Asian Economic Policy Review - 2022 - Morgan - Fintech and Financial Inclusion in Southeast Asia and India

doi: 10.1111/aepr.
12379 Asian Economic Policy Review (2022) 17, 183–208
Fintech and Financial Inclusion in Southeast

Asia and India
Peter J. MORGAN†
Asia Development Bank Institute
Financial inclusion, that is, access of excluded households and small firms to financial products
and services, is seen as a way to promote more inclusive growth by providing the previously
unbanked with access to means for savings, investment, consumption smoothing, and insurance.
Financial technology (Fintech), that is, using software, applications, and digital platforms to
deliver financial services to consumers and businesses through digital devices such as
smartphones, has become recognized as a promising tool to promote financial inclusion. The
present paper investigates the developments of financial inclusion and Fintech in the Association
of Southeast Asian Nations (ASEAN) member countries and India to identify the ways that
Fintech is contributing and can potentially contribute to increased financial inclusion. It also
examines potential risks arising from use of Fintech, highlights differences in the strategies and
implementation of financial inclusion and Fintech between India and ASEAN, and draws lessons
and policy recommendations from these findings.
Key words: Association of Southeast Asian Nations, digital currency, financial inclusion, Fintech,
India, mobile money
JEL codes: D14, E42, E51, G21
Accepted: 4 January 2022
1. Introduction
Financial inclusion, that is, access of excluded households and small firms to financial
products and services, is seen as a way to promote more inclusive growth by providing
the previously unbanked with access to mechanisms for savings, investment, consump-
tion smoothing, and insurance. People who hold accounts at banks and/or other finan-
cial institutions are more likely to use other financial services, such as credit and
insurance, to start and grow businesses, invest in education or health, manage risk,
and smooth consumption against shocks, which can improve their quality of life
(Global Partnership for Financial Inclusion, 2016).
Financial technology (Fintech), that is, using software, applications, and digital plat-
forms to deliver financial services to consumers and businesses through digital devices
such as smartphones, has become recognized as a promising tool to promote financial
inclusion. In 2010, the Group of Twenty (G20) endorsed the Financial Inclusion
†Correspondence: Peter J. Morgan, Asia Development Bank Institute, Kasumigaseki Building,

8F, 3-2-5 Kasumigaseki, Chiyoda-ku, Tokyo 100-6008, Japan. Email: pmorgan@adbi.org
© 2022 Japan Center for Economic Research. 183

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Fintech and Financial Inclusion Peter J. Morgan
Action Plan (FIAP) and established the Global Partnership for Financial Inclusion to
coordinate and implement it. The FIAP was updated at the 2014 G20 Leaders Summit
in Brisbane. Acknowledging the importance of Fintech, the FIAP includes a commit-
ment to implement the G20 Principles for Innovative Financial Inclusion under a
shared vision of universal access (BIS and WB, 2016). The COVID-19 pandemic has
increased the demand for Fintech services, due to reduced ability to access banks and
other financial institutions in person and the desire to minimize person-to-person
contacts.
The present paper reviews the development of financial inclusion and Fintech in
the Association of Southeast Asian Nations (ASEAN) region and India, and considers
how Fintech has contributed to increasing financial inclusion. It also examines various
risks associated with Fintech development, and suggests policies to help maximize the
beneficial effect of Fintech on financial inclusion.
Section 2 describes the overall development of Fintech in ASEAN and India.
Section 3 reviews the current status of financial inclusion in ASEAN and India, policies
to promote the use of Fintech, and risks associated with Fintech use. Section 4 reviews
regulatory aspects and Section 5 concludes and offers policy recommendations, includ-
ing those for regional cooperation.
2. Scope of Fintech Products and Services in Southeast Asia and India
Digital financial services (DFS) are defined as financial services which rely on digital
technologies for their delivery and use by consumers (Pazarbasioglu et al., 2020).
Fintech broadly refers to the latest wave of innovations in DFS, driven by develop-
ments such as smart mobile phones, artificial intelligence (AI), machine learning, and
big data. The scope of Fintech typically excludes more traditional digital transactions
such as those using credit cards or internet banking, although the divide can be some-
what arbitrary. The Financial Stability Board (FSB) defines Fintech as “technologically
enabled financial innovation that could result in new business models, applications,
processes, or products with an associated material effect on financial markets and insti-
tutions and the provision of financial services” (FSB, 2017). These functions may be
viewed as continuing efforts to reduce financial frictions, such as information
asymmetries, incomplete markets, negative externalities, misaligned incentives, network
effects, and behavioral distortions (FSB, 2017).
The FSB classifies Fintech activities into five major categories of financial services:
• Digital payments, clearing, and settlement: Electronic money (e-money), mobile

phone wallets, digital currencies (including cryptocurrencies [or crypto assets],
stablecoins, and central bank digital currencies [CBDCs]), remittance services, value
transfer networks, digital exchange platforms, etc.;
• Deposits, lending, and capital raising (alternative finance1): Crowdfunding, peer-to-
peer (P2P) lending, online balance sheet lending, invoice and supply chain
finance, etc.;
184 © 2022 Japan Center for Economic Research.

