Digital wallets in SE Asia & the war on cash
As the proportion of banked population in SE Asia grows from ~30% to ~60% over the next decade, conglomerates and local bulge-bracket banks will be natural contenders to run horizontal wallets with aggregated payments, savings, insurance and investment services. Boundaries between traditional credit products at the tip of the iceberg and digital movement of money between bank accounts at lower-middle of the pyramid will sharpen. This war on cash at the base of the pyramid may lead to ‘rebundling’ of banking services. User experience of local bank applications will improve, regulatory arbitrage favouring vertical fintech players may narrow and the bottom-middle of the pyramid in the range of 10-25 USD cash flow/day will rise and start desiring higher margin savings, insurance and investment services. SE Asia may witness a combination of the Chinese model of service aggregation at application layer, and the Indian model of identity and authentication infrastructure, on which to run these aggregated services. Creation of large but domestic islands is, however, a risk and payment networks might play a role in keeping these new infrastructures interoperable and running reliably at scale.
- Resurgence of local banks’ digital commerce: Vertical fintech plays in SE Asia are shifting towards getting business and making exits at traditional, old money banking establishments or at new entities entering the banking business. This will improve user experience of local banks’ digital offering even faster. The need for faster, simpler and less expensive digital tools for new customer acquisition and onboarding will help banks link these new customers to digital commerce services from the outset.
- Flattening of wallets: On the one hand, ambitious plans for creating national payment schemes, gateways and payment standards will result in ‘platforming’ of dominant transaction services like utility bill payments in mid-term while those grander goals are being met, to show intermediate wins. This will accelerate increase in number of services inside wallets. On the other hand, the big push by 3rd party wallet providers to move from online-only to offline spend categories will accelerate their direct competition with banks’ wallets. Both trends will make wallets more horizontal.
- Bifurcation of credit at PoS: Into longer instalment plans of 12-24 months for big ticket items and much shorter term 5-15 days’ credit lines supporting smaller ticket consumption uptick. Informal credit lines extended by corner grocers and sari-sari stores to their regular customers are getting a digital makeover and will be interesting to monitor.
- The urban-rural divide in SE Asia: Urbanization and mass migration from smaller towns are creating mega capital cities. Metro Manila, Jakarta and others are stretching and growing. Infrastructure, connectivity, smartphone penetration and cost of acquiring merchants and customers look very different in the capital v/s the rest of the country.
- Data and insights as the new asset: Algorithms and data sets producing rich insights at the top of the pyramid, will start getting applied to the middle-bottom and bolster business cases for digital commerce in this main battlefront against cash. While large tier 1 wallet providers build this alternative data repository on their own for captive adjacent businesses, smaller tier 2 pure-play wallet providers and banks might be more receptive to mash-ups and marketplaces for this transaction data.
Interplay of forces: dynamics
- Credit cards ‘race to the top’: The creamy top will be able to sustain the virtuous cycle of marketing & rewards and grow, but with a narrower product portfolio and may be a follower segment for digitalization. Debit cards and prepaid cards lend themselves to digitalization more vigorously and it will be interesting to see if the lines between these and digital interbank transfers get fuzzy.
- Shift of digital micropayment market share back to banks: 3rd party wallet providers are trying to seed fundamental shifts in consumer behaviour and simultaneously change attitude of the masses to cash in emerging South and SE Asian markets. Banks (technically those with a banking license) will benefit from this mid-term as the loyalty fostering intensity of cashback and other incentives from these 3rd party wallet providers may not be enough to keep customers from churning to banks’ improving digital offering. Accounts, and the role of moving money between these accounts, will become more important.
- Two worlds in the same country: Most SE Asian markets may witness their capital city creating more open and interoperable commerce systems while the rest of the country runs a subset of bill payments, domestic person to person (P2P) transfers and ticketing services. However, if Artificial Intelligence (AI), Natural Language Processing (NLP) and chatbots start supporting vernacular local languages in hinterlands, take up of these conversational commerce services will be much faster than projected in these areas having lower literacy rates.
ChIndia: Services & infrastructure for rest of Asia?
Much has been written on the BAT triumvirate in China and their digital commerce presence. Digital identity & authentication framework in India has also started catching media attention. The India stack and Aadhaar based digital ID systems may start becoming reference models for rollout of similar commerce supporting services in SE Asia. They could simplify identification and verification workflows and boost activity rates after application downloads.
The horizontal wallet++ will rule, eventually
The rising lower-middle of the pyramid will get more sophisticated over time. Transactional payments will be the start, not the end of the race. The lower-middle consumers will look at these accounts to save, then borrow and lend, later to insure and eventually even to invest. The perception of these digital accounts will not be limited to being consumption supporting expenditure tools, but vehicles of financial aspirations.
Role of payment networks
Banks will need to shield and buffer their core banking systems from this plethora of services. The role of payment networks might expand beyond traditional credit, debit and prepaid instruments to also become the interoperable middleware that moves money across bank accounts with connectivity to core banking on the one side, and provides open APIs to a diverse set of service providers & merchants on the other side.
What should you be doing?
- Circle back from O to O to O: Irrespective of whether your services start from online or offline, you will need to cover the other side and then loop the circle back to your starting point. The power of data insights will be higher and so will be your relevant share in consumers’ everyday spend.
- Cash & coins replacement, not plastic credit cards replacement: While having credit cards digitalized is good to have, getting to scale will need you to look at dominant cash replacement use cases.
- If you are not one, be one …or buy one: Access to a banking license may become important for offering the right mix of commerce services.
- Shopping, not just payments… Need to have supporting loyalty and rewards incentives even when it is only a payment tool.
- …then savings -> insurance -> investments: May have to layer more services as customers mature, to tap into higher margin services.
- Charity begins in the wallet: Donations, loyalty programs and other VAS like connectivity to local govt. services will become emotional hooks and make customers stay invested in your platform.
- Spin cycles -> delayed cash-out: For those running hybrid stored value accounts, the trick will be to how to make the cash coming in the account ‘spinning’ in your platform with more services and how to delay or avoid cash-out from your platform.
Note: A similar hypothesis was laid out in the Indian context this week. Linking here to acknowledge, not to serve as confirmation bias.
Disclaimer: This note is based on personal observations, interactions with people in the field and others’ commentaries in public domain. It is written in my personal capacity and does not imply endorsement of/from any organization I have been affiliated to.
Reading list on related topics:
On understanding digital consumers and designing habit forming products
On the many ills of cash and coins