Southeast Asia is rapidly replacing cash, but the banks and fintech companies helping the transformation aren’t getting much revenue from it. In our view, card and wallet companies need to chart a new course to increase revenue.
Southeast Asian banks are facing a significant slowdown in interchange revenue due to increased cardless payments and regulatory interventions. While fintechs will lead payments growth – thanks to their dominance in e-money-based mobile wallets – revenue opportunities are drastically reduced for ambitious tech companies.
Growing price compression in the industry should prompt changes in revenue models. Banks need to create a cloud-based issuance environment to meet consumer demands for digital experiences and to support emerging payment methods. Fintechs with insignificant position in the e-money market should turn to merchant acquiring business, where it is possible to generate high-margin revenue by providing software and services to improve payment performance and accelerating revenue through loyalty programs.
Soaring transaction values, low revenues
S&P Global Market Intelligence estimates that aggregate cashless retail payments are set to grow at a CAGR of 14% to reach $3.024 trillion in 2025 across four major Association of Southeast Asian Nations economies: Indonesia , Malaysia, Singapore and Thailand. Our analysis looked at the use of three popular retail payment instruments in the region: debit and credit cards; electronic money, consisting of rechargeable prepaid cards and digital wallets; and real-time payments facilitated by mobile banking apps and internet banking.
Issuer revenue from payments, however, is expected to grow at a calmer 4% CAGR to nearly $4 billion in 2025. We define issuer revenue as the portion of merchant fees that goes to banks and merchants. non-banks issuing payment instruments such as cards and electronic money. Instant Payments do not incur any fees and do not contribute directly to payment revenue.
Banks will be hardest hit by the revenue slowdown, as card payments will lag behind fintech-dominated e-money payments and instant transactions. We expect banks in all four countries to see their overall interchange revenues grow at a late CAGR of 2% to $3.07 billion in 2025. Along with the increase in cardless payments, increased competition between tech companies and low-cost government-run utility models. payment networks are driving down merchant fees in the region.
Fintechs, which offer popular mobile wallets, will lead payment revenue growth as we expect e-money revenue to grow more than 13% to $905 million from $544 million in 2021. But the overall revenue opportunity in payments is not big enough for fintechs. Additionally, as we have explained in our previous research, fintechs in Asia do not generate positive margins at the transaction level, as payment revenues are often not enough to cover the processing costs incurred to withdraw funds from clients in their stored-value wallets.
In our analysis, we have ranked the banking and fintech markets based on revenue growth potential. Although the region is increasingly integrated with various banks and fintechs creating regional businesses, growth opportunities vary from country to country.
Sluggish growth in card interchange revenue
Although already the largest market by value, Singapore remains the best bet for card issuers to increase interchange revenue. We expect interchange revenue on debit and credit card transactions in Singapore to grow at a CAGR of 3% to $1.64 billion in 2025. Thailand and Indonesia could also see steady growth card interchange revenue at CAGRs of 2% and 1%, respectively. Malaysia, on the other hand, is expected to see card revenue contract at a negative CAGR of 3%, due to regulatory pressure on interchange rates.
Our sober outlook on card redemption revenue reflects disappointing credit card usage. As the pandemic dampened banks’ risk appetite, credit card supply took a hit. We expect a slow rebound in credit card usage through 2025, with the share of consumers with recurring needs increasing as the economy recovers. Debit cards have proven relatively resilient during the pandemic and will see faster growth through 2025.
Banks have historically leveraged credit card companies to increase non-interest revenue and develop relationships with consumers and merchants. The provision of transactional services has helped banks in the region improve the share of low-cost and sticky deposits such as checking accounts and savings accounts in their deposit portfolio. With slowing card payments becoming an age-old trend, banks need to find alternative avenues to boost customer engagement and make up for the lost revenue.
Investing in a digital transformation could potentially create two options: for banks with resources and a market-leading position, to offer attractive mobile banking experiences that promote in-house card and cardless payment methods, as well as solutions unsecured consumer loan. Aligning with popular consumer-facing fintechs to underwrite their “buy now, pay later” and other point-of-sale financing options could be the way forward for smaller banks. But both options call for modernizing their issuance platforms through the deployment of microservices and application programming interfaces to improve flexibility and scalability.
Growth markets for fintechs
The dominance of non-banks as e-money issuers in the region makes e-money a good indicator of fintech payments. Our analysis shows that non-banks represent the majority of e-money licensees in Thailand, Indonesia and Malaysia. In Singapore, the central bank issued payment licenses to 29 non-bank e-money issuers. The island nation’s banks do not need a license to offer stored-value accounts, which differ from interest-bearing deposits. It is unknown how many financial institutions in Singapore issue e-money.
Indonesia offers the highest revenue potential for fintechs as e-money becomes the archipelago’s main payment instrument. The overall value of e-money in the country surpassed credit cards for the first time in 2021, rising from $14 billion to $21 billion in 2020. $225 million in 2021. Thailand will be the second basin revenue from fintechs, with its revenue from e-money transactions expected to grow at a CAGR of 13% to reach $365 million in 2025.
A growing consumer and merchant base allows major e-money issuers to add adjacent revenue streams by targeting populations with unmet credit demands. The low penetration of credit cards and small business financing solutions offers technology companies the opportunity to provide a virtual revolving line of credit.
Market leaders such as Grab Holdings Ltd., Sea Ltd. and PT GoTo Gojek Tokopedia Tbk have obtained banking licenses or acquired stakes in banks to take a bigger share of regulated financial services. Other fintechs with less advantageous market positions and limited resources are likely to shift their focus from issuance activities to merchant acquiring activities. Merchant acquirer revenue models will initially be tied to providing software and services for processing transactions, improving payment performance and managing loyalty programs, and will eventually have the opportunity to promote solutions financing such as BNPL offers and working capital financing.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.