Peter J. Morgan Fintech and Financial Inclusion
• Insurance: Insuretech;
• Investment management: Internet banking, online brokers, robo advisors, crypto
asset trading, personal financial management, mobile trading; and
• Market support: portal and data aggregators, ecosystems, data applications, distrib-
uted ledger technology (DLT), security, cloud computing, internet of things/mobile
technology, AI, and machine learning (FSB, 2017).
In the present paper we focus mainly on the first two categories—digital payments and
alternative finance—as they show the greatest potential to enhance financial inclusion,
especially among lower income and other disadvantaged groups.
2.1 Digital payments

In this section we focus on the following categories of digital payment transactions:
mobile point-of-sale (POS) payments, digital commerce, mobile money, remittances,
and digital currencies.
2.1.1 Mobile POS payments and digital commerce

Statista defines the digital payments market segment as being led by consumer transac-
tions and “…includes payments for products and services which are made over the
Internet as well as mobile payments at POS via smartphone applications. The following
are not included in this segment: transactions between businesses (Business-to-
Business payments), bank transfers initiated online (not in connection with products
and services purchased online), and payment transactions at the point of sale where
mobile card readers (terminals) are used (Statista, 2020). Digital payments comprise
two major subcategories: mobile POS payments and digital commerce.
2.1.2 Mobile money

Mobile money is also a subcategory of digital payments, but is separate from mobile
POS and digital commerce, and hence is not counted in the Statista statistics given
above. The GSM Association (2020) defines a mobile money service by the following
characteristics:
• It includes transferring money and making and receiving payments using a mobile
phone.
• It must be available to the unbanked, that is, people who do not have access to a for-
mal account at a financial institution.
• It must offer a network of physical transaction points which can include agents, out-
side of bank branches and ATMs, that make the service widely accessible. The
agents enable cash to be added to or withdrawn from an individual’s e-wallet with-
out requiring a bank deposit, that is, a “cash-in, cash-out” service. This makes it
available to the unbanked.

Mobile money transactions have some significant advantages for the unbanked or
under-banked compared with other channels. First, they reduce variable costs consid-
erably by taking advantage of the fixed costs of the mobile network already in place.
As a result, even low-value and low-volume transactions can be profitable, unlike
transactions through conventional banking channels. Second, mobile money relies on
an agent network, which is much less costly than a bank branch network. Third, if
accompanied by appropriate risk-based regulations that exempt clients with a smaller
number and size of transactions from cumbersome documentation requirements, large
parts of the population in the informal economy can have access to such payments
(Beck, 2020).
2.1.3 Remittances and international money transfers

The World Bank estimates that inward remittances and international money transfers
from migrants in ASEAN and India in 2019 totaled $78 billion and $83 billion, respec-
tively, together about 22% of global inflows (World Bank, 2020). (However, remit-
tances are estimated to have fallen in 2020 due to the COVID-19 pandemic.) Three
countries accounted for most of the ASEAN total in 2019, including the Philippines
(45%), Vietnam (22%), and Indonesia (15%). The great bulk of these transfers are still
made via traditional routes such as Western Union, but digital transactions are grow-
ing rapidly. According to Statista (2020), total digital remittances in 2019 reached
$73.9 billion, or about 11.1% of total global remittances, and the total number of users
reached 7.1 million. Applying the same share figure for total remittances to ASEAN
and India imply values of total digital remittances of $8.4 billion and $9.2 billion,
respectively. Digital remittances are projected to grow at an average rate of 14%, over
twice the rate of overall remittances, so the share will gradually increase.
2.1.4 Digital currencies

According to Bank for International Settlements (BIS) (2018) a digital currency is an
asset that only exists electronically and that can be used as a currency (means of pay-
ment, store of value, unit of account) although it is not legal tender.2 These include
private currencies and digital versions of national bank currencies. Digital currencies
that use cryptographic techniques to verify transactions are called “cryptocurrencies”
or “cryptoassets”.3 Digital currencies issued as liabilities of central banks are called
central bank digital currencies (CBDCs). There is little data on the use of
cryptocurrencies for payments or evidence that they are used widely for other than
speculative (or criminal) purposes, so we do not cover them further in the present
paper. However, central banks consider financial inclusion to be an important motive
for developing CBDCs, so we discuss them at some length, even though implementa-
tion in the region is still mainly at the experimental stage.
Proponents of CBDCs claim that they can lower costs, expand financial inclusion,
increase the efficiency of monetary policy implementation, counter competition from
private digital currencies, ensure competition and contestability of the payment

market, and offer a risk-free payment instrument to the public (International Monetary
Fund [IMF], 2019; BIS, 2021). CBDC proposals are of three types:
• Account-based CBDC targeting the general public;

• Value-based or digital-token-based CBDC targeting the general public; and
• CBDC based on DLT targeting financial institutions (Shirai, 2019).
In developing countries, the focus is mainly on improving operational and cost effi-
ciency. In countries with underdeveloped financial systems and a large portion of
unbanked citizens, a CBDC is viewed as way to increase financial inclusion and sup-
port digitalization (IMF, 2019; BIS, 2021).
CBDCs can have varying degrees of anonymity in transactions. A nonanonymous
CBDC could make the monitoring of transactions easier. Many central banks seem to
favor a hybrid approach that allows the authorities to trace large-value transactions,
which are more important for detecting tax-avoidance, money-laundering, terrorist
financing, and other illicit purposes, while small transactions remain anonymous. Sev-
eral central banks are focusing research on a two-pronged (or tiered) approach with
anonymous tokens for small holdings/transactions, and traceable currency for large
ones (IMF, 2019). Central banks in ASEAN are actively exploring the potential use of
CBDCs (see Table 1).
2.2 Alternative finance: Crowdfunding, P2P lending, online balance sheet

