UNIT 5:

By Karen Lee and Diego Lingad

Digital Growth and Financial Inclusion

in Southeast Asia
The transformation of southeast asian ride-share apps into “superapps” is set to
bring a host of challenges

1. On April 12, 2021, Grab announced that it would list on the NASDAQ stock market
after a landmark merger, catapulting the Singapore-based tech company into
the global spotlight. For Southeast Asian citizens, however, Grab is a household
name. Beginning as a ride-hailing app in 2012, Grab’s services have expanded
beyond transportation to include food delivery and digital payments. Although
“superapps” (apps that offer multiple digital services on a single platform) in
Southeast Asia have been lauded for their efforts to promote greater financial
inclusion, their ability to scale sustainably is less certain. Risks include
underprepared national cybersecurity frameworks and a persistent digital divide that
has improved slightly during the Covid-19 pandemic. These risks offer an area for
the United States government and development finance institutions to encourage the
secure and sustainable growth of fintech in the region.

Ride-Sharing Apps and Mobile Wallets

2. The two giants of Southeast Asia’s fintech industry today, Singapore-based Grab
and Indonesia-based Gojek, both began as ride-hailing apps. In 2017, Grab
launched its payment platform GrabPay, which now has over 100 million users
across the region. The company’s leveraging of a transportation demand gap to
attract initial users before expanding into the digital payment ecosystem has allowed
it to overcome adoption barriers to fintech, including lack of awareness and trust.

3. In Southeast Asia, where 73 percent of the population is estimated to be

unbanked, online payment platforms like GrabPay are expected to increase digital
financial inclusion by allowing customers without physical bank accounts to make
purchases. A 2019 survey of almost 5,000 consumers and merchants in the region
found that unbanked borrowers can utilize alternative data such as e-commerce
transactions to prove credit worthiness. Grab’s PayLater service, which allows the
app’s loyal users to pay for goods on credit, is a potential proof of concept.

4. Commercial banks, recognizing the growth potential of digital banking, have

launched their own e-wallets or in some cases partnered with superapp companies.
In 2019, Thailand’s Kasikorn Bank partnered with Grab to launch an e-wallet for
unbanked customers called GrabPay by KBank. Indonesia-based Bank Jago also
became the country’s fourth most valuable listed bank last year after receiving
investments from Gojek, and is planning on partnering with Gojek to embed its
financial services on the company’s platform.

The Risks of Scaling Up

5. As ride hailing apps in Southeast Asia expand into financial services to become
superapps, they face significant risks. Although harnessing mobile financial
technology can present a more creative model of financial depth and include
unbanked users, it should not come at the risk of cutting corners in cybersecurity,
digital inclusion, and regulations. The digital divide between rural and urban
consumers also presents a challenge to the equitable adoption of fintech tools.

6. Data breaches due to weak cybersecurity infrastructure are a significant risk. In

the first four months of 2020, Indonesia experienced over 88 million cyberattacks. In
May 2020, a data breach at Tokopedia, Indonesia’s largest e-commerce platform,
jeopardized more than 15 million user accounts. An expected $18 billion merger
between Gojek and Tokopedia also means that a single data breach could lead to
greater disruption and expose even more user data. According to a 2018 report from
CSIS and McAfee, weak cybersecurity systems cost the Indo-Pacific region more
than $300 billion in economic losses.

7. Individual companies cannot deal with cybersecurity alone, and governments have
an interest in strengthening national systems to enable private sector growth and as
a matter of national security. Wider adoption of Grab and Gojek’s financial services
may spur financial growth and inclusion, but allowing the companies to become too
big to fail poses questions that antitrust and financial regulations need to address.
Regulating these services will need to balance consumer protection and the integrity
of national financial systems without inundating growth.

