Financial technology firms hoping to carve out an edge in South-east Asia will have to target the small and medium-sized enterprises (SMEs) in the region.
These SMEs remain a largely underbanked segment in most Asean markets, according to a regional report on the future of digital financial services by consultancy firm Bain & Company, Temasek and Google yesterday.
Digital financial services that the report studied were payments, remittances, insurance, investment and lending.
Four in five of the 240 SMEs in Indonesia surveyed needed to borrow money but lacked access to affordable credit, it added.
The focus on SME lending comes as researchers find that revenue from digital financial services is set to jump to at least US$38 billion (S$51.8 billion) by 2025 from US$11 billion last year.
High interest rates were cited as the main reason for them not borrowing, followed by troublesome processes, uncertainty over where to go to borrow, and rejected applications.
Banks face higher risks and costs when they lend to SMEs, which traditionally lack credit information and history.
Some researchers said: "Digital advances are rapidly opening up new business models to serve this fragmented, underserved and potentially huge market... SME merchants have been inadequately supported by established financial services players."
They added that existing financial institutions risk losing underserved SMEs to new players that can use non-traditional forms of data sources such as users' consumption habits to determine customers' creditworthiness.
"SME merchants will likely become the main digital financial services battleground in South-east Asia in the years ahead."
Fintech firms will need to come up with integrated solutions to do well in the region, the report noted.
Merchants in the Philippines, Thailand and Malaysia are most enthusiastic about having a single payment provider for online and offline banking transactions, said researchers.
Mr Rohit Sipahimalani, joint head of the portfolio strategy and risk group at Temasek, said the report has helped define the market size of digital financial services in the region, an area that has not been extensively researched.
"The report helps us identify the big, investible markets," he said.
"Awareness is important to attract capital in the region and build an (investment) ecosystem," he added.
"It creates more competition for us because more people will come in... But this is one of those things where, unless an ecosystem is built, an individual investment is not going to be successful."
He added that Temasek's portfolio includes fintech companies of different growth stages.
Temasek has invested in a range of fintech companies in the region, including ride-hailing services Grab and Gojek, and remittance start-up InstaRem.
Mr Sipahimalani said more needs to be done to unlock the opportunities that the unbanked in the region offer.
"What an individual company can do out here is limited," he said. "Things have to be done at the national level to help (the unbanked)."
Governments and telecommunications companies can help in this endeavour, he added.