Nowhere has the pivot towards digital transactions been more successful than in Asia. Coronavirus has been an unexpected boon, pushing forward the adoption of digital banking and mobile payments. Kimberley Long looks at what has been achieved and the challenges still to overcome.
As coronavirus lockdowns closed shops and confined people to their homes, the world seemed to be coming to standstill. Yet people still needed to make purchases, whether for essentials like food and medication, computing equipment to enable home schooling, or kit for hobbies to while away the long hours at home. For digital payments and e-commerce providers, the world closing down allowed them to flourish to an even greater extent.
Mastercard reported a 40% increase globally in contactless payments in the first quarter of 2020, specifically in grocery stores and pharmacies. The value of these transactions is low, with 80% recorded at under $25, a sum Mastercard notes would previously have been dominated by cash payments. The types of transactions contactless is being used for gives an insight into how customers are changing their behaviour and moving away from cash.
The scale of this change is particularly obvious in China. Take the Chinese shopping event 6.18, held each year on June 18, initially just by online retailer JD.com to mark the date the company was founded. HSBC Global Research noted significant boosts to sales in the country’s main e-commerce platforms. Alibaba saw RMB698bn ($100bn) in sales, a sum three times that of JD.com’s RMB269bn.
The HSBC report noted: “China’s parcel volume growth accelerated to 49% year-on-year from June 1 to 18 (versus 41% in May and 29% in June 2019). This gives us more confidence that the second quarter online retail sales of physical goods could reaccelerate to 27%, as April and May average growth already reached 26% year-on-year even without promotions, likely driven by pent-up demand, rising penetration in less developed areas, category expansion and live streaming.”
David Lloyd, general manager for UK, Netherlands and Nordics, at Alibaba Group, says: “While retail sales in China fell by 2.8% year-on-year during May, online sales of physical consumer goods rose by 15.6% in the same month. Demand for imported goods in China has remained high. Data from Tmall Global, Alibaba’s cross-border e-commerce platform, in February 2020 shows that consumption of imported goods, particularly in key categories of beauty and personal care, and health and wellness, was up 52% year-on-year.”
The pace of change
Yet China’s impressive numbers do not tell the whole story in Asia. Many countries are still taking their first steps into the digital realm and the pandemic has forced the process to speed up considerably. Importantly, this is not limited to the emerging markets.
In countries where there is already a digital presence, the pandemic has provided consumers an opportunity to explore the services available to them. Brett Hodge, vice-president of Asia-Pacific, at Fenergo, says: “Australia has seen the rise of the neobanks in competition to the four main banks. While in other markets, the neobanks are subsidiaries of the major banks, telcos or fintechs, whereas they are mainly start-ups in Australia. They have been designed to work fully digitally and can onboard new customers in fewer than 25 clicks. As consumers look for better ways of banking digitally, they may become more appealing, once trust has grown in doing fully banking online.”
For others, it has proven to be a learning curve for businesses and consumers alike. Arnie Cho, banking and payments analyst at GlobalData, says: “In Japan, which is perceived as being a technologically advanced country, consumer transactitons are still very much cash-based and only now have begun to adopt mobile payments. The pandemic was a catalyst and has definitely made adoption grow, making things happen much earlier than it would have been otherwise.”
Japanese consumers have the choice of a number of mobile payments systems, including those offered by social media platform Line and online retailer Rakuten. Line has stated that of its 80 million users, 32 million are registered to Line Pay.
The new climate is helping emerging economies to embrace digital in numerous formats. Nitin Soni, senior director of corporate ratings Asia-Pacific at Fitch Ratings, says: “India and Indonesia are experiencing rapid digital acceleration, where fintech and other digital applications are growing strongly. The pandemic has accelerated digital adoption and what would have been expected to change in two or three years is now happening in a matter of months.”
Mr Soni explains this changing preference towards digital has been in part pushed by concerns that coronavirus could be transmitted by handling banknotes.
This may result in a long-term change in behaviour. Lewis Sun, head of product, global liquidity and cash management, Asia-Pacific, at HSBC, says: “The pandemic has established new behaviours, and once consumers and users see the benefits to electronic and digital, these behaviours will remain. I think this is a point for the reduction in the use of paper money and cheques.”
Meanwhile, the Philippines had been lagging behind in the adoption of mobile payments, according to Mr Cho, despite its large population of underbanked residents, which has proved a key factor for adoption in its regional neighbours.
But this is finally changing. New services have been gaining ground in the Philippines, as lockdown has forced people to use smaller shops closer to home, and companies have had to adapt. Mr Cho says: “[Before lockdown] only about 20% of these stores accepted digital payments. During lockdown it was difficult to get cash, so the stores began to accept a payment aggregation service called Posible. The lockdown in the Philippines pushed consumers to adopt digital wallets and merchants – especially small and micro businesses that typically only dealt in cash – to start accepting digital payments.”
Industry response
As consumers become accustomed to using digital channels, offering a mobile or online platform will be considered an essential component for business, rather than something nice to have. For some banks, this will mean having to race to make up lost ground against their rivals.
“Traditional banks are now faced with the problem of going digital or dying,” says Mr Hodge. “This is not only due to the benefits of a faster and easier customer experience, but how [digital] could streamline banks’ internal business operations. So far the approach to managing customers has been mainly piecemeal, with many loosely-coupled siloed processes. [But now] banks have had to respond quickly to tackle the issues presented by coronavirus.”
The change in consumer behaviour has been quantifiable, with DBS reporting that the value of digital transactions has increased by S$5.6bn ($4bn) in the first quarter of 2020. The banks also recorded 100,000 new digital users in the same period. Significantly, it was capturing a new demographic, as close to 30% of those consumers were more than 50 years old.
