Leading the charge is South-East Asia’s leading fintech platform, Grab Financial Group, which offers payments and financial services across lending, insurance and retail wealth management in the region. This rise of consumer fintech is expected to accelerate even further as it takes the biggest slice of the pie in venture capital transactions in South-East Asia; it already hit a record $10 billion in the first half of last year, surpassing 2020’s level of $8.2 billion.
Fintech is slowly waking up to the underserved consumer population in South-East Asia
Image: Bain
However, we have yet to see the same level of activity in innovation in the SME fintech space, an untapped trillion-dollar market opportunity that will unlock potential for a largely underbanked segment in the region.
Why is there a lack of innovation in financial services for SMEs? Historically, traditional banks did not invest enough in digital innovation and business capabilities to serve SMEs simply because it was unprofitable. For example, while it’s clear that SMEs in South-East Asia face large funding gaps (see below), extending credit to this customer segment is often not “worth it” for banks once risk profiles, or lack thereof, are taken into consideration.
SMEs are struggling to get the same recognition from fintech providers
Image: Bain
Despite this challenge, it is possible to address this critical barrier through innovation in the collection and use of new data sources on SMEs. Fintech lender First Circle has been successful in profitably lending millions of dollars to underbanked SMEs in the Philippines every year. This is enabled by its robust risk engine built on top of proprietary data collected from mapping thousands of business-to-business (B2B) supply chain transactions across various industries since 2016. This level of granularity in data also allows for further segmenting of the SME market into smaller homogeneous groups with similar working capital needs and risk profiles. Subsequently, it is easier to provide tailor-made financial products, from credit lines to B2B supplier payments, deposit and payroll accounts, and more.
While banks and fintech companies play a critical role in innovation and inclusive economic growth, the private sector cannot and should not do it alone. It takes longstanding public-private partnerships to make a significant impact, especially in the area of SME development. In the Philippines, its central bank, the Bangko Sentral ng Pilipinas (BSP), is at the forefront. The BSP’s Deputy Governor of the Financial Supervision Sector, Chuchi Fonacier, said: “The BSP is working closely with both the government and the private sector in pushing for various programmes recognizing that a whole-of-nation approach is needed to further the financial inclusion of SMEs.”
This work spans multisectoral projects, like the credit risk database of anonymized financial, non-financial and default-related data of SMEs, which addresses two critical barriers: the issue of cumbersome requirements faced by SMEs when applying for credit; and financial institutions’ lack of access to high-quality SME data.
Finally, the BSP is spearheading progressive legislation such as the Philippine Identification System Act, the Philippine Innovation Act and the Personal Property Security Act, which that will be game-changing in bringing millions of SMEs into the formal financial system so they can actively participate in the digital economy.
The digital economy in South-East Asia is at an inflection point. The pandemic has brought unprecedented challenges, but also spurred innovation and rapid change. Individual consumers have flocked online, with consumer fintech and e-commerce innovation on the rise, while the SME sector remains stuck with traditional ways of banking and doing business.
The private and public sectors must work together to address the digital and financial skills gap for SMEs; they should also facilitate new fintech innovation, especially in the area of credit and payments, to unlock the sector’s potential and speed the pandemic recovery. Ultimately, bringing SME development to the forefront will be the bridge to achieving broader inclusive growth and economic development in the region.
Benedict Carandang, Vice-President, First Circle Growth Finance
Tricia Canaveral, Former Head of Marketing, First Circle Growth Finance
The article was originally published in the World Economic Forum. You can read it here.
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