lending, and others
After digital payments, alternative finance is the second largest Fintech segment pro-
viding financial access for households and small firms. Market volume in Southeast
Asian economies has continued to increase, although erratically in some cases. Most
growth of the ASEAN market was contributed by Indonesia, which reached almost
$1.45 billion in 2018 compared to only $80 million in 2017, although it has been flat
since then (CCAF et al., 2018; CCAF, 2020, 2021).
However, despite rapid growth in recent years, the overall rate of penetration is still
small. Column (5) in Table 2 shows the overall levels of new digital finance as percent
of gross domestic product (GDP) in ASEAN countries and India. No country’s share
exceeded 0.1%, and only the figures for India, Indonesia, and Singapore even reach this
level. This reflects the small size of such loans, with their use being limited mainly to
working capital. It may also reflect basic limitations of the model, such as the lack of
collateral or any collection mechanism in the case of default. Inadequate access to the
internet may also inhibit participation, especially in rural areas. This suggests that con-
cerns about the competition of digital finance with traditional bank lending should not
be exaggerated, at least in the near term. The share of equity-related alternative finance
is even tinier compared with conventional stock market issuance volumes. Overall, it
seems that alternative finance has limited potential to increase financial inclusion at

Table 1 Research and development in Association of Southeast Asian Nations related to Central
Bank digital currency
Country/
project name Characteristics Progress
Cambodia Retail two-tier issuance; blockchain based Implemented 2020

Project system, but using Cambodian riel and US
Bakong dollars, so technically not central bank digital
currencies (CBDC)
Singapore Wholesale, a collaborative project with the Experiments, five phases of
Project industry to explore the use of blockchain and project completed in July
Ubin distributed ledger technology for clearing and 2020
settlement of payments and securities
Thailand Proof-of-concept for wholesale CBDC for Experiments
Project interbank and cross-border settlements; also
Inthanon prototype development project for CBDC for
business
Sources: NBC (2020), Bank of Japan and European Central Bank (2019), Bank of
Thailand (2021), Huang (2020), Kishi (2019), Monetary Authority of Singapore (2020),
Shirai (2019), Supadulya et al. (2019).
the macro level, even though it does widen funding opportunities for startups and
small firms.
3. Financial Inclusion Progress, Policies, and Impacts of Fintech
This section describes the overall status of financial inclusion in the region, the contri-
bution of Fintech to financial inclusion and policies to promote Fintech innovation
and financial inclusion.
3.1 Progress of financial inclusion

3.1.1 Individuals
The most commonly cited measure of financial inclusion is the percentage of adults
age 15 and above who have an account at a formal financial institution. This can be a
bank, some other savings institution, or a microfinance institution. Figure 1 shows the
evolution of this figure for most ASEAN countries and India from 2014 to 2017 (the
most recent data), based on the World Bank’s Global Findex Survey results. The figure
shows three distinct clusters: high-income countries with financial inclusion rates of
over 90% (Singapore); countries with financial inclusion rates of 80%–90% (India,
Malaysia, and Thailand); and middle-income countries in the range of 15%–50%
(Cambodia, Indonesia, Myanmar, Philippines, and Vietnam). (The figure for the Lao
PDR was not available in 2014, but was 29% in 2017, putting it in the third group as

Table 2 Comparison of alternative finance lending and conventional lending, 2019
Loans, % of GDP
(1) (2) (3) (4) (5)
Credit
Total unions
conventional Commercial and credit Microfinance Alternative
Economy (2) + (3) + (4) banks cooperatives institutions lending
Brunei 29.1 29.1 — — —

Darussalam
Cambodia 117.3 90.6 — 26.7 0.0
PRC 111.4 108.4 3.0 — 0.6
India 53.3 48.6 4.7 — 0.1
Indonesia 35.5 35.5 — — 0.1
Lao PDR 46.0 45.3 0.1 0.6 —
Malaysia 109.4 109.4 — — 0.0
Myanmar 24.3 22.8 — 1.5 0.0
Philippines 34.0 34.0 0.0 — 0.0
Singapore 136.4 136.4 — — 0.1
Thailand 83.3 70.8 12.5 — 0.0
Vietnam 134.9 133.0 2.0 — 0.0
Sources: IMF Financial Access Survey database, IMF World Financial Outlook database, Cam-
bridge Centre for Alternative Finance Global Alternative Finance Benchmarks database, Authors’
estimates.
—, not available; Lao PDR, Lao People’s Democratic Republic; PRC, People’s Republic of China.
well.) India showed by far the biggest increase from 2014, up 27 percentage points,
putting it on a par with Thailand, and well above the level consistent with its per capita
income. This reflected the success of its “JAM” strategy, described below. Most other
countries showed modest improvements between the two years, except Indonesia,
which had a large increase of 12 percentage points, and Vietnam, which had a slight
decrease. The level of financial inclusion generally correlates well with other
development-related measures such as per capita GDP and overall financial develop-
ment, except for India, for reasons explained below.
Figure 2 shows the share of the adult population that has used digital payments
based on the World Bank’s Global Findex Database in 2014 and 2017. (Digital pay-
ments here include credit card payments, so the definition is broader than that given
in Section 2.) Countries appear to be divided into the same three groups as for the
holding of financial accounts, except for India, which falls into the third group, much
more consistent with its income level. An increasing trend of the use of digital

% of adults (% age 15+) with a financial institution account

100%
SIN
90%
MAL
80% IND THA
PRC
70%
60%
2017
50% INO
40%
30% PHI
VIE
MYA
20%
CAM
10%
0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2014
Figure 1 Share of adult population with a financial institution account.

