Small businesses in Southeast Asia are missing out on the digital revolution. Here's how to persuade them to join you.

• During the epidemic, the digitization of South-East Asia's economy has been unevenly experienced.
  
• Individual customers, not SMEs, have benefited from the rise of digital services.
• More fintech innovation for SMEs is required, as well as public-private collaboration.

The epidemic has wreaked havoc on major economies in Southeast Asia, which are still trying to recover from new outbreaks, new virus strains, and a patchy vaccination roll-out. However, as damaging as these limitations have been, they are also proving to be a beneficial driving factor for millions of customers to adapt to new ways of spending and embrace internet commerce, resulting in irreversible changes in consumer behaviour.

According to Bain & Company and Facebook study, eight out of ten customers in Southeast Asia are currently online. To put that number in context, the number of new digital consumers added in the Philippines, Singapore, Malaysia, Indonesia, Thailand, and Vietnam in just one year is equal to the whole population of the United Kingdom.

The economy of Southeast Asia has been buoyed by digital financial services in particular. The significant rise in digital customers has been fueled by the rise of digital payments and greater internet access during the pandemic. The growing trend away from cash payments and increased use of e-commerce, as well as the continued development of new payment mechanisms, particularly for e-wallets and prepaid cards, are expected to push online payments in the region to approach $1 trillion by 2025.

SMEs in Southeast Asia that are underperforming

However, the benefits of becoming digital are not being felt equally by all sectors of the economy, which can be seen as a difficulty as well as an opportunity. Millions of small and medium enterprises (SMEs) in Southeast Asia confront severe impediments to digital technology access and use, preventing them from reaping the full benefits of participation in the new economy and realising their full potential.

SMEs are critical to the Philippine economy, accounting for 99.5 percent of all enterprises and employing 63 percent of the workforce. However, they underperform, accounting for only 36% of the economy's value added. If SMEs are unable to transition to digital, the gap is projected to widen as economies and cultures throughout the world adopt new methods of conducting business.

Many obstacles stand in the way of Philippine SMEs realising their full potential in the digital economy, the most evident of which are a lack of internet infrastructure, as well as digital skills, funding, and regulatory gaps. This challenge is exacerbated by the fact that 80 percent of SMEs outside of Metro Manila are located in rural areas, whose owners, who are typically in their 40s, have little digital and financial literacy and have little to no access to dependable mobile or broadband internet.

The absence of innovation in digital financial products that suit the specific demands of SMEs is perhaps the most interesting obstacle, and certainly the lowest hanging fruit. After all, financial inclusion for the economy's backbone, which employs the vast majority of the population, is the first step toward more inclusive growth and development.

Fintech for small businesses

Most fintech businesses delivering innovation in financial services have concentrated on individual consumers; unsurprisingly so, given that more than 70% of adults are either "underbanked" or "unbanked" (see below).

Grab Financial Group, Southeast Asia's premier fintech platform, is leading the trend, offering payments and financial services across loans, insurance, and retail wealth management. Consumer fintech's ascent is projected to accelerate even further, as it accounts for the largest share of venture capital transactions in Southeast Asia, with a record $10 billion in the first half of last year, surpassing the $8.2 billion in 2020.

However, we have yet to see the similar degree of investment in the SME fintech arena, a trillion-dollar market opportunity that has the potential to unleash potential for a largely unbanked population in the region.

Why is there a scarcity of financial services innovation for SMEs? Because it was unprofitable, traditional banks did not spend enough in digital innovation and business capabilities to service SMEs in the past. While it is evident that SMEs in Southeast Asia face significant funding shortfalls (see below), offering credit to this client category is frequently not "worth it" for banks once risk profiles, or the lack thereof, are considered.

Despite this obstacle, it is possible to overcome it by utilising new data sources on SMEs and innovating in the collection and use of that data. Every year, fintech lender First Circle makes a profit by lending millions of dollars to underbanked SMEs in the Philippines. This is made possible by its powerful risk engine, which is built on proprietary data gathered through mapping thousands of B2B supply chain transactions across multiple industries since 2016. This level of data granularity also enables the SME market to be segmented further into smaller homogeneous groups with comparable working capital needs and risk profiles. As a result, tailor-made financial solutions, such as credit lines, B2B supplier payments, deposit and payroll accounts, and more, are easier to deliver.

While banks and fintech firms are important contributors to innovation and inclusive economic growth, the private sector cannot and should not do so alone. To have a major influence, especially in the field of SME growth, long-standing public-private collaborations are required. The Bangko Sentral ng Pilipinas (BSP), the Philippines' central bank, is at the fore. "The BSP is working closely with both the government and the private sector in pushing for various programmes, recognising that a whole-of-nation approach is needed to advance the financial inclusion of SMEs," said Chuchi Fonacier, Deputy Governor of the BSP's Financial Supervision Sector.

This work includes multi-sectoral projects such as the credit risk database, which contains anonymized financial, non-financial, and default-related data from SMEs and addresses two critical barriers: the burdensome requirements that SMEs face when applying for credit, and financial institutions' lack of access to high-quality SME data.

Finally, the BSP is leading the charge on progressive legislation such as the Philippine Identification System Act, the Philippine Innovation Act, and the Personal Property Security Act, which will be game-changing in bringing millions of SMEs into the formal financial system and allowing them to participate fully in the digital economy.

In Southeast Asia, the digital economy is at a crossroads. The epidemic has posed enormous challenges, but it has also sparked unparalleled ingenuity and change. Individual consumers have flocked to the internet, with consumer fintech and e-commerce innovation on the increase, while the SME sector continues to rely on outdated banking and business practises.

What is the EDISON Alliance doing to close the digital divide?

COVID-19 has highlighted global digital imbalances and widened the digital gap. Even though the majority of the world lives in locations where mobile broadband is available, more than a third of the population (2.9 billion people) is still without access. The obstacle to connectivity is cost, not coverage.

The World Economic Forum created the EDISON Coalition, the first cross-sector alliance to advance digital inclusion and connect vital areas of the economy, as part of the Davos Agenda 2021.

The EDISON Alliance's 1 Billion Lives Challenge aims to improve 1 billion lives worldwide by 2025 through inexpensive and accessible digital solutions in healthcare, financial services, and education.

To harness the sector's potential and hasten the epidemic recovery, the private and public sectors must collaborate to overcome the digital and financial skills gap for SMEs. They should also enable new fintech innovation, particularly in the areas of lending and payments. Bringing SME development to the forefront will, in the end, be the key to the region's larger inclusive growth and economic development.