The digitisation of MSMEs in SEA

Tech in South East Asia, which generated more than 30+ unicorns last year, has kept the start-up community buzzing as digitisation has made strides of development over the last few years in South East Asia. 

Amongst the many ingredients which contributed to the astronomical success of the tech start-ups in SEA is inclusion. 

Whether its the financial inclusion of a large underbanked population or inclusion of customers from smaller cities – inclusion of customers and businesses across lifecycle and location was important. 

Similarly, the inclusion of MSMEs on this digitalisation wave was critical as they form a critical part of the overall economy.

MSMEs are a pivotal driving force in Southeast Asian economies, accounting for an average of 97% of all enterprises and 69% of the national labour force. They contributed an average of 41% of each country’s gross domestic product over the same period.

Till 2018, these merchants were operating their business as they were decades ago. 

Sales and purchases are logged by hand in a ledger, for instance. Similarly, many times these store owners couldn’t collect the dues timely as they kept the records of these “dues” on paper, and payment pleas were made verbally.

here were clearly issues which were to be resolved. Founders of leading start-ups realised that this is a big enough problem to solve, and they took the plunge.

Journey from Book-keeping to Building an Operating System

They essentially started as a service that enables digital bookkeeping — capturing daily transactions of a small business, tracking arrears, and helping with invoice management, among other things.

To ensure that the product is easy to use, most players have built their apps in the local language, with seamless integration with Whatsapp (or the local leading social media chat service) to enable easy communication with suppliers and customers. 

leading players offered these services to merchants at zero cost. Through digitisation, they could ensure transparency and gain merchants’ trust which was critical, as merchants were required to share data that they might not be sharing with their family members.

Further, through Whatsapp integration, the app could send auto-reminders to customers whose dues were outstanding and this led to better collection cycles. 

Overnight this product was a success, with multiple merchants downloading and starting to use it.

Book-keeping allowed startups to collect data which is of massive value and features like auto-reminder and simplicity of usage led to stickiness of customers. 

Founders also realised that as merchants were not maintaining proper records, raising funds was also difficult for them. 

Talking about Indonesia only, the opportunity is huge. A 2017 IFC report estimated Indonesia’s MSME credit gap to be worth US$165 billion—the world’s sixth-highest. Nearly a third of Indonesia’s 270 million population lacks access to formal financial services. 

Now, the vision is to build the digital infrastructure for small merchants and fundamentally build two kinds of tools — the right tools that allow them to run their business and tools that help them to grow their business.

First is solved for and the second is what they are working towards. 

Leading players and their journey

This space has seen a surge in activity in the recent past, with Bukukas leading the way in SEA. 

Started by Krishnan Menon and Lorenzo Peracchione, the company got 400,000 MSMEs to enrol on its platform within six months since its launch in 2019. As a financial management app, it started off by helping owners record all transactions in one place. Since then, they have grown exponentially, with over 2 million merchants on their platform. 

Within three years from launch, they closed a strong 80 million series C round, led by Sequoia and Tiger Global. Another company, BukuWarung, is seen as a strong competitor in Indonesia. With record growth, the Y-combinator backed startup is already valued at 250 million with funding from Valar Ventures and Goodwater Capital.

Now, with the bookkeeping platform as a base, they are using their engagement with MSMEs to provide other SAAS services as well. In Q4 last year, Bukukas launched LummoShop, a simple solution to enable MSMEs sell products online to consumers directly via social media platforms. 

In Vietnam, Kilo, a B2B ecommerce start up, is looking to acquire MSME customers through the other end of the supply chain – by digitizing the interaction with their wholesale suppliers.

In India, Khatabook has led the way. After a brief stint in Indonesia, they decided to quickly exit the market to focus on their home market.

Much like Bukukas, their aim has been to acquire customers by digitizing their daily ledger. Using this as a hook, they are now sitting on a treasure trove of data on purchase behavior, payments and credit history of MSMEs in India. 

With this, they could potentially extend loans to a segment where banks have struggled to scale, due to limited data on the credit worthiness of small business owners. (read our full story here)

By providing e-commerce solutions and credit, these startups are enabling the growth of MSMEs, which in turn could deliver value and help monetize their service.

Challenges and way forward

With a clear gap, the race to acquire and build the largest MSME customer base has started heating up. 

While Bukukas and Khatabook have used bookkeeping services to acquire MSME customers and data, others have used social commerce and payment integration. Social giant Facebook tied up with Shopify last year to offer easy e-commerce solutions for small players themselves. 

Moreover, for merchants facing payment unicorns like BharatPe, book-keeping and credit is just another feature that they can build into their app.

While small businesses have been happy to adopt a free service, questions remain on their willingness to pay. Especially after COVID, many small business owners have had to dip into their savings due to the sharp decline in revenue over the last two years. 

Living from paycheck to paycheck, they are not likely to pay for the service in the short term. 

In the last two years, the race for the fortune at has been fuelled by VC money. Over the next two years, the ability to solidify their position in the market and transition to a monetizable service will determine the winner in this segment.