Asia at the Forefront of Digital Payments
Asia-Pacific (APAC) is revolutionizing the global payments industry, driven by the surge in e-commerce, expanding internet connectivity, and the proliferation of digital wallets. This shift towards a digital payments ecosystem is transforming the region at a remarkable pace.
Undoubtedly, APAC holds a prominent position in the global payment landscape, and its influence is poised to expand further. Combining robust payment networks, exponential growth in digital wallet usage, and widespread consumer adoption of alternative credit products, APAC is actively shaping the future of payments.
Following an eventful iFX Expo Asia 2023, where I had the privilege to speak at the Shaking Up the Payments Landscape in 2023 panel, we delve into the multifaceted aspects of this transformation, showcasing Asia as a frontrunner in digital payment innovation.
Resilience Amid Economic Challenges
The payments market globally is facing several challenges in 2023, and the APAC payments market is no exception. Economic headwinds are likely to slow growth, and almost everyone in the payment value chain must rethink their strategies. As a result, firms are focusing on cutting overhead and improving go-to-market efficiencies. Furthermore, the focus on bottom lines is expected to result in a change of leadership among these companies.
Adding to this, broader economic challenges are adding pressure. A global growth slowdown, China’s lower growth rate, increased Federal Reserve rates, and higher oil prices are all contributing to a challenging environment. This external environment is expected to weigh heavily on the export-focused region, likely hampering consumption demand and slowing investment growth. Furthermore, continued US dollar strength means that Asian currencies will remain weak, adding further inflationary pressures and potentially resulting in higher policy rates across the region.
Amid these challenges, however, the APAC payments market demonstrates remarkable resilience. This strength is supported by payment players’ practical innovation focus and the region’s modern payment networks that increase efficiency for cross-border commerce.
Embracing the Cashless Trend
Cash still rules in some APAC countries. In 2022, the share of cash usage in Thailand was at 56%, followed by Japan at 51% and Vietnam at 47% – the highest rates in APAC. Each country in the APAC region has its unique factors shaping its payment landscape.
While internet usage rates are high, about 70% of Southeast Asia’s adults remain unbanked or underbanked.
Consumer habits have shifted towards digital payments, especially in countries like India and Indonesia. In India, for instance, the use of digital wallets accounted for 50% of e-commerce transaction value and 35% of POS transaction value in 2022, a drastic change from just a few years ago when cash was the dominant payment method. Similarly, in Indonesia, digital wallet transaction values are projected to grow at a 22% CAGR at POS and at a 21% CAGR in e-commerce through 2026.
Despite the promising trends toward digital payments, the journey toward a cashless future in APAC is not without challenges. Key issues such as data privacy and the fragmentation of digital wallet providers remain significant hurdles. Companies are continuously trying to create simpler and safer methods of authenticating their clients’ identities to strengthen mobile payments.
A Boom in E-Commerce
In 2022, APAC remained the world’s largest e-commerce market, totalling nearly US$4.2 trillion in transaction value and making up almost half of the global e-commerce market. The figure represents a 41.5% increase from 2021’s total of US$3 trillion, showcasing the rapid growth e-commerce has witnessed in the region over the past year.
Digital wallets were the favoured payment method for e-commerce transactions in China, India, Indonesia, the Philippines, and Vietnam in 2022. This trend is expected to continue, with digital wallets expected to rise from making up 12% of e-commerce transaction value in 2018 to 36% by 2026, and from accounting for a mere 3% of POS transaction value to 30% by 2026.
Southeast Asia and India are expected to see the region’s strongest e-commerce growth through 2026, with the Philippines, Indonesia, India, Malaysia, and Vietnam recording the biggest annual growth rates. With the rapid expansion of e-commerce and the convenience of digital wallets, the share of digital wallets used in online transactions in the Asia-Pacific region is projected to expand to 73% by 2026.
Digital Wallets and Real-Time Payments on the Rise
Digital wallet usage is growing in Southeast Asia, mainly due to its higher unbanked or underbanked population. Companies like Grab and GoTo Group are expanding their market share in the digital payments sector, allowing users to make cashless payments for a variety of services. Between 2018 and 2023, digital wallets in APAC (excluding China) more than doubled their share of e-commerce transaction value and saw their share of payment transaction value at POS grow sixfold.
As of 2023, the digital payments landscape in APAC continues to evolve with a strong push towards real-time payments, a trend largely driven by increasing consumer expectations for instant gratification, coupled with advancements in technology and regulatory support. Real-time payments are favoured as they enable immediate settlement of transactions, improving liquidity management for businesses and individuals, and reducing the risk of fraud.