Source: World Bank Global Findex Database (2018). [Color figure can be viewed at
wileyonlinelibrary.com]
% of adults (% age 15+) made or received digital payments in

the past year
100%
90% SIN
80%
70% PRC MAL
60% THA
2017
50%
40%
INO
30% IND
PHI
VIE
20%
CAM
10% MYA
0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2014
Figure 2 Share of adult population using digital payments.


payments can be seen in all countries except Cambodia, with especially large increases
in Thailand (up 29 percentage points) and Indonesia and Malaysia (up 12–13 percent-
age points). The 2017 share for the Lao PDR was 13 percentage points, putting it in
the third group.
Figure 3 shows the inclusion rates for adults with a mobile money account for the
same periods. Data for the Lao PDR are not available. All countries except Cambodia
and India showed increases, with the largest increases seen in Malaysia and Thailand.
The reason for the large decline in Cambodia is not clear. The markets are still rela-
tively small, with no country having a share above 11%. Nevertheless, this segment is
likely to show rapid growth.
The shares of adults making digital payments and having mobile money accounts
rose significantly mainly in the higher income countries of Malaysia, Singapore, and
Thailand. This suggests that progress in these areas has been greatest in those countries
which already have substantial financial inclusion and a strong internet infrastructure.
The slower progress in lower income countries probably reflects the existence of a
number of barriers such as difficulty of internet access, high transaction costs, and low
education levels.
3.1.2 Firms
The participation of micro-, small, and medium-sized enterprises (MSMEs) in capital
markets remains limited. According to Asian Development Bank (2020), the equity
market capitalization in 2019 of MSMEs was about 14.8% of GDP in Vietnam,
% of adults (% age 15+) with a mobile money account

14%
12%
MAL
10%
SIN
8% THA
2017
6%
CAM
PHI
4%
VIE
INO
2% IND
MYA
0%
0% 2% 4% 6% 8% 10% 12% 14%
2014
Figure 3 Share of adult population with a mobile money account.


followed by the Lao PDR (5.9%), Cambodia (2.6%), Singapore (1.9%), Myanmar (1.7%
[2018]), Malaysia (1.4%), Thailand (1.3%), and the Philippines (0.1%). The develop-
ment of MSME bond markets in the region is still at an early stage (Shinozaki, 2014).
The burgeoning trend of bank-Fintech partnerships and open banking initiatives also
indicates that Fintech is not only influencing bank operations through competition,
but also through adoption of new ways to develop products, approach the market, and
assess the risks (Chuard, 2021; Fintech News Philippines, 2021).
Bank lending to MSMEs also remains generally limited, especially for lower income
countries. Figure 4 shows that the share of SME loans by commercial banks in GDP
for Malaysia and Thailand is relatively high, although trending downward recently, but
the ratios for other countries are low, in the range of 2%–7% of GDP.
3.2 Role of Fintech in expanding financial inclusion

Fintech can promote financial inclusion in the following ways:
• Lowering the cost of transactions such as remittances, making them affordable for
segments of the population who found them too costly before;
• Lowering the costs of business-related payments relative to the costs of credit-card
payments;
• Enabling transactions to be made without having a bank account, such as mobile
money;
• Enabling transactions to be made without the need to visit a bank branch or auto-
matic teller machine, such as by using mobile phones or other internet connections;
• Enabling small firms to engage in e-commerce; and
SME outstanding loans with commercial banks (% of GDP)

30
25
% of GDP
20
15
10
0
2012 2013 2014 2015 2016 2017 2018 2019
IND INO MAL MYA THA
Figure 4 Share of commercial bank loans to SMEs in GDP.

Source: IMF Financial Access Survey (2019).

• Making credit or other fund raising more obtainable and less costly by reducing
information asymmetries and other costs related to credit applications.The first five
points are related to digital payments, while the last is related to alternative finance.
3.2.1 Digital payments

Digital payments have significant penetration in groups which are nonbanked or
under-banked.4 Figure 5 shows that 25% of digital payments customers in ASEAN
countries are unbanked, the highest penetration for any Fintech segment, and another
16% are under-banked. This underscores the potential of digital payments for expan-
ding financial inclusion. Presumably these are people who have mobile money
accounts, which do not require the holder to have a bank account. Digital lending (part
of alternative finance) has the next highest penetration rate of the unbanked, at 19% of
the total.
The COVID-19 pandemic has contributed substantially to highlight the positive
contribution of Fintech in a number of ways. Lockdowns and the need for social dis-
tancing have greatly increased the attractiveness of “no touch” online transactions such
as e-commerce and e-money transfers. Using data from mobile apps in 74 countries
from January to May 2020, Fu and Mishra (2020) found that downloads of financial
applications (apps) increased substantially since the outbreak of COVID-19 in January
2020. Governments have also found it very convenient to deliver transfers and aid to
households via electronic means (Morgan & Huang, 2022). In an unpublished paper,
Morgan, Kim, and Trinh find evidence that use of Fintech was positively associated
with continued operation and sales increases of household firms during the pandemic
period.
Complete Data Set 17% 28% 50% 5%
Asset Management 2%10% 77% 11%
Personal Financial Management 10% 13% 62% 16%
Capital Management 12% 30% 56% 2%
Digital Lending 19% 47% 31% 3%
Digital Payment 25% 16% 51% 8%
Unbanked Underbanked Banked Unknown
Figure 5 Banked status of Fintech customers in ASEAN countries. Source: CCAF (2020). Note:
Complete data set refers to average of all of the segments shown below it.

