How Embedded Finance Can Leapfrog Traditional Banking in Southeast Asia

How Embedded Finance Can Leapfrog Traditional Banking in Southeast Asia

With high smartphone penetration, a surge in digital adoption accelerated by the pandemic, and a population still largely unbanked, Southeast Asia is uniquely positioned to forge a 21st Century financial sector built on the strength of fintech and embedded finance.

About 70% of Southeast Asian consumers are unbanked or underbanked, but mobile penetration is nearly 100% (smartphones are at 68%). During the , 40 million more people s came online – twice the rate of previous years – and 1 in 3 users of digital services were new to those platforms.

“Southeast Asia has this opportunity to catapult itself to the forefront by leveraging embedded finance,” said Flourish Ventures Managing Partner Tilman Ehrbeck on a Sept. 30 webinar for the 2021 Asia PE-VC Virtual Summit. “The traditional banking system is at a lower starting point, so the region can forge its own path.”

Moderated by DealStreetAsia Founder & Editor-in-Chief Joji Philip, the webinar also featured Sheel Mohnot, Co-Founder & General Partner of Better Tomorrow Ventures. Tilman and Sheel discussed how U.S. investors are gauging Southeast Asia’s fintech potential – and both were most excited by embedded finance.

The Power of Platforms

“Most of Southeast Asia skipped the whole banking experience of going to a traditional branch, opening an account and having a checkbook,” said Joji, explaining the momentum shift underway. “They’re also using software for the first time on the mobile phone.”

In these markets, digital platforms that already established (such a Grab, Gojek, Facebook, and others) have the potential to embed financial services and reach consumers who traditional finance could not.

“Gig economy and social media platforms are really important in people’s lives. They have high engagement and low customer acquisition costs, and they generate data that has predictive power to [underwrite] credit and insurance,” Tilman said. “In that context, embedded finance is super powerful.”

For example, gig economy platforms like Grab can provide drivers and delivery workers with customized credit and insurance. Traditional insurance would never have covered these gig economy workers.

The next decade of embedded finance will be built on top of these platforms, Sheel predicted, as well as fintech infrastructure. “We’re still in very early innings,” he said. “Part of the excitement about embedded finance is these companies laying the infrastructure, the building blocks for the next set of companies.”

Net-New Business Models for SME Finance

Another embedded finance trend Sheel cited was SME finance. “What excites me is there are net-new businesses that could not have existed in the U.S.,” he said. For example, “mom and pop shops using software for credit underwriting. You have millions of shopkeepers using products like CreditBook in Pakistan.”

Building on top of the cloud-based B2B infrastructure of API-based fintechs, new services can provide SMEs as well as consumers better services at lower cost.

“This opportunity is unique to emerging markets,” said Tilman. “You have 10s of millions of corner stores, they live in the informal economy, they pay in cash – very inefficiently – and they keep their books on paper. So, by digitizing the corner store, you bring efficiencies to the procurement and logistics side, and you start to learn about the business. You can proxy the cash flows and say this store can easily borrow for working capital.”

This ability to underwrite SME credit (where the traditional financial system could not) spurred Flourish’s investments in ShopUp in Bangladesh. Similarly, TaniHub in Indonesia connects farmers with steady buyers and creates visibility into their cash flows.

Remaking the Financial System

These new models of digital finance for SMEs and smallholder farmers are just two examples of how Southeast Asian fintechs are innovating with embedded finance.

“Fintech in the West is looking at how big finance can be disrupted or done better, but across Southeast Asia, these startups aren’t targeting that,” said Joji. “They’re trying to remake the entire financial system.”