Voice of the Industry

Digital payments in Asia are still in a liminal phase

Tuesday 28 November 2023 09:03 CET | Editor: Raluca Ochiana | Voice of the industry

Joshua Chong, Analyst at Kapronasia, provides insights into the development of digital payments in Asia and the evolution of e-wallets in particular.


Aftermath of the wallet wars

People living in Southeast Asia may remember a time, not too long ago, where new digital wallets seemed to be launched every day, and promotion campaigns would offer eye-watering cashbacks and massive discounts. Unsurprisingly, this could not go on forever.

Standing in the wake of the ‘wallet wars’, the winning wallets have become household names, while many others have fallen by the wayside or merged into a larger entity. While marketing budget and promotional strategy were undoubtedly key factors, one other angle to consider is how the wallet facilitates payments – and the impact this had on adoption.

In the Asian market, there are three main types of wallets/pseudo-wallets:

  1. Staged digital wallets (GrabPay, GoPay, ShopeePay): Staged wallets require users to first load value into the wallet via bank transfer, card payment, or at a physical retail outlet such as a convenience store or gas station. Payments made are deducted from the pre-loaded value on the wallet.

  2. Account-to-account (A2A) real-time direct debit (bank-launched app): This refers to domestic real-time payment networks linked directly to a user’s bank account, where payments are debited from the bank account instantly. While some banks have created a separate wallet application, in many cases it is technically not a wallet, but it is often used in a similar way and utilises the same standardised QR code as other e-wallets.

  3. Pass-through wallets (Apple Pay, Samsung Pay): These wallets are linked to a credit or debit card, and the consumer’s card information is utilised directly. As card penetration is very low in most Asian markets, this wallet is rarely seen outside of developed markets such as Singapore or South Korea.

Staged digital wallets are widely used in many developing Asian markets as they are easily accessible and don’t require a bank account or card ownership. The user’s journey of loading small sums and making small value transactions also fits in well with the purchasing habits in sachet economies prevalent in Asia. At this juncture, the leading staged wallets have crossed the education and awareness barriers and gained sufficient user trust to see a significant and consistent number of daily active transactions. However, given the razor-thin margins on payments, wallets that are part of a larger super-app ecosystem have turned to the parallel distribution of financial and other services to improve monetisation with unclear results.

Conversely, traditional banks which have been chided for lagging in technology have made notable progress with launching A2A real-time payments that may pose a strong challenge to staged wallets. Making use of national real-time payment rails such as PayNow (Singapore), DuitNow (Malaysia), or PromptPay (Thailand), banks now offer consumers the option to pay via QR code directly from their bank account. For consumers, the main benefit of this approach is that they don’t need to load value or have a card present. For merchants, the MDR fees are much lower or even subsidised, and funds are received instantly. Thus, it is fairly common to find a small business in Singapore that accepts, for example, PayNow but not GrabPay. Ecommerce marketplaces such as Lazada and Shopee also offer 0.5%–1% off for consumers who opt to use PayNow

Nonetheless, using a bank account is first required for this payment service but with heightened government emphasis across Asia on increasing banking penetration, A2A payments may indeed pose a serious and sustained threat to staged wallets. 

SoftPOS, hard sell? 

The concept of SoftPOS sounds very attractive in theory but putting it into practice has its fair share of challenges around security and terminal management. Moreover, most SMEs in Asia, the target market for SoftPOS, prefer paper-based transactions and would want to print out a paper receipt after each transaction. This doesn’t fit well with a key concept of SoftPOS, which is to take a minimalist approach to payments by reducing hardware and staying digital as much as possible. Another key factor has been the falling prices of Android Smart POS, along with their enhanced capabilities which now include a built-in printer, GPS, and even a loudspeaker to broadcast transactions and new orders. 

The uptake of SoftPOS still remains very low across Asia, and much of the hype around it replacing traditional POS died. Nonetheless, SoftPOS still has a role in Asia, albeit a minor one. It is best positioned as a supporting cast member of a more comprehensive POS terminal offering, where the new line of sleek and well-equipped Android Smart POS takes centre stage. Meanwhile, SoftPOS can address niche situations that play to its strengths, such as serving tourists at luxury brand shops or airports. 

Influence of local payment culture on digital adoption 

The stark diversity of local payment culture across Asia contributed significantly to the extent of digital adoption. 

According to data from FIS, while Asia as a region leads in the push towards digital payments, cash still plays an essential role in markets such as Thailand and Japan, where it accounts for 56% and 51% of POS transactions respectively. Despite progress in increasing the banked population in Thailand, traditionally high rates of unbanked population means that card adoption hasn’t really picked up. Digital wallets have gained some popularity, but it is A2A payments via PromptPay that have become Thailand’s leading online payment method, accounting for 42% of ecommerce transaction value in 2022. This doesn’t come as a surprise, as A2A most closely mimics a cash-based transaction with real-time settlement for the merchant. 

The attachment to cash in Japan, on the other hand, can be attributed to an aging population, a vast ATM network and high card acceptance fees. However, there is also a cultural aspect to physical bills and the ceremonial role it plays. With a culture steeped in tradition, many small businesses have resisted the cashless trend and their customers have respectfully followed along. Even FIS data predicts Japan will have the highest cash rate by 2026 at 37%, while digital wallet adoption will accelerate across Asia. It appears Japan isn’t quite ready yet for a cashless world.

This editorial piece was first published in the Payment Methods Report 2023, which provides an in-depth overview of the latest worldwide developments in how people pay, the payment methods space, the innovative technologies that these methods work upon, and the best strategies on how to win at conversion and retention.

About Joshua Chong

Joshua is an analyst at Kapronasia and has experience across banking, payments, and capital markets. Before Kapronasia, Joshua was with Morgan Stanley Equity Research in London and held strategy and business development roles with UK-based fintechs in the payments and asset management industries. Joshua graduated from the London Business School with a Master of Science in Financial Analysis and holds a BBA degree from BI Norwegian Business School.

About Kapronasia

Kapronasia is a leading independent research and consulting company focused on the Asian financial services industry. We help financial institutions, technology vendors, consultancies, and private equity companies understand the impact of business, technology, and regulatory issues in banking, payments, insurance, and capital markets.

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Keywords: payments , digital payments, ecommerce, payment methods, digital wallet, account-to-account payment, SoftPOS, local payment method
Categories: Payments & Commerce
Companies: Kapronasia
Countries: World
This article is part of category

Payments & Commerce


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