Nonetheless, despite the widespread expectation that Fintech can help to improve
financial inclusion, there is surprisingly little empirical evidence to back this
up. Although the World Bank’s Global Findex survey now includes much data on the
percentage of adults using various kinds of Fintech products and services, the survey
does not provide any information about what fraction of those users were previously
not financially included. Similarly, Sahay et al. (2020) estimated both “digital” and
“traditional” indices of financial inclusion. They found that between 2014 and 2017 in
many countries the digital financial inclusion indices increased significantly more than
did the traditional indices. Nonetheless, it still is not clear what fraction of the increase
in digital financial inclusion could be attributed to individuals who were not previously
financially included. Further work needs to be done in this area.
It may take further technological and other innovations to fully unlock the poten-
tial of alternative finance to support financial inclusion. One possible approach is to
integrate Fintech into other financial inclusion policies. Two such examples from the
Philippines include: (i) regulations were changed to allow banks to open microfinance
windows to cater to MSMEs’ demand for small loans without collateral and (ii) the
central bank established a nationwide Credit Surety Fund that would serve as surety
for MSMEs’ loans with participating banks. Loans granted under this scheme did not
carry any requirement for collateral and credit history.
3.3 Policies to promote Fintech in expanding financial inclusion

3.3.1 ASEAN
Almost all ASEAN countries have financial inclusion strategies related to payments,
either at the national level or under the management of the central bank. These typi-
cally include one or more of the following elements: electronic or other ID; no frills
bank accounts; support for mobile money systems, including development of QR codes
and agent banking networks; and issuance of digital banking licenses. Six out of
10 ASEAN countries have adopted some form of digital ID. The exceptions are
Cambodia, Lao PDR, Myanmar, and Vietnam. Among these, Cambodia, Lao PDR, and
Vietnam are piloting digital ID schemes (see Table A1). Generally, ASEAN regulators
have shown a great willingness to support the growth and development of Fintech,
innovation offices, and regulatory sandboxes have been established in a number of
countries. Singapore and Thailand actively use regulatory sandboxes to test new
Fintech models before allowing firms to fully operationalize them. Regulators in some
countries have adopted favorable tax policies for Fintech firms such as tax exemptions
and lower corporate income tax rates, including in Indonesia, Lao PDR, Malaysia,
Philippines, Thailand, and Vietnam.
3.3.2 India
The “India Stack” approach to financial inclusion contains four layers of digital infra-
structure that have been introduced gradually over the last decade:

• The Aadhaar digital ID system that allows for identity verification and for the map-
ping of information across datasets;
• The Unified Payments Interface’s interoperable payments system, implemented by a
set of open application programming interfaces;
• A system that for allows for the verification of digital documents that can replace
traditional paper analogs; and
• The “consent layer”—which is not yet fully operational—that will involve the opera-
tion of data fiduciaries that act as intermediaries between individuals and financial
companies. (Carrière-Swallow et al., 2021).
India’s “JAM” strategy for financial inclusion provides a striking example of a suc-
cessful program to increase financial inclusion. “JAM” refers to three key elements of
the strategy: the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme for increasing
bank deposits; the Aadhaar biometric identity scheme; and the widespread use of
mobile phones. The Reserve Bank of India (RBI, 2019) provides a guide to India’s
overall financial inclusion strategy in 2019–2024. Launched in 2014 by Prime Minister
Narendra Modi, the PMJDY scheme required state-owned banks to open at least one
account for every unbanked household. According to the PMJDY website, the total
increase in bank accounts attributable to the program was 411.3 million as of
21 October 2020, of which private-sector banks accounted for just 12.7 million
(PMJDY, 2020). As a result, the share of adults in India having an account jumped
from 52.8% in 2014 to 79.8% in 2017, on a par with the PRC (Demirguc-Kunt et al.,
2018). However, the World Bank’s Findex Survey of 2017 (Demirgüç-Kunt
et al., 2018) estimated that 48% of Indian bank accounts were inactive, that is, they
saw no activity during the year. This implies that the degree of effective financial inclu-
sion was much less. Unfortunately, no more recent figures are available. It is quite pos-
sible that the use of these accounts increased significantly during the COVID-19
pandemic as a result of government aid cash payments to households made via these
accounts.
The JAM strategy is notable because it represents a straightforward extension of
the traditional bank-centric and relatively strongly regulated payments system. The
Aadhaar identity scheme solves the “know your customer” (KYC) problem, state-
owned banks took on the main role of providing accounts, and Fintech payments com-
panies are regulated as “payment banks.” These features may limit its applicability to
countries that lack one or both of the first two elements, as is the case for many
ASEAN countries. Mobile money, that is, payments systems that do not require bank
accounts, has played only a very minor and static role in India, as indicated in
Figure 3.
3.4 Possible negative impacts of Fintech

Use of Fintech products and services also entails various kinds of risks, especially for
those who lack financial sophistication.

