Despite being home to a 650 million population and emerging markets, Southeast Asia counts a big number of its populace as unbanked or underbanked at around 80 percent. Meanwhile, in China, while the percentage is significantly lower at around 20 percent, the sheer size of this population--at around 225 million people--makes it a ripe market for disruption.

This is defined as not having sufficient access to mainstream financial services that are typically offered by retail banks. Thus, such groups of individuals transact in cash, and they do not have access to financial instruments like credit cards, loans, mortgages, and the like.

In emerging economies, however, this subset of the population can also provide the much-needed boost to the economy, through inbound remittances. For example, China is the second top recipient of remittances, having received US$67.4 billion in 2018. In Southeast Asia, the Philippines and Vietnam are also counted in the top 10 global remittance recipients.

This year, inbound digital remittances to Asia will amount to US$26.18 billion, growing a 17 percent CAGR to US$42.16 billion by 2023. Improving accessibility and reducing costs would be greatly beneficial to this sector. To date, the average cost of remittances is at 7 percent, and the U.N. Sustainable Development Goals aim to reduce this to 3 percent. FinTech players can partner with various institutions in making payments and other financial services cheaper and more accessible to potentially address this need.

“According to a World Bank report, banks and post offices are the most expensive remittance channels, charging up to 11 percent and 7 percent, respectively, and such high costs of money transfers dilute the benefits of globalization,” says Victoria Krapivina, Head of Business Relations at Elevate Ventures. “Because of this, millions of migrant workers fall victim to exorbitant pricing without other options to remit funds back to their home countries. Sustainable development would, therefore, call for a more efficient and cost-effective means of providing such financial services.”

Addressing the challenge of fragmentation through partnerships

Even amidst the rising popularity of digital payment platforms, cash-based transactions still dominate in Southeast Asia. “Case in point, although cashless was one of the main thesis points of a mobile-first economy for Southeast Asia, we still see a strong reliance on cash throughout the business cycles,” says Saemin Ahn, Managing Partner at Rakuten Ventures, an early-stage corporate venture capital fund focused on empowering the startup ecosystem to positively affect Internet services globally. “In China, the conversion into a 80% cashless share was done with strong support from the government and a unified regulatory body.”

According to Jacky Lee, Chief Executive Officer at Tranglo, fragmentation is one of the biggest challenges in achieving cost-effectiveness in cross-border payments and fund transfers. This pertains to both regulatory frameworks and technical solutions. “The biggest regulatory challenge is the fact that each country/region has its own set of regulations encompassing differences in withholding taxes, double taxation status, compliance requirements, forex restrictions and more,” he says.

As per the World Bank report cited by Krapivina above, traditional facilities like banks and post offices would usually charge a premium on top of their fees, when partnering with exclusive money transfer operators, which drives up costs that are passed on to consumers. “Renegotiating exclusive partnerships and letting new players operate through national post offices, banks, and telecommunications companies will increase competition and lower remittance prices,” reads the report.

Tranglo, which is a company that provides seamless cross-border payments, achieves this through finding local partners in each target country, in order to find the most efficient means of providing such services. For instance, the company has partnered with Alipay and WeChat Pay HK, which businesses can leverage for their cross-border payments. “We seek out partnerships with reputable payment touchpoints all over the world so remittance players can save on operational costs, improve liquidity and give it back to consumers in terms of better services and lower/competitive prices,” says Lee.

How digital transactions can help give the economy a much-needed boost

Surely, reducing the cost of digital transactions such as cross-border payments and remittances will benefit migrant workers who need to send money back home. However, the bigger economic benefit can be felt across the region. For one, it will open markets for small businesses that can now cater to a more regional or even global clientele through digital products or by servicing customers from across borders, even without stringent banking requirements and procedures necessary when accepting payments through traditional channels like credit cards.

The digital payment ecosystem in Southeast Asia is set to grow from US$600 billion today to US$1 trillion by 2025, according to the e-Conomy study by Google, Temasek, and Bain & Company. The internet economy is expected to comprise a big part of this--almost half will come from internet-driven services such as e-commerce, ride-sharing, and the like. Digital wallets are expected to grow at a faster rate, from US$22 billion in 2019 to US$114 billion in 2025.

“The big unbanked and underbanked population in the region should be seen as an opportunity for FinTech companies and startups. Platforms that are already established are already making a big impact on this population,” says Krapivina.

With partnerships making transactions easier and more cost-effective across borders, now is the time for businesses to grab this opportunity for growth and financial inclusion.

Image Credit: Pexels