For many banks, meeting these demands this will mean increasing their workforce. DBS recently announced it will hire 360 experienced coders to work on its digital platforms. Citi is also filling roles for 2500 coders globally during 2020.
The regulators have also nudged the industry towards greater use of digital platforms. Mr Hodge says: “Regulators have responded to the threat of coronavirus by issuing their own guidance. The Monetary Authority of Singapore, for example, has encouraged consumers not to go to the bank due to safe distancing measures and guided them towards digital platforms instead. In Hong Kong, applications for the cash relief programmes have been conducted digitally from the outset.”
The impact of regulations on promoting digital goes much deeper than what has been implemented during 2020. Mr Sun says: “Growth has been helped by the number of countries where the regulator had started to implement real-time payment infrastructure before the pandemic.”
Having that infrastructure in place has meant digital payments have been able to increase rapidly. “In Hong Kong, where the Faster Payment System is live, there were 52 million digital transactions in the first half of 2020. That is roughly a 300% year-on-year increase,” Mr Sun explains.
Mr Soni says the impact of lockdown in India has helped the country’s digital payment systems to capitalise on the regulations already in place: “In terms of the merchandise value and the turnover it is doing, Paytm [an Indian e-commerce payment system] has grown rapidly in the past five years. The demonetisation [efforts] in India has helped the country to rise rapidly in its use of digital payment technologies.”
Wider development
This increased consumer comfort with using online retailers and trust in internet banking will likely have a knock-on effect for the wider digital ecosystem.
Fern Wang, director at S&P Global Ratings, says: “The growing digital wallet adoption also suggests a wide public trust in these service providers and will likely drive increased uptake of future fintech products from known providers, as we’ve seen in China, where a range of financial and other services are being offered through Alipay and WeChat Pay’s platforms.
“The pandemic has helped accelerate the adoption of digitalisation, which will likely benefit these service providers and provide a gateway for them to offer other value-adding services,” Ms Wang adds.
The providers are already expanding their offerings. Japan’s Rakuten launched the Rakuten Real-time Takeout service during May 2020 to allow consumers to place contactless orders with local cafes and restaurants, with payments made through their Rakuten accounts.
In China, Alipay has opened up its platform to allow consumers to access a wider range of services. “During the Covid-19 outbreak, Alipay introduced a campaign encouraging third-party developers to create mini-programs that would address users’ needs during the health crisis,” Mr Lloyd says. “Within a week of the campaign’s launch, 181 mini-programs were created and housed on the Alipay app, including programs for contactless grocery deliveries, legal and medical advice, logistics and public services.”
Banks have needed to step up to meet the challenges their customers are facing. HSBC’s Mr Sun says: “The spotlight is really on e-commerce sales around essential retail sales, and online servicing and entertainment. At HSBC, we have the Omni-Collect proposition which allows merchants to receive payment from multiple wallets and credit cards via one interface.”
Keeping business afloat
Although digital companies may boast of increased sales and wallet providers report double-digit growth figures for the first half of 2020, it has not replaced the sales that have been lost in physical stores.
“The use of digital wallets has increased percentage-wise, but not in terms of the size of the transactions,” cautions Mr Sun.
Fitch’s Mr Soni adds: “In China, you’ve seen e-commerce companies such as Alibaba and JD.com reporting increases in sales. While it has helped to mitigate the overall decline in sales, it has not compensated for the declines due to shops being shut and cities being locked down. But it has accelerated the trend towards e-commerce.”
To this point, Mr Lloyd says Alibaba has expanded the range of entertainment services it offers across its platform: “Consumers have turned to their mobile devices for entertainment as well as shopping, accelerating the adoption of tools and technologies such as live streaming, 3D shopping, and augmented reality to deliver three-dimensional, interactive and social shopping experiences – ‘shoppertainment’. In early February, sessions on Taobao Live, Alibaba’s live streaming platform, had increased by 110% compared to the same period in 2019.”
Even with these changes, the economic outlook looks bleak. The World Bank forecasts a decline in real gross domestic product in east Asia in 2020 that will see the region’s economies retract by 0.5%, with China’s growth to slow to just 0.1%.
In these difficult conditions, companies have been looking at how to boost their takings, understanding that simply providing digital operations does not guarantee success. Even as some parts of a diverse platform may thrive under lockdown conditions, others may struggle.
“Growth will come only if consumers are willing to spend,” says Mr Cho. “For example, Gojek in Indonesia is laying off 9% of its workforce due to the pandemic. This company is a digital payment player, but it’s exposed to [the taxi] market that’s suffering under Covid-19 and lockdown.”
Mr Soni also cautions that the high numbers some companies have been reporting may not show the full picture. “Some of these banks and companies are still start-ups, so they are not financially successful,” he explains. “Many have been funded by likes of Softbank and Chinese e-commerce and technology giants, or they’re funded by a private equity venture. Even with the likes of [Singapore’s] Grab, they make limited money on the digital wallet service. Money services are not really profitable at the moment in many countries.”
However, it is here again that one country is bucking the trend. “China is the one exception, with some mobile banks, such as Ant’s MYBank, now bigger than some international banks,” Mr Soni adds. “China is so far ahead of the curve in terms of digital adoption, especially with the commercial launch of 5G in place.”
The current situation can be seen as an opportunity, with other markets adopting the digital habits seen in China at a rate faster than could be anticipated at the beginning of the year. “The drastic period of change we have lived through will drive a long-term shift in consumer purchasing behaviours and expectations around retail, both online and offline,” says Mr Lloyd. “This provides an extraordinary opportunity for brands across the globe to use the power of online retail technology to respond to consumer demand for an easy, convenient shopping experience.”
