Over the last decade, digital payments have materially increased in size, particularly in emerging markets.
This trend has been driven by supportive factors such as increasing technology adoption and global smartphone penetration (3.2 billion users as of 2020, representing 41.5% of the global population).
This resulted in global payments revenue reaching just under US$2 trillion in 2020, according to a report by McKinsey.
The players working behind the scenes
Southeast Asia is no stranger to this boom, with major proliferation of digital payments. However, when one speaks about payments, it is often the consumer applications that come to mind.
Geographical challenges, large underbanked and unbanked populations, and unique payments culture in each country require companies to offer unique payment solutions in each country.
Google Pay, Venmo, PayPal, Zelle, Whatsapp Pay are pretty much household names at this point. And in Southeast Asia, you have local standalone/super-app extensions like PayNow, Shopee Pay, Grab Pay amongst others.
The advantages of these payment applications are obvious, both to the consumer and the merchants that accept them.
Convenience, lower cost and ecosystem benefits that these payment applications provide have seen continued adoption in the Southeast Asia region.
However, what often goes unnoticed is that there is a lot that goes behind the scenes to make these payment methods acceptable for consumers and merchants.
Enter payment gateway and processors, the oft forgotten heroes that are enabling the digital payment revolution.
The payments journey in Southeast Asia, and why it needs these players the most
The payments journey in Southeast Asia is a unique one.
It has not followed the US and Western markets, which are dominated by debit/credit cards as the major digital payment methods. Why have credit cards not taken off in a similar manner in Southeast Asia?
There are two primary reasons.
First, that consumers are unwilling to pay the high fees typically associated with these cards. Second, that there remains inadequate credit coverage and infrastructure for banks to push card products just yet.
In many ways, Southeast Asia’s payment journey has been more similar to China than that of the US. China was a predominantly cash based economy, until the rise of the super-app ecosystems developed by Alibaba and Tencent came into effect.
The rise of Alipay and WeChat Pay respectively allowed consumers an easier, cheaper way to transact. Because most Chinese consumers use (if not both) of the two super-app offerings, it made logical sense for them to open up digital wallets for these consumers to transact.
By 2014, Alipay overtook PayPal as the world’s largest mobile payment platform, and as of today, Alipay and WeChat account for ~92% of digital payments in China. This has also caused greater merchant adoption because merchants only have to integrate with these 2 major players.
Similar to China, Southeast Asia has effectively followed the cash to digital wallet journey, instead of cards.
However, there is one very important difference.
While players like SEA, Grab and Gojek are trying to expand to super-app like offerings, they have not reached the scale of Alibaba and Tencent in China just yet.
Thus, rather than having two dominant players, Southeast Asian has seen a number of applications proliferate the market.
Arguably, while this improves the choices of consumers, it does cause a lot of pain on the merchant end, who have to make sure they can accept all these methods.
However, someone has to do it. So who are these players working behind the scenes in Southeast Asia?
The need for localized solutions
Stripe is undoubtedly the first name that comes to mind when it comes to payment processing.
The company has transformed the payments landscape globally, becoming a US$160 billion dollar behemoth.
However, given the deep fragmentation of the market in Southeast Asia, there exists an opportunity for local players to gain a big chunk of the ever increasing payments pie. Many of these have made good strides.
Xendit, which has just been announced as a unicorn (thanks to a certain tiger), has been a trailblazer in the space. Xendit began as a peer-to-peer payment provider in 2015 and has since evolved into a company providing payment solutions to Indonesia, and surround regions.
Founded by an ex-Y Combinator partner, it is the first Indonesian company accepted into the Y Combinator accelerator program.
2C2P, has also made distinguished progress as a payment gateway. It has presence in more than 10 countries in Asia and Europe and also offers a suite of services in the payment space such as corporate card issuance, digital wallets and remittance services.
A key aspect here is that these solutions have focused a lot on SMEs and the smaller end of town, which contribute to a majority of the region’s volumes.
This is unlike Stripe and Adyen, who have traditionally focused more on enterprise. Stripe has also shown a willingness to partner and invest with some of these players. For example, Stripe invested in PayMongo, a Philippines based player.
The need for these solutions has also caught the eye for some of the consumer applications. Leading the pack is Gojek, which has already bought three fintech firms—Kartuku, an offline payments processing company,
Midtrans, a popular online payment gateway, and Mapan, a savings and lending network to expand their presence in this segment.
What lies ahead
Southeast Asia’s countries are on an exciting journey into their own forms of cashless and e-payments. As the region’s payment journey continues to evolve, the need for these backend providers on the gateway and processing end will continue to grow.
While it is ultimately becoming a competitive space, there is a long pathway of growth ahead for these players who continue to work their magic behind the scenes.