Open source — the key to Asia’s unbanked opportunity?

• Traditional banks are finally catching up to the digital disruptors in SEA, and the flexible interoperability of open banking 

Southeast Asia’s internet economy is booming. A recent Google report indicated it had already surpassed the US$100 billion mark and is set to hit US$300 billion by 2025.

Digitization had already rocketed across the region before the pandemic accelerated things, not least the digital transformation of the banking and payments sector and the rising popularity of digital banking and fintech, which has been driven by a rising need for contactless payment methods, physical branch closures, and rising demands from customers.

Meanwhile, Bain research shows that over seven out of 10 adults in Southeast Asia are still either “underbanked” or are “unbanked,” without a basic bank account at all. In addition, millions of Southeast Asia’s small and midsize enterprises (SMEs) face large funding gaps, and these have given rise to alternative lending fintechs in societies like Indonesia and the Philippines.

Faced with these changing market dynamics, established banks are now shifting their customer services online and investing heavily in front-end IT infrastructure. And after years of mistrust, classical banking is finally ready to embrace open source technology to make it happen.

On Tech Wire Asia’s Tech Means Business podcast, Ben Henshall the general manager for Southeast Asian markets at open source architecture specialist Red Hat, discussed how the market demand for ease of product accessibility made brick-and-mortar banks realize the role open source could play.

“If you [the bank] don’t have that ability to provide a decent experience and accessibility to financial service products through a digital means […] then, you’re going to be left behind,” said Henshall.

“And that requires the use and implementation of […] open-source, hybrid cloud secure architectures, software architectures, and systems.”

Having overcome the myths around open source, like the technology being untrustworthy and risky, traditional financial services are set to innovate faster, more cheaply and with more agility to produce competitive advantages like fraud detection, automated loan approvals, support bots, automated trading, and more.

The Monetary Authority of Singapore (MAS) is making open banking APIs available in the market, which can empower consumers to aggregate their banking, insurance, and investment data from across banks and financial institutions onto a single platform.

This could, in turn, allow for easier comparability and a higher level of competitiveness in Singapore’s banking industry, according to a DBS Group Research report. Henshall says the flexibility and interoperability of open source software allow the traditional players to quickly scale up their digital efforts, and to pursue innovative solutions, “but in a secure, reliable, stable, maintainable, certified way.”

The unbanked opportunity

Banks in Southeast Asia have some of the strictest and most archaic security and regulatory processes, and getting over those acceptance hurdles was eased by the potential represented by the unbanked masses in the region.

“That’s a huge market opportunity and you’ve got rising middle and rising low incomes and middle income […] you’ve got this massive explosion of SME lending, and high GDP growth rates, obviously pre-COVID, and I think that’ll pick up in the new, post-COVID world,” commented Red Hat’s Henshall. And the opportunity is not just about immediate financial gain, it’s about building better understanding of a valuable consumer-type through data, which can then enable banks to hone and enhance their products for a demanding new audience.

Gen Zs or millennials may not be highly profitable customers, but “my gosh, you get them in early and you give them good experience,” said Henshall. “You get the data from those transactions and the interactions. That’s really, really interesting.

“Definitely, the number of millennials or Gen Zs that are within the radius of Southeast Asia, the majority that live in that area constitutes a greater number of people than are employed in Western Europe or that are in North America!

“So they are a huge audience that is now pretty educated – highly educated – very aspirational, have access to a smartphone, and 4G or broadband, and their expectations of their service providers or consumers or brands that they use is very, very high.”

Increased acceptance and understanding of open source allows for other benefits as well, such as collaborating with partners who would otherwise be competitors and leveraging each other’s strengths to build out better financial products or a better IT strategy.

Today, older, established institutions such as HSBC, Deutsche Bank, or Barclays, are under huge pressure to change their ways, exploring agile practices that allow them to deliver new services or banking products faster digitally.

At the same time, banks are seeing growing competition from the very companies they want to work with, with companies like Google offering payment services.

“There’s this interesting co-operation and competitiveness where the banks are saying, ‘I want to partner with these cloud companies, but then also, actually tomorrow, they could be my direct competitor.”

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