% of the population in 2022. This surge in digital adoption has led to the emergence of various digital financial service providers, including fintech companies, embedded financing providers, and digital banks

Traditional financial institutions are also rapidly digitising their operations to improve efficiency and offer better-quality products. This digitalisation wave is accompanied by new partnerships between traditional and digital players, as well as collaborations across sectors, allowing a wider range of customers to access comprehensive financial, business, and other services through integrated digital ecosystems and platforms.

Expanding access to reach underserved segments

Digital financial service providers are playing a vital role in expanding access to financial services in Southeast Asia. They are particularly effective in reaching underserved customer segments, including urban, low-income, and male customers. 

According to the CIIP survey, fintechs are outperforming traditional financial services providers in serving the underserved. 63% of fintechs are more likely to reach first-time borrowers versus 46% of traditional financial services providers, and they offer services that fill crucial gaps in the market, such as mobile wallets that allow safe and effective loan disbursement and repayment.

This accessibility is achieved through innovative business models, partnerships with local players, and the development of specialised, customer-centric products.

Financial Inclusion Asia Post Covid

Source: “Financial Inclusion in Post-COVID Southeast Asia: Accelerating Impact Beyond Access”

Driving cost reduction and risk mitigation

Digital financial service providers are actively seeking solutions to bring down costs and risks to achieve scalability and long-term financial sustainability. They are digitising backend processes, automating know-your-client (KYC) procedures, underwriting, loan disbursements, and payment reminders. 

These providers are also leveraging data from mobile app behaviour, e-commerce transactions, harvest cycles, and agronomic information to develop efficient credit scoring methods for customer segments that lack credit history and transaction data. While these practices are still evolving in Southeast Asia compared to other markets, they present opportunities for differentiation among providers.

Customer protection and literacy enhancement

Digital financial service providers are investing in customer capacity building to bridge gaps in financial and digital literacy and entrepreneurial skills. They are delivering training courses, running public campaigns, and bundling services to improve customers’ exposure to financial and business products beyond credit. 

These initiatives aim to elevate both financial and digital literacy among their customer segments, ensuring they can make informed decisions and effectively utilise the services offered.

Are Digital Financial Service Financial Inclusion Drives Working?

Source: “Financial Inclusion in Post-COVID Southeast Asia: Accelerating Impact Beyond Access”

Untapped market and the digital divide

Despite the progress made in expanding access to credit, there remains a significant untapped market in Southeast Asia. Approximately 225 million people in the region lack access to bank accounts, while 350 million have no access to formal credit. Moreover, 39 million micro, small, and medium enterprises face a funding gap of up to US$300 billion. 

The digital divide is still prevalent, with fintechs predominantly targeting urban and male customers. However, some fintechs are making efforts to focus on rural customers. 76% of traditional financial service providers are more successful in reaching women customers compared to just 57% of fintechs.

57% of fintech customers saying they could not find a good alternative compared to 40% for traditional financial services providers. To achieve digital equity, more fintechs need to extend their focus to women, rural, and lower-income customers, while traditional providers should continue to enhance their reach through digitalisation.

Broadening the range of services

Digital financial service providers have a significant opportunity to offer a broader range of financial and business services, in addition to credit. Customers accessing non-credit services demonstrate higher impact outcomes, such as 10% more increased savings for those who access non-credit services, 5% higher in improved quality meals, and 6% increased spending on home improvements. 

While insurance and savings are popular services, business-related services, such as business development and e-commerce services, are particularly valuable to female customers, fintech users, and urban customers. By diversifying their offerings, digital financial service providers can enhance their impact on customers and contribute to their overall financial well-being.

The study clearly demonstrates that digital financial service providers have played a crucial role in driving financial inclusion in Southeast Asia. Their innovative business models, focus on customer needs, digitalisation efforts, and partnerships have expanded access to credit and other financial services, benefiting individuals and micro-businesses.

However, challenges remain, including the need to reach underserved segments, bridge the digital divide, and offer a wider range of services. By addressing these challenges, digital financial service providers can continue to foster financial inclusion and contribute to the socio-economic development of Southeast Asia.