E-wallets in use will jump 311% from 2020 to almost 440 million by 2025 in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam on the back of an e-commerce boom, according to a recent study by London-based fintech Boku Inc. and Juniper Research.
E-wallet competition tends to be heated in APAC with the exception of China, where the duopoly of Alipay and WeChat Pay control roughly 90% of the market. The intensity of competition, especially in Southeast Asia, has made profitability elusive for most e-wallet operators as they are obliged to continuously subsidize customers that lack loyalty to specific brands.
Once seen as a logical progression for the e-wallet market to improve competitiveness, consolidation has largely failed to materialize, with the exception of the merger in 2021 of the Indonesian platform companies Gojek and Tokopedia, which brought together the respective e-wallets GoPay and Ovo. However, rival platform company Grab bought out both Tokopedia’s and Indonesian conglomerate Lippo Group’s stakes in Ovo for an estimated US$500 million to US$1 billion.
The advantages of an ecosystem
Instead of pursuing consolidation, the most ambitious platform companies in Southeast Asia have tried to build moats around their e-wallets by turning them into comprehensive digital financial services ecosystems. This can be seen in Indonesia with GoTo, in the Philippines with Alibaba-backed GCash as well as Tencent-backed PayMaya (now Maya Bank), in Vietnam with MoMo and regionally with Tencent-backed Sea Group (operator of the ShopeePay e-wallet) and GrabFin.
The imprimatur of Alibaba and Tencent runs far and wide in Southeast Asia’s e-wallets, even when the Chinese tech giants have no direct investments. Both of the Chinese companies have enjoyed enormous success with their respective super apps in China. For both Alibaba and Tencent, an e-wallet provided the foundation on which to build a much larger suite of digital financial services – and a gateway to high-margin services like lending and wealth management.
Though Chinese tech giants have seen their digital financial services revenue growth slow considerably amid China’s crackdown on technology companies, it remains a massive business for both Alibaba and Tencent. For instance, Alibaba’s fintech unit Ant Group recorded a net profit of RMB 11.38 billion (US$1.58 billion) in the first quarter, down 17% from a year earlier. Tencent’s fintech and business services revenue grew 1% annually in the second quarter to RMB 42.2 billion (US$5.87 billion).
The jury is still out
The jury is very much still out on whether the Chinese super app approach can work outside of China. Alipay-backed Kakao in South Korea has come the closest to replicating the success of the Chinese firms. However, its e-wallet unit Kakao Pay swung to a loss in the first quarter and has shed 81% of its market capitalization since listing on the Korea Stock Exchange last year, battered by investor disillusionment with growth stocks and rising interest rates. In an October research note, Citigroup recommended selling the stock and predicted that Kakao Pay’s quarterly operating profit decline would continue until the end of 2023.
In Southeast Asia, none of the platform companies’ fintech divisions is yet profitable as measured by net income, but Alibaba-backed GCash reached EBITDA profitability in 2021. GCash is benefiting from its deep pockets – which allow it to spend heavily to subsidize users without depleting too much cash – and unmatched scale. The company boasts 66 million users, about 60% of the Philippines’ population of 109.6 million, and achieved a gross transaction value (GTV) of P3 trillion (US$50.8 billion) in the first half of the year, nearly equaling its total GTV of P3.8 trillion (US$64.4 billion) for 2021.
Given ample low-hanging fruit in the Philippines – 34.3 million people still lack a bank account and many others are underbanked – GCash has plenty of room to grow. Having begun as a simple e-wallet, the company is now foraying aggressively into lending. GCredit, GCash’s digital lending business, has provided P29 billion (US$518 million) worth of credit lines since its launch in 2018. In 2021, GCash launched a quick cash loan platform, GLoan, which provided P2.2 billion ($US39 million) in loans in its first 10 months of operation.
Whether other e-wallets in Southeast Asia can achieve similar success without consolidation remains to be seen. Companies like Grab and Sea Group, which enjoy similar scale advantages to GCash, may be constrained by the uneven performances of their non-fintech units and the cost of maintaining operations in so many different markets.
Nevertheless, there are reasons for optimism in the e-wallet world. In May, Chris Yeo, then head of Grab’s payments and rewards business, told consultancy McKinsey in an interview that more than six in ten people in Southeast Asia are still unbanked, while just 17% of transactions in the region are cashless.
“This means really strong growth for wallets. It may be the only payment method that’s consistently gaining share across most or all markets in Southeast Asia,” he said.
This commentary was written in collaboration with Banking Circle and originally appeared on Banking Circle.