3.4.1 Excessive borrowing

Paradoxically, although poorer and less educated households overall have less financial
access, they are also potentially more vulnerable to excessive borrowing as a result of
insufficient understanding of loan provisions and interest rates. To the extent that
Fintech makes such borrowing easier, it could contribute to the overborrowing
problem.
3.4.2 Cyber-related risks

Improved access to financial services via Fintech can expose unsophisticated users to
various risks such as mis-selling, frauds such phishing, hacking attacks, unauthorized
use of data, discriminatory treatment as a result of AI algorithms, and so on. This
requires higher levels of digital financial literacy to make effective use of Fintech prod-
ucts and services and avoid these risks (Morgan et al., 2019).
3.4.3 Income and wealth distribution

The literature has shown significant gaps in financial inclusion and financial literacy
between men and women, between urban and rural residents, between those with
higher and lower incomes, and between small and large firms, among others. While
Fintech has been expected to help reduce such gaps, in fact Fintech early adopters tend
to be those with higher education, higher income and higher levels of digital financial
literacy. This suggests that financial literacy education strategies need to target disad-
vantaged groups of individuals and firms in order to narrow these gaps and enable
Fintech to contribute to more inclusive financial and economic development.
Figure 6 shows the gaps in usage of Fintech products by gender, location (urban
vs. rural) and income group in Vietnam. Gender gaps are relatively small, but the gaps
100
Gaps in awareness & usage of fintech products
77.4
80 69.5
66.8
60.2
60
46.1 47.4
40
26.3
18.0 19.5 21.2
15.0 17.4 15.9
14.5
20 13.2
10.5 11.3
11.1
4.63.43.4 4.73.12.5
0
Men Women Urban Rural Higher income Lower income
Awareness of at least one digital product Smart banking services
E-payment services E-transfer services
Figure 6 Gaps in usage and awareness of Fintech products in Vietnam (% of total respondents).
Source: Morgan and Trinh (2020). Note: Vietnam’s poorer group consists of those who lives in
households with total income less than VND85 million (equal to 75% of the median household
income in our sample). [Color figure can be viewed at wileyonlinelibrary.com]

in Fintech usage among rural and urban residents and among low- and high-income
groups in Vietnam are substantial. For example, the percentage of urban residents that
use Fintech services is about five times larger than that for rural residents, while a sim-
ilar ratio is seen in the gap between higher-income and lower-income households
(Morgan & Trinh, 2020). Similar patterns are seen in other developing countries.
4. Regulatory Aspects
Regulatory regimes for digital payments and alternative finance vary substantially
across these countries. In general, higher income countries tend to have more complete
and customized regulatory regimes for these sectors. Lack of an adequate regulatory
framework could tend to inhibit the development of these sectors.
4.1 ASEAN
Since ASEAN’s 10 member countries differ markedly in terms of the level of economic
and financial development as well as economic and political systems, it is difficult to
generalize about their regulatory approaches to Fintech and financial inclusion. How-
ever, broadly speaking, in contrast to India, ASEAN countries have tended to develop
separate and less stringent regulatory frameworks for Fintech firms operating in the
payments and alternative finance segments. Some key points regarding regulations
related to digital payments, alternative finance, regulatory sandboxes, and tax policies
can be highlighted. A detailed table on the regulatory situation in each country is given
in Table A1.
Eight out of 10 ASEAN countries have developed specific regulatory frameworks
for digital payments, the only exceptions being Brunei (unregulated) and Cambodia
(regulated under existing legislation). On the other hand, progress on interoperability
of payment systems remains uneven (CCAF et al., 2019).
Five out of 10 ASEAN countries have dedicated regulatory regimes for P2P lending.
These vary from specific licensing regimes (Cambodia, Indonesia, Singapore, and
Thailand) to the appointment of designated platform operators (Malaysia). The other
five countries either have no significant P2P lending activity, regulate them the same
as other lending institutions or have no regulatory regime for them. Equity
crowdfunding platforms are under capital market regulators (Brunei, Cambodia,
Indonesia, Malaysia, Singapore, Thailand, and Vietnam) while regulations have limited
scope in the Philippines and there are no relevant ones in the Lao PDR or in
Myanmar (CCAF et al., 2019).
4.2 India
India’s case is somewhat special due to the large market share of state-owned banks.
As noted above, private banks have participated in the PMJDY scheme to a much
lesser extent than have state-owned banks. Also, India’s regulation of Fintech payment

firms is relatively strict compared with regulatory regimes in Southeast Asia. They
either have to become licensed as payment banks (a newly created category of simpli-
fied bank which only takes deposits and makes transfers and remittances) and be
directly regulated by the RBI, or run their payments through a licensed bank
(Carrière-Swallow et al., 2021). This may tend to limit entry into the sector.
P2P/Marketplace Lending platforms are treated as nonbank financial companies.
They must obtain a “Certificate of Registration” from RBI to commence or carry out
the business of P2P/Marketplace Lending. On the other hand, equity-based
crowdfunding remains a gray area awaiting further input from the Securities &
Exchange Board of India. While a number of platforms are operating in this space,
there still is a lack of clarity on their authorization and legal status, which presumably
inhibits growth of the sector (CCAF et al., 2018).
5. Conclusions and Recommendations

