How Covid-19-inspired Consumer Behavior will Deliver Southeast Asia’s Digital Future

Courtesy of Bain & Company

By Allan Schulte, Alessandro Cannarsi & Aadarsh Baijal

With life beyond the pandemic closer to becoming a reality, predictions are starting to circulate about what a post-Covid 19 world will look like in Southeast Asia. While so many aspects of the near-term future remain uncertain, one thing is clear: consumers undoubtedly will maintain their reliance on digital services.

Coronavirus introduced a massive digital adoption spurt, with more than one-in-three digital services consumers being new to the service and more than 90% intending to continue post-pandemic, according to research by Bain, Google and Temasek based on Kantar data covering Singapore, Indonesia, Malaysia, the Philippines, Thailand and Vietnam. Forty million new Internet users were added in 2020, bringing the total to 400 million users. Now, 70% of the region is online.

The research also found that Southeast Asians spent on average an hour more a day on the Internet during Covid-19-imposed lockdowns. It’s easy to see why. The Internet sector provided access to essential goods, healthcare, education and entertainment while helping businesses keep the lights on. With eight out of ten Southeast Asians viewing technology as very helpful during the pandemic, it has become an indispensable part of people’s daily lives. The Internet economy remains resilient at US $100 billion gross merchandise value (GMV), even with the global slowdown. As consumers and SMEs come online, and with a supportive ecosystem and regulatory environment, the predicted 2025 total stands strong at over US $300 billion, indicating growth despite a challenged environment. The big hotspots include Vietnam and Indonesia.

The big shift in consumer behavior to digital services has massive implications both for traditional companies venturing into the digital realm and digital native companies. Education and Groceries benefited most from the influx of new digital consumers. For example, 55% of users of online education service were new to the service in 2020. In grocery e-commerce, 47% of consumers were new. Meanwhile, 34% of survey respondents in the region said they used food delivery more than they had before the pandemic. While Covid-19 accelerated adoption in these and other sectors, it also set back some, like transport (ride hailing) and online travel.   

Our research helped us clearly see how changes in consumer behavior will unfold. Shoppers are buying more groceries online and they are not going back. As intra-city travel resumes, so will Ride Hailing - but it will take time. And the surge in users of digital streaming is likely to continue. As evidence, consider that streaming video on demand providers have not seen a significant increase in churn and that more than half of the users (6 out of 10) intend to continue their video and music subscriptions indefinitely. Yet, that prediction comes with a caution: users have also indicated that there is a likelihood of unsubscribing once the trial period ends. 

Some of the biggest opportunities exist in the budding Digital Financial Services sector, which spans the Payments, Remittance, Insurance, Investing and Lending subsectors. Consumers and SMEs have adopted Digital Financial Services like never before, and behavioral changes are here to stay, driving adoption and penetration. Leading financial institutions enhanced their apps and saw engagement increase. Year-to-date monthly Mobile banking app users grew 73% in Vietnam in the first three quarters of 2020.

Payments are steadily moving online. Based on Kantar research, the average number of cash transactions dropped by 11% during Covid, with more merchants shifting online out of necessity. Because of the rise in digital activity, we have increased our 2025 global transaction value estimates to US $1.2 trillion.

The Digital Remittance subsector benefited from a similar rise in usage. Amid travel restrictions, adoption grew nearly twofold. Also driving digital adoption: regulators and employers went online to pay migrant workers electronically, and then helped them transfer funds to their families. Convenience and lower prices will likely sustain behavioral change, with up to 40% of total remittance value expected to be transacted online by 2025.

In Insurance, purchases moved online as traditional channels were disrupted during the year of Covid. Life and Health Insurance saw an online boost as consumers became more risk conscious in the pandemic.  Further driving growth: Bite-sized micro-insurance gained traction and offers significant potential for serving underinsured segments. Partnerships between established insurers and consumer platforms spurred these short-term innovative products, which were then embedded into their core platform services. According to our research, traditional products do not sell well online. That means established insurers that are heavily reliant on agents and bancassurance will see the need to digitize their channel mix quickly and adapt new products for the digital channel. With such advances in place, the Insurance subsector could grow 31% by 2025.

The nascent online Investment sector continues to expand at a brisk pace from a small base as consumers become increasingly comfortable with investing online.  There are three primary competitors in online investment: pure-play FinTechs (i.e. Robo-Advisors), consumer tech platforms; and established wealth management companies. Each of these players has sufficient room to address a different customer segment with distinct value propositions.

Finally, only one Digital Financial Services subsector failed to achieve impressive growth during Covid-19: Lending, which was held back by concerns over credit quality. Government action slightly softened the blow, intervening aggressively through loan moratoriums, restructuring, stimulus packages, tax incentives, and interest rate adjustments. However, a spike in non-performing loans put some lenders on shaky ground. While banks in the region have been shoring up reserves, lender confidence remains low. Untested peer-to-peer lenders targeting riskier payday loans and some smaller traditional lenders will face difficulties in the coming quarters, so we anticipate market consolidation going forward.

The only sector that saw a stall in 2020 was Digital Lending – which didn’t see any growth in 2020, mostly due to concerns about credit quality amidst the pandemic: governments across the region have intervened aggressively in support of the economy including through loan moratoriums and there was a concern that non-performing loans (NPLs) might rise sharply once the moratoriums come to an end. That said, the long term opportunity remains given the large proportion of individuals and companies without access to credit in SEA (outside Singapore), favourable regulators who are gradually incentivising more competition, and continued innovation in credit scoring algorithms. We expect Digital Lending to be a $92 billion business across the region by 2025, as more and more consumers in Southeast Asia embrace the digital future.

Allan Schulte is a partner based in Bangkok. Alessandro Cannarsi and Aadarsh Baijal are both based in Singapore.

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