The Battle to Monopolize Southeast Asia’s Embedded Finance Ecosystem

Mitsui and Microsoft are collaborating on a new financial services initiative. Photo: AP and Reuters

Japanese megabank Sumitomo Mitsui and U.S. tech giant Microsoft are teaming up to provide financial services to digital platforms in Southeast Asia. 

In an interview with Nikkei Asia, Katsunori Tanizaki, Sumitomo Mitsui's group chief digital innovation officer, boldly claimed that the group's "aspiration is to develop an embedded solution ecosystem in Southeast Asia."

But what exactly is “embedded finance” and why the emphasis on Southeast Asia? Simply put, embedded finance is the use of financial tools or services — such as lending or payment processing — by a non-financial provider. This helps to streamline financial processes for consumers, making it easier for them to access the services they need.

In this sense, Southeast Asia is a gold mine. According to research conducted by Google, Temasek Holdings and Bain & Co., about half of Southeast Asia's nearly 400 million adults do not have a bank account. These vast arrays of “unbanked” populations creates a new opportunity for fintech players to put up new products that generate revenue streams from interest, payments, and financing.

Southeast Asia suffers high rates of unbanked and underbanked populations, making it an ideal target for embedded finance initiatives. Source: Bain & Company

With such untapped potential in the region, the partnership between Sumitomo Mitsui and Microsoft seems to be a marriage of necessity, as they need each other’s local presence and technology respectively. 

This merging of resources to dominate Southeast Asia’s embedded finance system, is however, not revolutionary. It is just adding one more player in the battle between fintechs and traditional lenders in Southeast Asia. 

Southeast Asia's tech giants are in an intensifying battle with conventional banks over the region's burgeoning digital banking services. 

The fintech revolution in Southeast Asia is forcing current players in the financial ecosystem, such as Visa and Mastercard, to adapt rapidly. Visa has invested in Gojek, an Indonesian tech unicorn. Mastercard has partnered with Grab, Southeast Asia’s first “decacorn”.  

This changing landscape in Southeast Asia through the rapid adoption of smartphones has certainly not gone unnoticed. In addition to old financial players revolutionizing their digital banking infrastructure, new tech start-ups clearly see digital banking as a natural extension of services already offered through their apps. 

This is perhaps why European banks have made similar headways into this market through collaborations as well, with Standard Chartered launching a digital banking service  with Indonesian tech unicorn Bukalapak this September.

COVID-19 has merely accelerated the potential growth for the region, driving greater digital adoption and highlighting the pathways to digital banking growth. 

Analysts say the combatants bring powerful but differing strengths to the fight. As of now, the banking industry seems fragmented and competitive, with no victor yet in the fight to control Southeast Asia's growing digital finance market.

Microsoft seems to be the latest tech giant to bet heavily in Southeast Asia. And it is still too early to say if they will have a significant impact on the region’s embedded finance ecosystem. 

The only certainty is that long neglected rural populations may soon have access to some of the most technologically advanced financial services in the world. That in itself, perhaps, is promising.