Impact of Innovation and Regional Payment Networks
Innovation is a crucial factor in the APAC payments market, with payment fintechs changing leadership and focusing more on the bottom line. Investment in innovation is expected to be more focused, with 90% of it needing to offer a clear-cut return to be spent. Money that would have been used for groundbreaking payment experiences, like in the metaverse or other blockchain projects, is now being redirected to baseline payments infrastructure and modernization projects. This means that the highly competitive world of consumer payments will draw less investment and fewer innovations while B2B payments modernization becomes the priority.
Moreover, regional payment networks that use modern technology, including blockchain, and APIs to ensure interoperability are set to boost cross-border commerce. These networks, such as the QR code-based system and multi-CBDC pilots across Southeast Asia, the CIPS system in China, and the UPI system in India, are poised to replace the 50-year-old SWIFT system. Banks and payment firms are therefore encouraged to increase investments in developing API-based and modularized solutions that can seamlessly integrate with these new payment networks.
AI Tides: Enhancing the Payment Experience
AI is making significant strides in transforming the payments landscape in the Asia-Pacific region, especially in the context of KYC (Know Your Customer) and the onboarding process. The benefits of leveraging AI technology in finance range from improved efficiency and enhanced security to revolutionizing the customer experience.
Here are the key ways AI is impacting these areas:
AI is instrumental in interpreting biometric data during the onboarding process, providing a more secure and user-friendly method of authentication. Biometric authentication systems such as fingerprint scanning, facial recognition, and voice recognition are being increasingly used, with AI algorithms assessing and validating biometric data swiftly and accurately.
Blockchain technology, often coupled with AI, is being used for secure, transparent, and efficient KYC processes. It helps in eliminating the need for repetitive KYC checks across different financial institutions, reducing the time and cost associated with KYC compliance.
AI and machine learning are being leveraged to enhance the onboarding experience by personalizing customer interactions. They help in understanding the needs and preferences of customers, thereby improving the effectiveness of onboarding and the overall customer experience.
AI-powered regulatory technology (Regtech) solutions are being used to ensure compliance with laws and regulations, including those associated with KYC procedures. These solutions can identify potential regulatory breaches before they occur and can streamline regulatory reporting, making the onboarding process more efficient and compliant.
Efficiency in KYC Processes
AI has the potential to make the KYC process a lot easier and more efficient. AI and machine learning can automate and streamline the KYC process, reducing manual tasks, increasing accuracy, and enhancing customer experience. These technologies can rapidly process vast amounts of data and identify patterns and anomalies that would be difficult to detect manually, thereby reducing the risk of fraud and money laundering.
However, it’s important to note that while AI offers many advantages, it also presents challenges, particularly in terms of data privacy and security. The nature of AI-powered KYC and onboarding solutions requires collecting and analysing vast amounts of personal data, which raises concerns about potential misuse or unauthorized access to sensitive personal information.
The Crucial Contribution of Banks
Historically, the evolution of digital financial solutions has been predominantly consumer-centric, overlooking the unique needs of small businesses. However, as the wave of digital wallets sweeps across Southeast Asia, it is becoming increasingly vital to incorporate Micro, Small, and Medium Enterprises (MSMEs) into the emerging digital financial ecosystem. This integration is crucial for the region’s economic prosperity.
Micro, small, and medium enterprises (MSMEs) face a $300 billion funding gap, with a strong demand for digital payments and digitized lending. Strengthening MSMEs is crucial for Southeast Asia’s economic recovery, and digital finance is playing a key role in this transformation.
Banks are at the heart of achieving this objective. They can enhance the payment capabilities of merchants and streamline the flow of mobile wallet payments across various online and offline channels. This way, they can cater to the specific requirements of MSMEs and fuel the micro-commerce that forms the backbone of the region’s economic activities. When it comes to cross-border transactions, banks, with their established leadership in the payments sector, are ideally placed to develop integrated services that cater to both businesses and individual consumers.
Banks will play a vital role in the digital payments revolution, serving as crucial funding conduits, enhancing merchant payment capabilities, and seamlessly integrating mobile wallet payment flows across various channels.
Redefining the Global Payments Landscape
The APAC region is pioneering the future of digital payment systems. Despite various challenges, the region is leveraging its strengths and innovative spirit to drive significant changes in the global payment landscape.
As the digital payments revolution evolves, the role of banks will become increasingly crucial in facilitating this transition, demonstrating the importance of integrating all sectors of society into this new financial ecosystem.
Capitalixe boasts a global footprint and offers a comprehensive range of payment and banking solutions tailored to medium to high-risk businesses in APAC. Our future-proof financial services are founded on innovation and collaboration. If you want your business to embrace the future of payments and stay ahead of the curve, book your complimentary consultation to discover how we can help!