While global eCommerce has passed its COVID induced peak, the sector is still on track to expand for the foreseeable, growing a further 10.4% this year with global sales reaching US$6.3 trillion according to eMarketer. Asia is also expected have the lion’s share of this growth with over US$2 trillion[1] in sales. Zooming into Southeast Asia, the market is projected to mushroom by 22% and will reach around US$230 billion in gross merchandise volume in 2026[2], with Singapore leading the region.
eCommerce is essential to Asia’s economic prospects
The growing eCommerce market has provided a platform for many of Asia’s small to medium enterprises (SMEs) to reach new markets and engage in international trade. Importantly SMEs are the backbone of Asia’s economy and these businesses represent 17% of national GDP in low-income countries such as India, or circa 40 – 50% in higher income countries such as Singapore and Malaysia[3].
Here we have a unique window of opportunity. Macroeconomic headwinds are battering Western markets, while economic optimism has returned to Asia. The Regional Comprehensive Economic Partnership (RCEP) is also picking up the momentum and sets to drive more cross-border trade.
Yet threatening this optimism is that SMEs remain largely an underserved group. The most recent figures from the Alternative Credit Council, quantifies the funding gap for Asian SMEs at US$4.1 trillion.
The challenge lies in that when these SMEs grow, they do so at pace and as do their financing needs. Yet all too often entrepreneurs face substantial challenges accessing funding quickly enough through traditional avenues such as via banks.
Turning data into insights
There are several reasons for this. One is the lack of insights available to financial institutions in making lending decisions. Underwriting for funding remains largely paper-based evidence from a pre-defined list of documents such as invoices or previous sales records. Thus underwriting decisions are based on a very limited base of non digital backward looking data resulting in a reduced risk tolerance to compensate.
Yet interestingly, when it comes to eCommerce, there is an abundance of real time data across different platforms and partners in the value chain from procurement to fulfilment. While this offers a treasure trove of alternative data, the challenge is that such data is often unstructured, unconnected and in various formats. By breaking the siloes between eCommerce and finance data, richer insights can be uncovered and is the first step to informing underwriting decisions.
The need to bring together investors with innovators
Another issue is that although traditional financial institutions such as banks are holders of capital, they may not have the capability, operational model, or risk appetite to lend to this segment of the market. This is where hubs such as Hong Kong and Singapore can play an important role in connecting financial institutions with the financial power, with fintech companies that have the technological and operational models to deploy capital and serve this sector. Given its proximity, Singapore is well placed to be a funding corridor into Southeast Asia which has immense potential for cross-border eCommerce trade. Burgeoning markets include Vietnam as well as Indonesia, where its government is aiming to boost the SME share of exports by 54% to 21.6% by next year.[4]
Filling the quantum requires an innovative approach
While these measures are a start, the size of the gap requires a solution which goes beyond these. Perhaps a good stress test of this was the Chinese cross-border eCommerce sector during the pandemic. Based on our data, Gross Merchandise Value in Chinese cross-border eCommerce increased an incredible 63% between 2019 and 2022. What made Chinese SMEs so successful was their ability to adapt quickly to overseas consumer trends and market opportunities. While these SMEs grew at an incredible pace, their funding needs also evolved just as rapidly.
For many Chinese entrepreneurs, traditional lending avenues even if successful, were unable to keep up with their businesses’ evolving needs, eventually becoming a bottleneck. It was during this period when we witnessed an increasing demand from these cross-border businesses for fintech alternatives able to offer dynamic funding facilities that scale with their growth patterns.
Most data involved in SME funding is backward looking. Therefore, funding decisions are often made upon less relevant and untimely data. For this reason, providers often offer funding limited to what the customer needs in that moment – rather than based on what they need to help them grow going forward. This issue is not limited to traditional financial institutions but something common among alternative lenders and even fintech companies in this space.
There is no question that the move to digital has made the financing process faster and more efficient. However, often the underlying risk assessment continues to be structured upon parameters and information when paper-based applications were still the norm. This is what needs to change. It is building the ability to develop forward-looking risk modelling and harness emerging technologies such as machine learning. To sustainably deliver financial inclusion to this underserved group we need to shift mindset and business models to adapt and fully capture their needs rather than expect the underserved to conform to an approach that is not representative of their needs.
Behind every SME is an entrepreneur, real people whose lives and prosperity can be uplifted if we close this funding gap. The scale of the mission cannot be achieved alone by one bank or fintech provider. It requires the finance and fintech sector as a whole to step outside the norm, collaborate and innovate. This is an exciting moment for Asia, and there’s been no better time to be leading the charge.
References:
[1]
https://www.statista.com/forecasts/1117851/worldwide-e-commerce-revenue-by-region
[2] McKinsey & Company, E-commerce is entering a new phase in Southeast Asia. Are logistics players prepared? –
https://mck.co/3LeTgfL
[3]SME Finance Forum –
https://www.smefinanceforum.org/post/the-role-of-smes-in-asias-economic-growth#:~:text=Ata%3A%20In%20the%20Asia%2DPacific,countries%20like%20Malaysia%20and%20Singapore.
[4]
https://www.xendit.co/en/blog/cross-border-ecommerce-opportunities-and-challenges-for-indonesian-smes/