8. The all-in-one nature of these apps also raises concerns about their ability to
provide sustainable financial services. A slide from a Grab investor presentation from
April 2021 lists some of the risks of investing in the company, including that “Grab
relies on its partnerships with financial institutions and other third parties for payment
processing infrastructure” and “Grab’s business depends upon the interoperability
of Grab’s superapp and platform with different devices.” The same presentation
reveals that Grab has not made net profits since its inception. Risks from primary
ventures of rideshare and food delivery could affect these companies’ ability to lend
and store money. External shocks to the rideshare businesses, such as a pandemic
that halts commutes, or patchwork regulations that have disenchanted similar
companies before, could also leave companies in a credit crunch and unable to
meet financial commitments to consumers. While Grab and Gojek have managed to
navigate the tapestry of social change and varied laws of Southeast Asia, doing so in
the absence of common regional standards will become more difficult as the industry
becomes more crowded.

9. The digital divide in Southeast Asia is also another barrier to scaling up, and risks
leaving large segments of the population out of a mobile money boom. Across the
region, urban consumers make up 85 percent of e-wallet users. Increasing the
reliance on superapps without first addressing the digital divide risks leaving behind
lower-income and rural communities. On the supply side, meanwhile, this digital
divide sets a cap on companies’ potential market penetration.

How the United States Can Help

10. Increasing digital capacity in developing countries would fit in with USAID’s
Digital Strategy for 2020 to 2024, which aims to counter cyber threats and increase
digital infrastructure in partner countries. USAID has a proven track record of
investing in financial inclusion in Southeast Asia; since 2015, the agency’s E-PESO
project has worked with the Philippines’ central bank to support the digitization of the
Bureau of Internal Revenue systems, open mobile tax payment platforms for local
governments, and assist the Department of Trade Industry in training women
entrepreneurs. The Philippines’ Department of Social Welfare and Development has
also partnered with USAID during the Covid-19 pandemic to develop ReliefAgad, a
digital app to distribute pandemic relief funds to beneficiaries’ e-wallets or bank
accounts. While the digital divide persists across Southeast Asia, national
governments have shown more willingness and drive during the coronavirus
pandemic to shift services to mobile platforms. U.S. investment into existing
government initiatives would likely be welcomed.

11. Development finance institutions like the U.S. International Development Finance
Corporation and the Asian Development Bank can address barriers to the growth of
mobile financial services, namely through investing in cybersecurity and bridging
the digital divide. Such institutions have the advantage of working with the private
sector to complement USAID’s work with regional governments. Private sector
companies can also play a role in creating innovative user models or advising
Southeast Asian startups. In 2019, Grab and Mastercard launched the GrabPay
Card, enabling unbanked users to make secure transactions with merchants that
accept Mastercard. Tokopedia, the e-commerce platform considering a merger with
Gojek, also hired Citigroup as an adviser in 2021 following its plan to go public.

12. Official development assistance, development finance institutions, and the

private sector are all avenues for U.S. engagement in the burgeoning digital
payments market in Southeast Asia. The way the region pays is changing—and it is
up to stakeholders to keep up.
Reading comprehension
I. words and expressions
Explain the meaning of the following words and phrases, as used in the article:
1. superapps: Superapps refer to mobile applications that offer a wide range of
digital services and functionalities on a single platform. These apps typically go
beyond their original purpose to include services like transportation, food delivery,
digital payments, and more, all in one place.
2. catapulting the Singapore-based tech company into the global spotlight:
the merger and subsequent listing on the NASDAQ stock market brought significant
attention and recognition to the Singapore-based tech company, Grab, on a
worldwide scale. It placed the company prominently in the global tech industry.
3. overcome adoption barriers to fintech
successfully addressing the challenges or obstacles that hinder the acceptance and
use of financial technology (fintech) services by consumers. These barriers can
include issues like lack of awareness, trust, or access to traditional banking services.
4. credit worthiness:
Creditworthiness refers to a person's or entity's ability to repay borrowed money or to
meet financial obligations without defaulting. It's a measure of their financial stability
and trustworthiness in handling credit or loans.