Financial technology (Fintech), that is, using software, applications and digital plat-
forms to deliver financial services to consumers and businesses through digital devices
such as smartphones, has become recognized as a promising tool to promote financial
inclusion. Two segments of Fintech—digital payments and alternative finance—show
the greatest potential to enhance financial inclusion.
On the whole, Fintech adoption is spreading faster in higher income countries,
and, within countries, it is spreading faster among higher income and more highly
educated groups. The contribution of alternative finance to financial inclusion is still
very modest. None of the countries in this study have shares of alternative lending
larger than 0.1% of GDP. Thus, while alternative lending can provide financing alter-
natives for individuals and MSMEs, it seems far away from making a macro-level
impact or posing a serious threat to traditional banks. The model appears to have fun-
damental limitations, especially the lack of collateral and means for enforcement of
collection. Perhaps Fintech firms may make a relatively greater contribution to finan-
cial inclusion by partnering with banks to overcome the various barriers to expanding
conventional lending, including reducing costs of transactions and information
asymmetries.
ASEAN member countries and India have adopted somewhat divergent policies to
promote the use of digital payments to encourage financial inclusion. India tackled the
issue of increasing financial inclusion head on through its “JAM” strategy, including:
requiring banks to open no-frills deposits for any applicants; implementing a national
biometric identity scheme; and promoting use of mobile telephones for banking trans-
actions. In contrast, generally lacking large state-owned bank sectors, ASEAN member
countries have adopted less strict regimes for regulating Fintech payments and alterna-
tive finance companies as way to promote financial inclusion. However, aside from
Indonesia, they generally saw only very modest increases in the share of adults with an
account at a financial institution between 2014 and 2017. Moreover, the shares of

adults making digital payments and having mobile money accounts improved mainly
in the higher income countries of Malaysia, Singapore, and Thailand.
Regulators face ongoing challenges on how to balance the need to support Fintech
innovation with the requirements to preserve financial stability and protect consumers.
There have been cases where over-regulation has stifled development. For example, ini-
tially the requirements for equity crowdfunding platforms to obtain an operating
license were so strict that almost no platforms were being approved. Identifying the
appropriate level of regulation is still a work in progress.
Regarding payment systems, a multi-level approach seems appropriate in most
cases. Nonbank e-money service providers which do not take deposits should be regu-
lated less stringently than banks and have a separate licensing regime. Also, financial
inclusion can be promoted by adopting the principle of “tiered KYC,” that is, the
degree of identity verification of the individual required increases with the size of the
transaction.
Some principles can help promote balanced regulation of Fintech lending plat-
forms. Nemoto et al. (2019) propose a number of principles of regulatory frameworks
for P2P lending, including: lending should differentiate among borrowers based on
their riskiness; platforms should provide investors with an accurate understanding of
credit risks; investors should hold at least some of the risk to prevent moral hazard;
and unviable lending platforms should be able to exit the market without causing
losses to investors or funding shortfalls for borrowers. Also, there should be principles
limiting the risk of balance-sheet lending by platforms. Most of these would apply to
equity crowdfunding platforms as well.
Consumers face various risks from use of Fintech products and services. Issues of
overborrowing need to be addressed through a combination of regulation, consumer
education, and consumer protection, including measures to make redress possible.
Exposure to cyber risks calls for a combination of digital financial education, regula-
tion, and the provision of redress mechanisms to enable consumer to seek aid if they
have suffered losses due to fraud or other criminal activity. In particular, digital finan-
cial education needs to be integrated into national financial education strategies.
Although Fintech can increase financial inclusion, it could potentially increase
inequalities of income and wealth. This can be addressed by a three-pronged approach.
First, programs for financial literacy and digital financial literacy need to be targeted at
vulnerable groups, including those with low incomes, ethnic minorities, and women.
This should include “on the ground” interventions such as could be provided by non-
governmental organizations (Morgan et al., 2020). Second, measures should be taken
to invest in adequate internet infrastructure to reach groups that are still under-served
currently, especially in rural areas. Multilateral development banks can contribute to
supporting such investment. Third, purchases of personal computers and smartphones
by eligible groups could be subsidized.
The degree of development of Fintech and Fintech regulation varies widely among
countries. Regional cooperation mechanisms should be developed to disseminate expe-
riences and best practices among central banks and financial regulators. International

