The ASEAN Access to Digital Finance Study

Tania Ziegler (CCAF), Krishnamurthy Suresh (CCAF), Zhifu Xie (CCAF), Felipe Ferri de Camargo Paes (CCAF), Peter J Morgan (ADBI), Bryan Zhang (CCAF).

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This first edition of ‘The ASEAN Access to Digital Finance Study’, aims to provide valuable data and insights into how individual households, consumers, and micro, small and medium enterprise (MSME) customers use digital alternative finance channels, such as online digital lending and capital raising platforms, to access credit or raise funds across the key countries in the Association of Southeast Asian Nations (ASEAN) region. The report focuses on five ASEAN countries: Indonesia, Malaysia, the Philippines, Singapore and Thailand. This study has been jointly developed by the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School and the Asian Development Bank Institute (ADBI). It assesses various qualitative and quantitative factors of borrower or issuer activities related to financial access via an online fintech platform operating in the lending or equity space. The models observed in this study are peer-to-peer (P2P)/marketplace consumer and business lending, balance-sheet consumer and business lending, invoice trading, equity-based crowdfunding, and buy now, pay later (BNPL).

Highlights from the report

The study looks at four aspects of digital finance use in the ASEAN region:

  1. Respondent profile/demographics and company structure (for businesses).
  2. Relationship with traditional finance channels.
  3. Financing experiences when using fintech-based financial services.
  4. Post-financing outcomes and the impact of the COVID-19 pandemic.

In terms of the quantitative factors, it should be noted that it is not the intention to present precise or absolute figures for individual income, company revenue, borrowed or fundraised amounts, or overall performance, but rather to provide an assessment of how ASEAN borrowers and fundraisers experience and use fintech solutions for their financing needs.

The survey responses were collected between 28 February and 15 April 2022 from respondents who had used a digital alternative finance platform to access credit or raise funds between 2020 and 2021. This study is based on 600 cleaned and verified data responses from both individual consumer and business (MSMEs) respondents across all five countries sampled. The report is divided into two main chapters: individual consumer and household access to digital finance, and MSME access to digital finance. Each chapter analyses the relevant digital alternative finance models included in this study, and each model is discussed against the key research themes identified. The key findings are summarised below.

Individual consumer and household users of digital finance

Two models that cater to individual consumers and households – P2P/marketplace (and balance-sheet) consumer lending and BNPL – were analysed. A total of 410 responses related to those two models were received.

  • Millennials made up the greatest proportion of users of online consumer finance in the ASEAN countries analysed across the individual consumers facing alternative digital finance channels. Approximately 44% of P2P/marketplace consumer lending respondents were between 25 and 34 years of age, followed by 34% who were between 35 and 44. Of BNPL users, 54% were between the ages of 25 and 34. Across both models, most respondents were male, had an undergraduate degree, and were in full-time employment with an annual income slightly higher than their country’s minimum wage.
  • Before turning to P2P/marketplace consumer lending platforms for financing, family and friends, and banks were the two most popular sources of finance for individual borrowers. Notably, the offer and acceptance rates for borrowers who approached informal finance providers were relatively higher than for those who sought funding from the most popular traditional finance channels, despite having fewer borrowers.
  • For individual household users of P2P/marketplace consumer lending, the primary purpose for borrowing funds was to cover day-to-day expenses, while for BNPL customers it was to purchase fashion items and apparel. Nearly half the individual consumers who used P2P/marketplace consumer lending platforms borrowed funds to meet daily expenses or short-term needs, such as buying groceries, paying utility bills and top-ups. For BNPL users, fashion items and apparel were the main types of purchases made. This was closely followed by home appliances, mobile phones, other electronics and daily expenses, each with a proportion of around one-third.
  • The speed of receiving funds was the main decision-making factor that led individual households to borrow from fintech platforms. For BNPL users, it was paying zero or low interest. Platform use factors, such as transparency, better approval rates and flexible terms, also influenced P2P/marketplace consumer lending users. Similarly, convenience was the other top factor that influenced BNPL users, including flexible terms, easy application and approval processes, and better customer service.
  • Alternative finance platforms in the ASEAN region complement traditional banking systems, as they mainly serve the underbanked and enable financial inclusion. Borrowers who used P2P/marketplace consumer lending platforms reported using banking products and services more often after receiving funds from online alternative finance platforms. More than half started to use or increased the frequency with which they used their personal savings or checking accounts. This was followed by an increase in the use of personal loan contracts, personal credit cards and overdraft accounts.

