The promising and challenging terrain of embedded finance in Southeast Asia

the promising and challenging terrain of embedded finance in southeast asia

In the rapidly evolving world of financial technology, few themes resonate as powerfully as embedded finance. It stands as a beacon that enables truly seamless and frictionless financial services for diverse industries, from e-commerce and marketplaces to remittance providers and smaller and medium-sized banks. Enterprises across these sectors are well aware of what embedded finance can do to enhance customer service and boost revenue, however, as alluring the prospects are, the path to successful integration is laden with considerable obstacles.

The broad spectrum of opportunities that embedded finance offers

Companies worldwide recognize the immense potential of offering financial services. This recognition is not just a passing trend; it’s a strategic move to remain competitive, relevant, and enable longer-term sustainable growth in a digitally dominated marketplace. By integrating financial services, businesses can enhance the customer experience, delivering added value beyond their traditional offerings.

Particularly in Southeast Asia, with a significant unbanked and underbanked population and an estimated 400 million internet users expected in 2023, the potential for embedded finance to play a significant role is evident. It can provide numerous businesses with more growth opportunities and access to financial services without relying on traditional banks. According to Airwallex’s recently-launched embedded finance report, small and medium-sized businesses (SMBs) in Singapore are most skeptical about the prospect of traditional banks meeting their financial services needs. While only 33 percent had confidence in traditional banks, almost double (62%) think SaaS platforms or marketplaces that offer embedded financial services can effectively serve their needs. These platforms are better able to offer various opportunities, especially for SMBs to thrive in the region. As a result, we are witnessing a substantial integration of financial services into non-financial platforms throughout the region.

Navigating the regulatory and financial hurdle of integration

As companies embark on this integration journey, they encounter a complex web of challenges. Foremost among these is compliance with an array of regulations such as Know Your Customer (KYC), Anti-Money Laundering (AML), and Payment Card Industry Data Security Standard (PCI DSS). Navigating these regulatory requirements is a significant challenge. The intricate task of ensuring adherence to each guideline demands substantial knowledge and expertise in risk and compliance, leading many enterprises to establish new, dedicated teams.

As businesses expand their operations globally, they must tackle a diverse range of regional regulations, each with its unique specifications and often subject to change. This is particularly true in Southeast Asia, home to eleven countries, each with its own distinct regulatory and risk environment. Such global operations magnify the complexity, making compliance a more daunting task. Against this backdrop, 48 percent of SMBs in Singapore are looking to migrate to alternative payment solution providers that can satisfy their cross-border payment needs in the next 12 months.

Beyond the regulatory hurdles, the financial cost of integrating financial services is another significant challenge. Companies must make substantial upfront investments to develop their financial offerings, followed by ongoing expenses. These include hiring dedicated teams to coordinate with banking partners across various regions, an endeavor requiring substantial resources and effort.

Paving the way forward

Despite these challenges, pathways exist for companies to successfully navigate the embedded finance landscape. A viable solution lies in partnering with Payment Service Providers (PSPs) and fintech companies that offer Banking as a Service (BaaS).

These companies, equipped with robust relationships with multiple banking partners and comprehensive financial infrastructure, enable enterprises to launch financial products swiftly and with a considerably lower initial investment than directly approaching a bank. Managing the intricate process from beginning to end, these providers ensure businesses can effortlessly integrate financial services, alleviating the burdens of licensing, technology management, and system embedding.

By relying on the expertise of these partners, businesses can effectively navigate the challenges, minimize costs, and ensure the seamless operation of their embedded finance solutions, ultimately reaping the benefits of enhanced customer service and increased revenue.

In conclusion, while the integration of embedded finance presents notable challenges, the potential rewards for businesses and their customers are substantial. By strategically partnering with experienced providers, enterprises can navigate the complexities, ensuring not only their compliance and operational efficiency but also securing a competitive edge in the market, promising sustained growth and innovation in the world of embedded finance.

David Brady is Director, Enterprise at Airwallex.

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