Southeast Asia’s Digital Economy: An Update  

Before the coronavirus pandemic, the economies of Southeast Asia were undergoing major transformations due to widespread digitization. COVID-19 has only hastened the changes. To look at how technology is rapidly reshaping the region, GLG recently met with three executives whose perspectives offer unique insights: Howard Soh, former Head of Strategy and Corporate Development at Sea Ltd.; J. P. Ellis, CEO and Co-Founder of C88 Financial Technologies, an owner and operator of financial marketplaces, and a Director and Co-Founder of the Indonesia Fintech Association; and Stephen Vickers, former Chief Economist and Special Advisor to the CEO at Grab and former CEO of Thunes, a cross-border payments network. Their edited comments follow.

Stephen Vickers: We should start by noting that the internet economy in Southeast Asia is only about six or seven years old. Tokopedia, Lazada, and Shopee, for example, are relatively young compared with the 20-plus-year-old goliaths of Amazon, Google, Tencent, and Alibaba. Today, the owner of Shopee — Sea Group — is the most valuable listed company in Southeast Asia, having a higher market cap than any bank, oil company, or telco. Where this really gets interesting is the combination of an emerging internet economy and the relative lack of access to traditional banking services. More than 50% of the population in Southeast Asia doesn’t have a debit card, credit card, or traditional bank account. Combine that with massive VC investments into hundreds of start-ups, including the super apps of Grab and Gojek, and you’ve got a competitive technology environment that is truly and very rapidly changing the lives of people in Southeast Asia.

Howard Soh: In addition to companies in the region being young, we should note that the population of the region is young as well. Almost 60% of the ASEAN-6 population is age 35 and younger, so we’re talking about individuals who all have smartphones and are very tech savvy. So following on Steve’s point about low banking penetration, how do people participate in a digital economy when they don’t have a credit card or bank account? That creates an opportunity to leapfrog the traditional payment systems and go straight to mobile methods, which is why Southeast Asia has become such fertile ground for fintechs. I bucket the players in this dynamic landscape into three broad categories. There are the “traditionals” — telcos, retailers, and banks — who have huge established consumer bases. Then there are the platforms such as Grab, Lazada, Gojek, and Sea, which have operations in areas such as ride-hailing, e-commerce, and games and see tremendous opportunities in fintech, which they are approaching in their own individual ways. And finally, there are the pure-play fintechs, such as StashAway in Singapore, which focuses on investing, and Akulaku, a lender based in Indonesia. They’re tackling specific pain points within the value chain to gain momentum.

Stephen Vickers: One of the most compelling spaces I see is that of mobile wallets. There are probably 20 or 30 players in the space currently in Southeast Asia, and only a few will be able to build critical mass and gain significant traction. Clearly, the platform players are keen to leverage their strengths to become winners in that space in each of their operating countries, but there are some standalone companies that are doing a great job, such as Wave Money in Myanmar. It just received a new investment from Ant Financial, which should help them build on their success.

J.P. Ellis: We’ve had mobile wallets from telcos for a long time, but they never really truly got to critical mass. And even today, users of mobile wallets can be fickle. It would seem that success could come from the fintech innovators joining forces with the established banks. But partnerships, particularly partnerships between large companies and small companies, can be complicated.

Howard Soh: Partnerships can be crafted to be win-win, particularly now when there are benefits to be had on both sides. But it comes down to a deal’s specific structure. As long as the opportunities are there, you can bet that companies will be going after them.

J.P. Ellis: Of course, since the financial services landscape is so fragmented in Southeast Asia, we also could see consolidation in the sector as well as partnerships.

Howard Soh: Yes, but even assuming regulators give the green light to that, there are all the practical considerations with regard to integrating different cultures. Just because these countries are all geographic neighbors doesn’t mean they all share the same cultural norms in terms of working arrangements and the like.

J.P. Ellis: That’s true. To those of us on the ground, this is not a contiguous area like the U.S. It could mean we’re moving toward China-style integration. I’d be curious to hear where you think the exits are going to come from.

