Digital payments are rising in ASEAN but profits remain elusive

digital payments are
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Southeast Asia is in the midst of a digital payments revolution, with more and more people eschewing cash in favor of electronic alternatives. This shift is being driven by a number of factors, including the increasing availability of affordable smartphones and internet access, as well as the growing popularity of e-commerce.

While this transition away from cash is good news for the region as a whole – since it can help to boost financial inclusion and make transactions more efficient – it poses a challenge for banks and fintech companies that have been behind the push for digital payments.

That’s because, even as they are playing an increasingly important role in facilitating these transactions, they are not seeing a corresponding increase in revenues. In fact, banks in particular are facing a significant slowdown in interchange revenue due to the rise of noncard payments and regulatory interventions, a report by S&P Global Market Intelligence reveals.

The report forecasts that the value of cashless retail payments in Southeast Asia will grow at a compound annual growth rate (CAGR) of 14% to just over $3 trillion by 2025, up from $1.3 trillion in 2020. This growth will be driven by four large economies in the region: Indonesia, Malaysia, Singapore, and Thailand.

However, while the number of transactions is expected to rise sharply, the revenue generated by these payments is not expected to grow at a similar pace. In fact, issuer revenues (that is, the portion of merchant fees that goes to banks and nonbanks issuing payments instruments such as cards and e-money) are forecast to increase at a more sedate CAGR of 4% to reach $4 billion by 2025.

Analysts expect that banks will take a worse beating, with their aggregate interchange revenue (the fees charged to merchants when a card is used for payment) forecast to grow at just 2% annually to reach a little over $3 billion by 2025.

In addition to the rise of noncard payments, banks are also facing heightened competition from technology companies and low-cost utility models of government-run payment networks, which are driving down merchant fees.

Meanwhile, S&P Global Intelligence expects fintech companies to take the lead in driving growth in payment revenues. It forecasts that e-money revenues will grow by an over 13% CAGR to $905 million from $544 million in 2021.

However, the aggregate revenue opportunity in payments is not large enough for fintechs to sustain their businesses, the report notes. Asian fintechs don’t earn good margins from individual transaction levels owing to low payment revenues that are insufficient to cover the costs of drawing customer funds into their stored-value wallets.

Analysts are urging banks to explore alternative methods to encourage client participation and make up for revenue losses as card payment rates fall.

Digital transformation can help banks develop new capabilities and business models, but this will require significant investments. Big banks with the resources to make these investments could see their market-leading positions strengthened, providing them with an opportunity to offer compelling mobile banking experiences that promote in-house card and non-card payment methods as well as unsecured consumer lending solutions.

The way forward

For smaller banks, partnering with popular consumer-facing fintechs could be a way to generate additional revenue. These fintechs can offer ‘buy now, pay later’ (BNPL) and other point-of-sale financing options to their customers, with banks providing the necessary financing.

Smaller fintechs with limited resources may also want to shift their focus from issuing to merchant acquiring, as this will give them access to a steadier stream of revenue.

This means that they will need to provide software and services for transaction processing, payment performance improvements and managing loyalty programs, and eventually promote financing solutions such as BNPL offerings and working capital financing.

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