It is expected that over time, fintech customers will build up some credit history and gain financial discipline

The phenomena of economic growth and investment attractiveness often coincide. In this respect, Southeast Asia provides a good example.

Today, the world economy is growing at an average rate of 3 per cent per year. Meantime, the dynamic of SEA countries has been almost twice ahead in the world.

In particular, tourism with rich natural and human resources have facilitated it. However, one of the most significant reasons looks even more ordinary.

Local countries have only recently overcome the agricultural past, so previous underdevelopment of many economic sectors explains the rapid dynamic of GDP.

Although underdevelopment doesn’t seem attractive, it still indicates opportunities for a leap forward. Quickly entering people’s lives, fintech has confirmed this pattern.

Online services, including lending ones, are drawing higher interest among the population. The same refers to investors looking for profit, and there are some points to their advantage.

Rapid economic growth and low penetration of lending services

Even the most optimistic estimates state that no more than 50 per cent of the population in Southeast Asia have a bank account. About 450 million people don’t have access to lending services. Besides, high poverty, uneven urbanisation and cultural peculiarities some regions are holding back the penetration of banks and development of lending.

Then, many people still shy away from formal lending and address relatives and friends to borrow some funds.

However, impressive rates of economic growth have promised to change the situation in near time.

Thus, only Brunei and Singapore will have rates lower than the global average, while other countries in the region easily outpace the forecasted 5 per cent.

Economic growth has an effect both on commercial entities and the population of Southeast Asia. Improved welfare promotes an increase in consumption.

The share of people whose income allows to meet only basic needs is expected to fall from 50 per cent in 2010 to 30 per cent in 2025.

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The middle class will almost double. Apart from a direct increase in domestic spending on goods and services distinct from basic, the culture of consumption also corresponds with the formation of lending institutions and loans perceived as a normal part of the expenses structure.

Low competition with banks and banking products

Most banks in Southeast Asian countries have developed with an eye on the Western counterparts focused on solvent private clients, large enterprises and government institutions.

Although these services are in demand, it prevents them from tapping to a broader audience often lacking credit history and bearing higher risks.

At the same time, to open additional branches in remote areas means higher transaction costs and a complicated collection. That is why there is a gap between a bank and a client.

Large banks are not interested in working with small loans because of significant transaction costs. At the same time, an average loan amount in Asia is rarely above US$300. Meanwhile, own statistics of Robocash Group shows that advances of even less size (about US$100) are in higher demand.

Focus on online activities helps microfinance companies working in this segment to reduce transaction expenses. There is a shining example of the Philippines, where an electronic transaction takes 1 per cent of the amount that would be needed if to serve it at an offline branch (US$3).

Regulation and government support

There is a distinct interest from regional authorities in the development of alternative lending in Southeast Asia. In addition to providing convenient access to finance for end-users, this segment helps to solve socio-economic issues and improve the welfare of people.

There are regulatory sandboxes in Brunei, Indonesia, Malaysia, Singapore and Thailand. Moreover, Southeast Asia has no countries that are not elaborating legal requirements to non-bank lending and digital data security.

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Most of them have already formed a minimum set of regulatory conditions facilitating the provision of alternative lending both online and offline.

Raising mobile and internet penetration

Remarkably, most countries with the adoption of fintech above 60 per cent belong to the group of developing countries. In contrast, Japan and the United States have lower figures.

So there is a clear correlation between a rapid increase in the use of mobile and Internet technologies and the dynamic growth of fintech and alternative lending.

The reason is in the age of people in these countries. With 50 per cent of the population under 30 years old, Southeast Asia turns out to be more open to technological innovations. Meanwhile, the average age in developed countries is much higher and thus assumes more conservatism among people.

At the same time, it is essential to mention the heterogeneous nature of the fintech market. Digital lending is not the most rapidly growing segment in Southeast Asia.

It takes only 8 per cent of the total number of all fintech companies, while payments services comprise almost 40 per cent. It gives an idea that the lending sector remains undervalued that only strengthens its investment attractiveness.

Also, with an expanding digital footprint of customers, lending companies may consider more information when assessing potential solvency. In turn, it allows managing risks at an appropriate level.

Bright prospects

Apart from factors explaining why the industry is growing, there is a real statistics on digital lending. According to BBVA, it is developing countries where this market will actively expand. Meanwhile, the digital segment is the most promising one that is also confirmed by the current statistics of Robocash Group on the prevalence of online channels over offline ones.

Undoubtedly, investing has always been associated with risks, and digital lending also has them. The main points are related to competition primarily caused by a broad expansion of Chinese fintechs to Southeast Asia.

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Although competition is necessary, market oversaturation may slow down the growth of some companies and the overall industry that investors wouldn’t welcome. Moreover, there are significant local banks with an eye on the segment as a potential asset in the future.

Banks will have to step on the digital path already explored by fintech companies before. Most likely, banks will need at least several years to tap the opportunity in full. Meanwhile, fintech players will only increase their potential.

Sure, long-term prospects add some elements of risk and uncertainty into investment attractiveness of the alternative lending and fintech in Southeast Asia.

Nevertheless, if there is a question on a specific investment in fintech on the agenda today, then premises in its favour certainly outweigh any doubts.

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Image Credit: Jonas Leupe

 

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