How RegTech Powers SME Financial Inclusion in Southeast Asia

It is no exaggeration that SMEs are the backbone of the economy.

According to the World Bank, SMEs represent about 90% of businesses and over 50% of employment worldwide. In Southeast Asia specifically, SMEs account for up to 99% of all companies.     

However, many small and micro businesses still struggle to access the financial products that could help them thrive in today’s hyperconnected world.

This highlights a blind spot many of us have when talking about “financial inclusion”. Usually, when referring to it, we think about how to make financial products more accessible to individuals who have been kept out of the traditional financial system for one reason or another.

Yet, while the importance of making financial products accessible to as many individuals as possible should not be underestimated, financial inclusion for SMEs and newly created businesses is arguably even more impactful.

A recent report by the Yusof Ishak Institute suggested that there may be many “missing businesses” in Southeast Asia. Several countries in the region have a large informal business sector that is unmonitored and unregulated. As a result, up to 90% of SMEs in some countries may be excluded from official counts and often also from access to credit and other financial products.

Bringing these missing businesses onto the map while empowering the overall entrepreneur economy could generate a substantial positive ripple effect.    

Specifically, in 2018 the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) described a Southeast Asian “e-commerce revolution”. Their report outlined the profound changes that financial inclusion for SMEs can have on a region and its people.

E-commerce can make emerging economies more inclusive. It can link rural and urban markets and level the playing field for entrepreneurs. Thanks to e-commerce, traditionally disadvantaged segments of the population can now access and profit from opportunities that might have previously been off-limits.

In addition, founding a new SME is often the best path for individuals to transition from the margins of society to building wealth for themselves, their employees, and their communities.

In this way, making SMEs a pillar of financial inclusion initiatives can bring economic and social benefits that stretch far beyond what many might have thought possible.

How RegTech Adoption Can Drive Financial Inclusion

At this point and time in history, fintech firms and payment providers have the incredible opportunity to offer all SMEs and local entrepreneurs, including any “missing businesses”, access to the products and services they need, helping their communities grow.

However, Fintech and payment firms cannot rely on the traditional processes of manual onboarding and anti-money laundering (AML) checks for these customers. The economics of staff costs and time spent per new customer just wouldn’t work as the potential returns would not justify the effort and costs involved.

But here is where RegTech comes in.

It’s been said many times before that RegTech is the force behind Fintech’s success, finding new solutions to old compliance problems. Especially in the case of SME onboarding, RegTech solutions help Fintechs find that perfect balance between ongoing compliance, optimal customer experience and – most notably in this case – commercial viability, ensuring that their onboarding meets all the necessary regulations.

In particular, it can be costly and time-consuming to validate a small company’s structure while simultaneously satisfying all of the region’s mandatory regulations.

For micro-enterprises, or newly-established businesses, the challenge can be even greater, as these organisations may not be able to readily produce the data or paperwork necessary for the onboarding to proceed in the traditional process, and their information is also not yet present in conventional static company information databases.

As a result, some Fintech and payment providers may have overlooked SMEs when designing their financial products. And as we saw from the initial numbers, this is a huge missed opportunity.

In this context, partnerships between Fintech and RegTech organisations, particularly around digital onboarding, can be instrumental in driving financial inclusion in the region. Such initiatives can help create a level playing field and bring down the barriers – both operational and cost-related – that are currently preventing SMEs from growing in emerging markets.

The Strategic Importance of Streamlined Merchant Onboarding

Merchant onboarding is right at the intersection of all the above - SMEs, e-commerce Fintech and payment providers. Therefore, solving the merchant onboarding challenges for SMEs in the region is the key to accelerating all the already mentioned benefits.

According to a McKinsey report on the future of payments in Asia, simplified digitised onboarding processes can demonstrably enhance SME and entrepreneurs’ own sales capabilities. Such financial inclusion allows them to access multichannel, digital-first solutions from the moment they go online. The faster they can access Fintech solutions, the faster they can offer their customers online payments, card-not-present sales, and other advanced e-commerce services that are quickly becoming the preferred means for making purchases.

And as these solutions are flexible, service providers can continuously expand their range of payment methods to ensure their services remain accessible and effective for organisations of all sizes.

Onboarding solutions that provide real-time access to primary sources, such as corporate registries, can significantly streamline the process. With such solutions, Fintech and payment service providers can access official company documents digitally while using AI systems to identify shareholders and UBOs. This also allows them to verify newly incorporated businesses, which is impossible when using a traditional entity database. In fact, research from Know Your Customer revealed that an average 9% of all companies present in selected registries from around the world were incorporated in the course of the last year for which data was available (2020 or 2021).

Relying on real-time registry aggregators also takes the pressure off new merchants – they no longer need to complete complex forms or submit large amounts of documents or data. Instead, they can complete a simple online onboarding process, which has been shown to reduce drop-offs by 60%.

Even regulators know that the key to sustained growth is for Fintech and payment service providers to innovate through RegTech adoption. A clear example of this awareness is represented by the Regulatory Technology Grant currently offered by the Monetary Authority of Singapore. This grant is designed to support Singapore’s financial institutions in using technological solutions to enhance their risk management and compliance processes. It also supports initiatives to upskill employees to use new RegTech effectively.

In conclusion, thanks to RegTech, Fintech and payment service providers can offer a better and more equitable service. And thanks to smart automation, they can do so without compromising on their KYC, KYB and AML requirements.

But perhaps more importantly, solid Fintech/RegTech partnerships are helping to bring down the cost of compliance and onboarding. This means that SMEs and entrepreneurs can access essential payment services that might have previously been off-limits. And in this way, Southeast Asia’s e-commerce revolution, and all the benefits it promises to bring, can scale sustainably.