MSME users of digital finance

Three models that cater to MSMEs – P2P/marketplace (and balance-sheet) business lending, invoice trading and equity crowdfunding – were analysed. A total of 190 responses related to those 3 models were received.

  • Female business borrowers made up a greater proportion of the respondents, but they borrowed less than their male counterparts. When looking at the gender distribution of business respondents, female borrowers represented 54% across all the business-facing models, 57% of whom used P2P/marketplace business lending platforms. In terms of education level, most female borrowers had completed secondary school, whereas most male borrowers had an undergraduate degree. The results indicate that the alternative finance industry plays an important role in the inclusion of under-represented business borrowers into the financial system.
  • Most MSMEs were young, micro and small businesses, and were operating either as sole traders or with few full-time employees. Most MSME respondents that had borrowed or raised finance were micro and small enterprises, operating with no (sole traders) or between one and five full-time employees. Most had been operating for between one and 5 years, and a smaller proportion was less than one year old. This reinforces the hypothesis that alternative finance plays an important role in providing access to finance to smaller businesses.
  • Regarding the use of traditional finance facilities, MSMEs often used personal financial products to meet their business funding needs. MSMEs that used P2P/marketplace business lending and equity crowdfunding models reported using personal checking or savings accounts the most, followed by personal current accounts. The results suggest that the owners of these businesses relied on personal financial products to meet their funding needs. Conversely, MSMEs that used invoice trading platforms mainly used business savings or checking accounts.
  • MSMEs that used P2P/marketplace business lending and invoice trading platforms to borrow funds were strongly influenced by better customer service, flexible terms, ease of getting funding compared to traditional sources and speed of receiving the funds. Non-financial benefits, such as public relations and marketing, and insights and expertise from the platforms’ investors, were the main decision-making factors for businesses that chose to fundraise through equity crowdfunding platforms. The main reason MSMEs borrowed funds, across all three models, was to raise working capital, followed by expansion and growth.
  • Most MSMEs reported growth in their business performance (net profit, revenue and employment) after receiving finance through a fintech platform. Most MSMEs reported that the financing had a positive impact on their business, primarily through increased productivity and an expanded customer base. Further, alternative finance borrowers defaulted less compared to the non-performing loan (NPL) average (over 3%) in ASEAN countries, according to the World Bank, reporting an almost negligible default rate (1%).
  • During the COVID-19 pandemic, most MSMEs reported they had not received any financial assistance from their government or fintech platform and hence had to adjust their business operations. For those MSMEs that received government assistance, it was mostly in the form of cash assistance/loan subsidies or tax relief. A slightly higher proportion received assistance from fintech platforms, mostly in the form of fee waivers, eased payment plans and additional credit facilities. It should be noted that, in many cases, the governments themselves asked fintech platforms to reduce or eliminate fees, and even directed additional credit facilities through this channel.

Policy implications and recommendations

  • Regulators may impose limits on the amount that can be borrowed through digital lending channels. Some regulators in ASEAN countries have already implemented mandates setting limits on the total amount individuals can borrow through P2P platforms based on their annual income. For example, the Philippines limits consumers’ total borrowing to 5% of their annual income. To this end, regulators should also communicate more with platforms to get a better understanding of the amounts consumers borrow.
  • Regulators may impose caps on the interest rates charged by digital lenders. Some ASEAN countries reported illegal and unauthorised digital lenders engaging in predatory lending or collection practices and charging exorbitant interest rates. To overcome this issue, regulators in some ASEAN countries have imposed caps on the interest rates that P2P lenders can charge their borrowers. For example, Thailand caps the interest rate at 15% a year. Further, it is also important for regulators to create a whitelist of regulated digital lending fintechs that are operating in the country.
  • There is a need for industry standards or guidelines for BNPL providers to ensure consumer interests are protected. Most respondent BNPL users were young (Millennials and Gen Z) and new to credit, making protecting consumers’ interests even more important. Regulators need to supply BNPL providers with clear guidelines (code of conduct) and ensure they carry out sufficient checks to confirm whether consumers can afford to take out such loans. Further, regulation could also focus on product design to ensure sufficient information is provided at checkout points so users can make informed decisions.
  • There is a need to promote adequate disclosure and digital financial literacy among digital finance users. In most cases, P2P lenders charged higher interest rates compared with banks and other financial institutions. This study shows that most business borrowers are micro and small enterprises and generally have a lower education level. Hence, platforms must tell businesses what interest rate they are being charged and provide mandatory user education. Furthermore, regulators need to promote digital financial literacy among borrowers using digital finance platforms.