Stephen Vickers: I would say acquisitions are more likely to come from China first, rather than the U.S. or Europe. The most recent announcements by Tencent, Alibaba, ByteDance, and others indicate that their next source of growth will be Southeast Asia. Many are putting engineers and commercial people in Singapore, and I’m sure there will be a spate of M&A activity coming from that. But I think there still will be local champions in many of these verticals that will have a better grasp of the needs of the local population and a better ability to offer services that meet those needs.

Howard Soh: I wouldn’t count out some of the big U.S. companies. We’ve seen how Facebook and Google have dipped their toes into the water here in terms of investing in some platforms. They’re keeping a watch. Indonesia is probably getting the lion’s share of attention from those companies, because it has the largest population.

J.P. Ellis:  Overall, in three to five years, I think we’re going to see a few platforms controlling a lot of touch points. Plugging to those touch points will be many specialty players such as credit-scoring firms, as well as banks that essentially become wholesale providers. There’ll also be a lot of cross-border M&A, particularly in the banking sector, involving Japanese and Korean banks. The West, living in negative interest rates, will wake up to the fact that real rates in Southeast Asia are orders of magnitude more interesting than theirs.

Howard Soh: I think platforms are going to pave the way forward for the adoption of mobile wallets and lead people into the digital economy. Other players will want to work with these platforms in order to distribute their products.

Stephen Vickers: We are only at the very early stage of the internet digital economy in Southeast Asia. Only 3% to 5% of purchases are online today; it’s going to be in the high teens or low 20s within the next five years. Platforms will get stronger in some sectors and become more dominant. But they won’t squeeze out opportunities for significant local players to become true country champions, particularly when it comes to the mobile wallet side. In the words of Winston Churchill, we’re at the end of the beginning.

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About Howard Soh

Howard has over a decade of experience in technology and consumer internet in Southeast Asia. He was appointed as an e-commerce expert by the World Economic Forum Digital Trade Project. He was previously Head of Strategy and Corporate Development at Sea Ltd. Prior to this, he worked at Ekuinas, McKinsey & Company, and CIMB. He was also CEO at Rocket Internet GmbH Malaysia. Howard holds an MBA from the Harvard Business School.

About J. P. Ellis

John Patrick (J.P.) is an experienced American financial technology executive currently based in Singapore and Jakarta. J.P. has a private equity and entrepreneurial background, and a demonstrated history of successful commercial and product leadership in the financial services, enterprise software, mobile consumer internet, and data analytics industries. J.P. has successfully founded companies as well as new divisions and new products within companies. He has owned and grown PLs, successfully performed MA transactions, and integrated organization cultures. He has worked with company boards as well as governments to solve complex problems and establish road maps. J.P. earned his BA in politics and international relations from Columbia University in the city of New York, where he also studied languages. He is also technical and holds a variety of computer science and programming certificates.

About Stephen Vickers

Former Chief Economist Grab Indonesia and Special Advisor to the CEO at Grab, Stephen Vickers is an experienced executive with strategy, marketing, and business development focus. Until January 2020, Steve was the CEO of a fintech payments company, Thunes. He spent 2016 to 2018 as Chief Economist for Grab Indonesia and Special Advisor to the CEO at Grab, Southeast Asia’s leading ride-hailing platform. He was also the Managing Director for Xiaomi in Southeast Asia. Steve has over 20 years of business experience, and has worked in Europe, the USA, and APAC. Prior to Xiaomi, Steve worked for Navteq as well as in consulting to several technology start-ups. Steve was formerly a Manager with McKinsey & Company. Working in the U.S. and Europe, he consulted to Fortune 500 companies, addressing marketing and strategy issues associated with the adoption of new technologies. Steve started his career in consumer marketing and brand management, where he worked for several leading packaged goods companies.

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This article is adapted from the November 19, 2020, Remote Convene “Digital Economy in Southeast Asia.” If you would like access to the transcript for this event or would like to speak with these Network Members, or any of our more than 900,000 experts, contact us.