5. cutting corners in cybersecurity

This expression means taking shortcuts or not investing sufficient resources in
ensuring proper cybersecurity measures. It implies neglecting security protocols,
which can lead to vulnerabilities and breaches.
6. companies to become too big to fail
companies have grown so large and integral to an industry or economy that their
failure could have significant and far-reaching negative consequences. It's often
used in the context of financial institutions or major corporations.
7. depends upon the interoperability of Grab’s superapp and platform with different
devices:
This means that Grab's success relies on its superapp and platform being
compatible and able to work seamlessly with various types of devices, such as
smartphones, tablets, and computers.
8. a credit crunch
A credit crunch refers to a situation where there is a sudden reduction in the general
availability of loans or credit from financial institutions. It often leads to difficulty in
obtaining loans or financing.
9. a proven track record
This phrase indicates a history of success and achievement in a particular area or
field. It means that an individual or organization has demonstrated their ability to
consistently achieve positive results or meet their goals.
10. bridging the digital divide
This means taking steps to reduce or eliminate the gap in access to digital
technologies and the internet between different groups of people, particularly
between urban and rural areas or between income levels. It involves ensuring that
more people have equal opportunities to benefit from digital advancements.

Comprehension questions
Answer the following questions in your own words:
1. How has Grab grown to become the giant in Southeast Asia fintech?
Grab has grown to become a giant in Southeast Asia fintech by initially starting as a
ride-hailing app in 2012 and then expanding its services to include digital payments
through GrabPay. This expansion allowed Grab to overcome adoption barriers to
fintech by attracting users through its transportation services before introducing them
to digital payment options.
2. What are the risks of "scaling up" for the companies?
The risks of "scaling up" for companies like Grab and Gojek include data breaches
due to weak cybersecurity infrastructure, potential financial instability due to
overreliance on their primary ventures like ride-sharing and food delivery, and
challenges related to the equitable adoption of fintech tools, especially in bridging the
digital divide between urban and rural consumers.
3. What incentive did the online payment platforms offer to lure in new customers?
Online payment platforms like GrabPay offered the incentive of increasing digital
financial inclusion by allowing customers without physical bank accounts to make
purchases. They achieved this by enabling unbanked borrowers to utilize alternative
data, such as e-commerce transactions, to prove their creditworthiness. Additionally,
Grab introduced services like PayLater, allowing loyal users to pay for goods on
credit, serving as a proof of concept.
4. Commercial banks have joined the game. How are they holding up?
Commercial banks have joined the game by either launching their own e-wallets or
partnering with superapp companies like Grab and Gojek to embed their financial
services on the superapp platforms. For example, Thailand's Kasikorn Bank
partnered with Grab to launch GrabPay by KBank, an e-wallet for unbanked
customers. Indonesia-based Bank Jago also became one of the country's most
valuable listed banks after receiving investments from Gojek.
5. What are the governments' interests in strengthening up cybersecurity
infrastructure?
Governments have an interest in strengthening cybersecurity infrastructure for
national security reasons. Weak cybersecurity systems can lead to data breaches
and economic losses. Governments aim to enable private sector growth and protect
their national financial systems by enhancing cybersecurity measures.
6. Why does the all - in - one nature of the apps raise doubts amongst observers?
The all-in-one nature of superapps raises doubts among observers because it may
create concerns about the sustainability of their financial services. These apps
initially focus on ride-sharing and food delivery, and external factors like a pandemic
or changing regulations in these primary ventures could lead to financial instability,
impacting their ability to provide financial services.
7. What problems can a "digital divide" pose to Southeast Asia region?
A "digital divide" can pose problems in the Southeast Asia region by leaving large
segments of the population, especially in rural and lower-income areas, without
access to mobile money and digital financial services. This divide sets a limit on
companies' market penetration and excludes certain groups from the benefits of
digital advancements.
8. How is the situation fitting into the USAID's Digital Strategy for 2020
to 2024
The situation fits into USAID's Digital Strategy for 2020 to 2024 by addressing the
goal of increasing digital infrastructure and reducing cyber threats in partner
countries. USAID has a history of investing in financial inclusion projects in
Southeast Asia, making it a suitable platform to support initiatives aimed at
narrowing the digital divide and promoting digital capacity in the region.
9. How can foreign financial institutions help to narrow "the digital divide"?
Foreign financial institutions can help narrow "the digital divide" by investing in
initiatives that aim to increase access to digital technologies and internet services in
underserved areas. They can also collaborate with governments and private sector
companies to develop innovative solutions and provide expertise in bridging the gap
between urban and rural communities in terms of digital access and financial
services.