Digital Growth and Financial Inclusion in Southeast Asia

By Karen Lee and Diego Lingad

On April 12, 2021, Grab announced that it would list on the NASDAQ stock market after a landmark merger, catapulting the Singapore-based tech company into the global spotlight. For Southeast Asian citizens, however, Grab is a household name. Beginning as a ride-hailing app in 2012, Grab’s services have expanded beyond transportation to include food delivery and digital payments. Although “superapps” (apps that offer multiple digital services on a single platform) in Southeast Asia have been lauded for their efforts to promote greater financial inclusion, their ability to scale sustainably is less certain. Risks include underprepared national cybersecurity frameworks and a persistent digital divide that has improved slightly during the Covid-19 pandemic. These risks offer an area for the United States government and development finance institutions to encourage the secure and sustainable growth of fintech in the region. 

Ride-Sharing Apps and Mobile Wallets

The two giants of Southeast Asia’s fintech industry today, Singapore-based Grab and Indonesia-based Gojek, both began as ride-hailing apps. In 2017, Grab launched its payment platform GrabPay, which now has over 100 million users across the region. The company’s leveraging of a transportation demand gap to attract initial users before expanding into the digital payment ecosystem has allowed it to overcome adoption barriers to fintech, including lack of awareness and trust. 

In Southeast Asia, where 73 percent of the population is estimated to be unbanked, online payment platforms like GrabPay are expected to increase digital financial inclusion by allowing customers without physical bank accounts to make purchases. A 2019 survey of almost 5,000 consumers and merchants in the region found that unbanked borrowers can utilize alternative data such as e-commerce transactions to prove credit worthiness. Grab’s PayLater service, which allows the app’s loyal users to pay for goods on credit, is a potential proof of concept. 

Commercial banks, recognizing the growth potential of digital banking, have launched their own e-wallets or in some cases partnered with superapp companies. In 2019, Thailand’s Kasikorn Bank partnered with Grab to launch an e-wallet for unbanked customers called GrabPay by KBank. Indonesia-based Bank Jago also became the country’s fourth most valuable listed bank last year after receiving investments from Gojek, and is planning on partnering with Gojek to embed its financial services on the company’s platform.

The Risks of Scaling Up 

As ride hailing apps in Southeast Asia expand into financial services to become superapps, they face significant risks. Although harnessing mobile financial technology can present a more creative model of financial depth and include unbanked users, it should not come at the risk of cutting corners in cybersecurity, digital inclusion, and regulations. The digital divide between rural and urban consumers also presents a challenge to the equitable adoption of fintech tools.

Data breaches due to weak cybersecurity infrastructure are a significant risk. In the first four months of 2020, Indonesia experienced over 88 million cyberattacks. In May 2020, a data breach at Tokopedia, Indonesia’s largest e-commerce platform, jeopardized more than 15 million user accounts. An expected $18 billion merger between Gojek and Tokopedia also means that a single data breach could lead to greater disruption and expose even more user data. According to a 2018 report from CSIS and McAfee, weak cybersecurity systems cost the Indo-Pacific region more than $300 billion in economic losses. Individual companies cannot deal with cybersecurity alone, and governments have an interest in strengthening national systems to enable private sector growth and as a matter of national security. Wider adoption of Grab and Gojek’s financial services may spur financial growth and inclusion, but allowing the companies to become too big to fail poses questions that antitrust and financial regulations need to address. Regulating these services will need to balance consumer protection and the integrity of national financial systems without inundating growth.

The all-in-one nature of these apps also raises concerns about their ability to provide sustainable financial services. A slide from a Grab investor presentation from April 2021 lists some of the risks of investing in the company, including that “Grab relies on its partnerships with financial institutions and other third parties for payment processing infrastructure” and “Grab’s business depends upon the interoperability of Grab’s superapp and platform with different devices.” The same presentation reveals that Grab has not made net profits since its inception. Risks from primary ventures of rideshare and food delivery could affect these companies’ ability to lend and store money. External shocks to the rideshare businesses, such as a pandemic that halts commutes, or patchwork regulations that have disenchanted similar companies before, could also leave companies in a credit crunch and unable to meet financial commitments to consumers. While Grab and Gojek have managed to navigate the tapestry of social change and varied laws of Southeast Asia, doing so in the absence of common regional standards will become more difficult as the industry becomes more crowded.

The digital divide in Southeast Asia is also another barrier to scaling up, and risks leaving large segments of the population out of a mobile money boom. Across the region, urban consumers make up 85 percent of e-wallet users. Increasing the reliance on superapps without first addressing the digital divide risks leaving behind lower-income and rural communities. On the supply side, meanwhile, this digital divide sets a cap on companies’ potential market penetration.

How the United States Can Help

Because first-mover advantage is crucial, early U.S. assistance to Southeast Asian markets could help American investors in e-wallets and digital payment platforms remain competitive in the face of similar efforts by Chinese tech giants such as Tencent and Alipay. Engaging in this sector now also gives the United States a seat at the table as countries define digital norms in consumer privacy and the free flow of data.

Increasing digital capacity in developing countries would fit in with USAID’s Digital Strategy for 2020 to 2024, which aims to counter cyber threats and increase digital infrastructure in partner countries. USAID has a proven track record of investing in financial inclusion in Southeast Asia; since 2015, the agency’s E-PESO project has worked with the Philippines’ central bank to support the digitization of the Bureau of Internal Revenue systems, open mobile tax payment platforms for local governments, and assist the Department of Trade Industry in training women entrepreneurs. The Philippines’ Department of Social Welfare and Development has also partnered with USAID during the Covid-19 pandemic to develop ReliefAgad, a digital app to distribute pandemic relief funds to beneficiaries’ e-wallets or bank accounts. While the digital divide persists across Southeast Asia, national governments have shown more willingness and drive during the coronavirus pandemic to shift services to mobile platforms. U.S. investment into existing government initiatives would likely be welcomed.

Development finance institutions like the U.S. International Development Finance Corporation and the Asian Development Bank can address barriers to the growth of mobile financial services, namely through investing in cybersecurity and bridging the digital divide. Such institutions have the advantage of working with the private sector to complement USAID’s work with regional governments. Private sector companies can also play a role in creating innovative user models or advising Southeast Asian startups. In 2019, Grab and Mastercard launched the GrabPay Card, enabling unbanked users to make secure transactions with merchants that accept Mastercard. Tokopedia, the e-commerce platform considering a merger with Gojek, also hired Citigroup as an adviser in 2021 following its plan to go public.

Official development assistance, development finance institutions, and the private sector are all avenues for U.S. engagement in the burgeoning digital payments market in Southeast Asia. The way the region pays is changing—and it is up to stakeholders to keep up.

Karen Lee is a research intern with the Southeast Asia Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Diego Lingad is a former research intern with the CSIS Southeast Asia Program.