Digital payments are growing at a fast pace in Southeast Asia. Mobile payment wallets have become a vital part of the Southeast Asian consumer landscape, allowing financial access for millions of previously excluded people. As online spending soared during the COVID-19 pandemic, mobile payment wallets saw a surge in newly registered users. In Southeast Asia, the pandemic and several other factors in the years prior to the pandemic have led to the rise of alternative payment methods that are disrupting the financial landscape in the region.

Key drivers

Covid-19 pandemic

The pandemic, by far, has provided the biggest thrust to the digital payments ecosystem in the Southeast Asian region. It also helped overcome the fear of virus transmission, which was one of the reasons for many to prefer the cash economy. As businesses went digital, people shopped online and completed financial transactions with a few clicks on their smartphones or computers. Businesses across sectors were forced to adapt and transition to a hybrid way of work and life, offering solutions via dedicated online platforms. However, no sector was as affected as the payments industry – it significantly ramped up capacity to cater to the burgeoning requirements of a slew of new and existing customers. The pandemic has transformed the entire payments ecosystem; contactless transactions have become more dominant much earlier than previously anticipated.

Low penetration of traditional banking across the region

Southeast Asia has a large number of unbanked individuals who are more than keen to embark on an alternative payments journey, given the lack of banking penetration in the region. According to a report, the majority of the population in Southeast Asia is unbanked, with about 73 per cent or 470 million people unbanked as of 2020. This is an extremely high figure, indicating the low penetration of basic financial services in Southeast Asia compared to other regions. Cambodia is among the countries lagging far behind, with traditional banking services accessible to only 5 per cent of the population. In the backdrop of such a landscape, the presence of digitally powered alternative payment systems is enabling Southeast Asians to enjoy the perks of banking services without having to access traditional structures. The growing payments ecosystem encourages financial inclusion while also accelerating economic growth and development.

Growth in e-commerce

E-commerce has proved to be another catalyst for the growth of the digital payments ecosystem in the Southeast Asian region. It has expanded steadily and has, in turn, promoted the adoption of alternative payment methods. According to a research study, ecommerce in Southeast Asia has spiked because of the pandemic, with Indonesia exhibiting the biggest appetite for the online marketplace, followed by the Philippines and Malaysia. E-commerce offers customers myriad benefits, ranging from the safety of shopping from their own homes to the convenience of paying on delivery and of easy return policies. The report states that Southeast Asia has a higher prevalence of e-commerce than mature economies, with Indonesia having the highest rate of e-commerce adoption globally (at 87 per cent as of 2020).

Thailand and Malaysia followed close behind, with 84 per cent and 83 per cent respectively of internet users purchasing things online. Southeast Asia has been a late adopter of the internet, and most of the region’s population accesses e-commerce and digital payment methods through increasingly affordable and accessible smartphones. Indonesia also topped the list of the world’s largest mobile e-commerce users, with 79 per cent of the country’s internet users having bought items online using a mobile device.

Adoption trends

Usage of digital financial services is expanding strongly in Southeast Asia, a trend mostly driven by digital payments and digital lending adoption, according to the eConomy Southeast Asia Report 2021. According to the report, all digital financial services are flourishing in Southeast Asia, but digital payments and digital lending, in particular, have been leading the change, driven by strong usage of digital services such as e-commerce, ride-hailing and food delivery, and infrastructure development. Between 2020 and 2021, the share of ewallet and account-to-account (A2A) transactions rose by 1 percentage point and 2 percentage points respectively, to the detriment of card payments, whose market share declined by 1 percentage point. Usage of A2A transactions has been propelled by infrastructure development and real-time payment systems like FAST/PayNow in Singapore and PromptPay in Thailand. These platforms are becoming a popular form of payment amongst consumers, allowing a fast, cheap and seamless experience.

In April 2021, PromptPay recorded a roughly 80 per cent year-over-year (YoY) growth in transaction value. In Singapore, instant payments grew 58 per cent over the previous year. After digital payments, digital lending is another area poised for strong growth. After a year of uncertainty, the appetite for digital lending from both consumers and merchants rebounded this year. On the consumer side, there was a 14 per cent YoY increase in lending related searches on Google, the report says. Digital merchants are also showing interest in embracing digital lending with about 30 per cent stating they would likely increase usage of supply chain financing and buy now, pay later (BNPL) offerings in the near future. Digital lending outstanding balance is projected to reach $39 billion this year, up 48 per cent from 2020.

Between 2021 and 2025, the figure is expected to increase by 31 per cent to reach $116 billion. Besides digital payments and digital lending, digital insurance and robo-advisory services are other fintech segments that have recorded strong growth in Southeast Asia. Digital insurance premiums reached $3.2 billion in 2021, up 40 per cent from the previous year. It is expected to reach $9 billion in 2025. Southeast Asian robo-advisory platforms cumulated 12 million users in 2021, up 32 per cent from 2020. It’s predicted to surge to 23 million by 2025. Mobile phone penetration in most Southeast Asian countries has significantly outpaced credit card or bank account penetration. In Indonesia, for instance, around 75 per cent of the population owns a mobile phone, while credit card ownership is negligible and only half the population has a bank account. Additionally, about half of Southeast Asia’s population is under the age of 30 and tech-savvy; the region has adopted online payments faster than their counterparts in the West.

The way forward

Going forward, according to the eConomy Southeast Asia Report 2021, in 2025, it is projected that e-wallet transactions will make up 7 per cent of all transactions, up 3 percentage points from 2021 levels. Transaction value will more than double by then. Further, by 2025, the share of A2A transactions will make up 22 per cent of all transactions, up by 2 percentage points from 2021. Rising consumer adoption has pushed merchants to follow suit with over 90 per cent of digital merchants now accepting payments digitally, the research found. Over the next one to two years, 92 per cent of digital merchants expect to continue using or increasing their usage of digital payments, with e-wallets being their top choice.