Introduction
The rise of e-commerce during the pandemic and innovations in FinTech have brought in business opportunities to small and medium-sized enterprises (SMEs) in Southeast Asia.
We’re seeing growing demand for cross-border transactions as a result. Expansion-minded SMEs have benefitted from FinTech companies and regulatory bodies’ work in overcoming obstacles like high transaction fees and long clearing times. But lingering scepticism has also led some SMEs to choose legacy services over FinTech.
Our recent SME Digital Finance and Payments Behaviours study found that pain points in cross-border payments may be preventing regional SMEs from pursuing inter-country transactions, leading to a more local focus.
It’s a fluid situation, though. Shifting economic trends, such as the China Plus One strategy and an ASEAN digital cross-border payments system, are making cross-border transactions more attractive. And SMEs are in a prime position to capitalise on this critical moment.
Singapore, Thailand, and Vietnam lead the demand for cross-border transactions
Our survey found that the majority of SME transactions with both customers and suppliers were local, not transnational. On average, 21% of respondents said that cross-border transactions were important for them. Other concerns like access to loans and obtaining alternative financing were a higher priority.
SMEs in Singapore, Thailand, and Vietnam lead the pack among those that value cross-border transactions. This is not surprising, as the three countries are among those that have the highest total imports in ASEAN.
Our new SME report offers some insight into these trends. Among the SMEs we surveyed, those in Singapore, Vietnam, and Thailand did more cross-border transactions than those in Malaysia and Indonesia. These transactions were higher for payments to suppliers than for receiving payments from customers. On the other hand, SMEs in Indonesia overwhelmingly reported local transactions.
In terms of paying suppliers, Singapore and Vietnam were the top users of credit and debit cards, at 28% and 31%, respectively. Meanwhile, Indonesia ranked the lowest, with only 5% of SMEs reporting that they used a credit or debit card to pay suppliers. The regional average was 23%.
The demand for cross-border payments will rise significantly over the next few years. A recent study by Google, Bain, and Temasek expects the digital payment market to hit US$2 trillion in 2030, as the pandemic and its immediate aftermath increased digital payment adoption even in areas where digital solutions are not yet commonplace.
Indonesia is projected to post the highest growth in the digital economy, as online spending is expected to rise to US$130 billion by 2025. This is followed by Thailand, Vietnam, the Philippines, Malaysia, and Singapore.
Trends and regulations in FinTech
Competition among FinTech companies has intensified in recent years, effectively boosting digital and financial inclusion.
A study by Ernst & Young revealed that FinTech companies have been striving to cover all bases, from C2C, B2C, and B2B transactions, especially for SMEs in emerging markets who are underserved by traditional financial institutions.
Policies that ease business transactions are also creating favourable conditions for cross-border payments growth. In 2022, representatives from Indonesia, Malaysia, Thailand, Philippines and Singapore signed a memorandum of understanding on regional cross-border payments, promoting the use of QR payments for cross-border transactions. To a great extent, this reduces the layers involved in payments and lowers fees incurred by both vendors and customers.
Moreover, the QR code system is no longer dependent on the value of the US dollar. Conversion is based on the prevailing exchange rates among ASEAN member countries.
ASEAN is also working on regulatory frameworks for larger financial transactions, as well as a framework on digital data governance which further aligns data and financial regulations.
More progress toward diminishing cross-border transaction pain points
Despite these developments in technology and regulation, a few persistent pain points hamper the adoption of cross-border transactions among the SMEs we surveyed.
The high costs due to additional intermediary fees, foreign exchange rates, and disjointed regulatory frameworks still remain. For instance, customers still pay large spreads on the exchange rate with every cross-border transaction. Fees compound as different intermediaries in the transaction get a cut.
Secondly, the system is still plagued by delays and opacity. Our study finds that cash is still king and most transactions are still coursed through banks. Traditional financial institutions use SWIFT messages, the international norm for cross-border settlements. While used for decades, money transfers processed through SWIFT may take up to five working days to clear. They extract more fees due to multiple conversion rates and are harder for end-users to track.
Opening up to change
We found that SMEs are exploring various payment and financing channels. This openness may extend to cross-border transactions in the future.
Cross-border payments don’t have to be a headache or be intimidating for SMEs. If lack of access to working capital hinders overseas expansion, some services address that.
Export financing services like supply chain financing give SMEs access to working capital and steady cash flow in the face of erratic revenue issues like postponed payments and sudden expenses. This service lets SMEs continue operations without waiting for overseas customers, as the loan programme ensures funding even before goods and services are delivered and paid for.
Export financing also protects SMEs’ finances if the customer, whether local or international, fails to pay late or not pay at all, as the service involves insurance and other forms of guarantees.
Meanwhile, credit line services and virtual business cards not only give SMEs more spending power but also provide an easier means to transact and integrate with international partners.
Credit line services can be used not just for addressing financial issues. They can also help hasten procurement and payment due to the increasingly digital nature of business transactions in the region.
Crossing the bridge
Our recently released FSMK study finds that the business environment is more conducive than ever for SMEs in Southeast Asia to access payments in neighbouring countries — they just have to open up to the possibilities before them.
Small businesses can now access both financing options and cross-border payment solutions, as digital transactions become more widely acceptable and governments pave the way for regional integration.
Read our SME Digital Finance and Payments Behaviours report to find out more about the latest opportunities for SMEs in Southeast Asia’s exciting business landscape.