The Digital Finance Roles in Financial Inclusion in Southeast Asia

A study by Asian Development Bank’s (ADB) on digital finance in Asia concluded that addressing digital finance in the countries on could raise their gross domestic product (GDP) hugely on the countries focused on.

ADB engaged with consulting firms Oliver Wyman and MicroSave to conduct a study named “Accelerating Financial Inclusion in Southeast Asia with Digital Finance”  focusing on four Southeast Asian markets which is Indonesia, Philippines, Cambodia, and Myanmar. The research focuses on financial inclusion in three segments namely base of pyramid (BoP), women and micro, small and medium enterprises (MSMEs).

More than 80 stakeholders were interviewed across the four markets and extensive research, and analysis. They found that widening the opportunity of digital finance could raise GDP by between 9% to 14%, even in relatively large economies such as the Philippines and Indonesia. In Cambodia, the possible boost to GDP is as high as 32%.

According to the study, “Making the most of this opportunity could also help influence the future shape of the financial services industry, particularly in smaller markets such as Cambodia and Myanmar, where only a small percentage of the current needs for financial services are met by formal providers. In Cambodia, for example, formal institutions meet only 16% of the demand for savings facilities from people in the financial inclusion target segment.”

The effects on improved digital finance option are far reaching for small enterprises, female and low income populations. Advanced technologies that are currently being used nowadays including:

  • Alternative digital information, such as biometrics data, to verify customer’s identity for account opening and payment authorisation.
  • Alternative platforms, such as mobile phones and digital platforms, to enable last-mile access. These will enable the financially excluded and people in rural areas to be reached without the need for physical bank branches.
  • Mobile wallets developed by non-banks, such as mobile network operators, to improve the customer experience in savings and payments.
  • Analysis of transactional and digital footprint data to generate insights to improve customer targeting and credit risk assessment.

The growth of financial inclusion will require action from public policymaking institutions and regulators. The unattractive economics serve them continues to be a challenge for the supply side in terms of resource and investment mobilization. For the target customers, the solutions on offer are often not attractive alternatives to the current informal solutions. Moreover, they are held back by a low-level of financial literacy and overall awareness.

In the base of pyramid and MSME segments, ADB estimated that digital finance could address up to 40% of the gap in payments volume and 20% of unmet credit needs. Furthermore, they estimated that the cumulative effects of such digitally-driven financial inclusion could boost GDP by 2% to 3% in markets like Indonesia and the Philippines and 6% in Cambodia. They mention that “For the population earning less than $2 a day, that would translate to a 10 percent increase in income in Indonesia and the Philippines, and an increase of around 30 percent in Cambodia.”

From the report, they suggested that to create a level-playing field by allowing both traditional financial services players and new participants such as mobile network operators (MNOs) to collaborate and compete in order to close the gaps.

Other than that, producing a roadmap for financial inclusion to focus the efforts of various stakeholders, put in place a governance mechanism to facilitate coordination, and ensure stakeholder accountability to be processed in all relevant government departments. Data security must be bolstered, therefore, every transaction by the users will leave a trace, added by the report.

The report concluded that the BoP could be the greatest beneficiary of digital finance. This is because of the segment easy to expose base on the low financial literacy, its lack of alternative option for example to earn credit, and the difficulty it has to expressing grievances effectively. Hence a suitable policy and regulation must be implemented as a public policy that will play a vital role in consumer education and protection.