organizations and multilateral banks such as the Asian Development Bank can also
contribute to this kind of information dissemination and exchange.
The development of CBDCs provides a potential area for regional cooperation to
help promote financial inclusion. Perhaps the main challenge is to develop mecha-
nisms for carrying out foreign exchange transactions between CBDCs. This holds out
the promise of substantially reducing the cost of foreign exchange transactions and
increasing transparency. Multiple CBDC (mCBDC) Bridge is one such development.
First initiated bilaterally by the Hong Kong Monetary Authority and the Bank of
Thailand under the name Inthanon-LionRock, the project was renamed mCBDC
Bridge when the People’s Bank of China and the Central Bank of the
United Arab Emirates joined. The project explores the capabilities of DLT and studies
the application of CBDC in enhancing multi-currency cross-border payments. By tack-
ling pain points such as inefficiencies, high cost, low transparency, and complexities
related to achieving regulatory compliance, mCBDC is expected one day to build a
real-time, 24-h payment bridge between Asia and the Middle East (Auer et al., 2021).
Notes
1 Digital finance and alternative finance are referred to interchangeably here.
2 The last part of the definition seems to be out of date, since CBDCs are digital currencies but
presumably are legal tender.
3 The terms cryptocurrencies and cryptoassets are used interchangeably by institutions such as
the Financial Stability Board and the Bank for International Settlements.
4 Individuals who have a bank account, but limited or no access to other financial products and
services are classified as under-banked.
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APPENDIX
204
Table A1 Financial inclusion regulatory measures
Consumer
Country Regulatory agencies ID-related measures Payments Alternative finance protection
Fintech and Financial Inclusion
Brunei Autoriti Monetari e-Darussalam Account No legal requirement No P2P lending firms yet. —
Darussalam Brunei Darussalam is a nationwide to register corporate Equity crowdfunding
digital mobile payment platform operators must
authentication key services, but apply for a Capital
that provides access generally done so in Market Services License.
to multiple online practice
services provided by
the government.
Cambodia National Bank of Piloting digitized ID No regulations yet for P2P lending governed by —
Cambodia (NBC) system cashless payments or the Law on Banking and
e-commerce Financial Institutions,
primarily under the NBC.
Law on the Issuance and
Trading of Non-
Government Securities is
the primary legislation
for equity crowdfunding,
including both the
issuing entity and
platform.
Peter J. Morgan
© 2022 Japan Center for Economic Research.

Table A1 continued
Consumer
Peter J. Morgan
India Reserve Bank of India Aadhaar biometric ID Must be regulated as Lending platforms treated RBI: Grievance
(RBI), Securities & program, linked to payment bank, or as nonbank financial Redress Mechanism
Exchange Board of access to micro- put transactions companies, must obtain a in banks; banking
India accounts through a regulated ‘Certificate of ombudsman system
bank Registration’ from RBI.
Equity-based

crowdfunding remains a
gray area.
Indonesia Bank Indonesia, Electronic identity Five Bank Indonesia OJK regulations govern National Consumer
Financial card known as e- Initiatives for the organization of Protection Agency,
Supervisory Agency KTP Payment System technology-based P2P Consumer Dispute
(OJK) under Decree No. lending services and Settlement Board,
18/73/DKom: equity crowdfunding. Credit Information
national payment Bureau
gateway; national
standard for
Indonesian Chip
Card Specification;
payment transaction
processing; financial
technology; and
government to
person social
assistance
205
206
Table A1 continued
Consumer
Lao PDR Bank of Lao PDR Piloting digitized ID Payment system No provision for equity —
system operator and crowdfunding
provider apply for

business operation
license
Malaysia Bank Negara Malaysia “MyKad” card Digital payments SC has appointed six —
(BNM), Securities incorporates both governed as a operators to run P2P
Commission photo identification payment instrument. platforms. Equity
Malaysia (SCM) and fingerprint Issuers are required crowdfunding firms
biometric data, but to obtain BNM’s regulated by the SCM.
not verifiable prior approval
Myanmar Central Bank of Digital ID regarded as Regulated either as (i) P2P lending and equity —
Myanmar national priority mobile banking as a crowdfunding currently
traditional bank or not regulated
by a Fintech
company in
conjunction with a
traditional bank; or
(ii) mobile financial
service, which is
operator-led.
Peter J. Morgan

Table A1 continued
Consumer
Peter J. Morgan
Philippines Bangko Sentral ng Phil-ID will collect BSP Circular No. 649, No specific regulations BSP: Consumer Affairs
Pilipinas (BSP), information and Series of 2009 governing online P2P Group; SEC;
Securities and biometric data provides guidelines lending. Lending National Credit
Exchange including iris scans, for issuers as a retail companies are under the Council and
Commission (SEC) fingerprint and payment medium. Securities and Exchange National Anti-

facial images Issuers may be Commission. Rules Poverty Council
banks or covering the operation Microfinance
nonbanking and use of equity and Consumer
financial institutions lending-based Protection
registered as a crowdfunding only apply Guidebook
money transfer to registered persons.
agent.
Singapore Monetary Authority of Digital IC serves as an New Payment Services Platforms which allow P2P- —
Singapore official identification Bill for which aims lending to nonaccredited
document, security to streamline natural persons require a
measures are in existing regulations license under the
place to protect the of payment services Moneylenders Act.
user’s identity Equity crowdfunding
platforms must hold a
Capital Market Services
license
207
Table A1 continued
208
Consumer
Thailand Bank of Thailand Digital ID system Licensing of payment BoT regulates P2P lending BoT: Financial
(BoT), Securities allows institutions to systems and other platforms. SEC oversees Consumer
and Exchange electronically services such as the operation of Protection Center
Commission (SEC) identify and systems for fund crowdfunding platforms
authenticate end- transfer handling,

users, but not clearing or
mandatory settlement for retail
fund transfers,
electronic cards
services, e-money
service and bill
payment service
Vietnam State Bank of Vietnam, Piloting digitized ID Third-party payment No official legal framework —
State Securities system service providers for P2P lending. Equity
Commission (SSC) (nonbanks) licensed crowdfunding platforms
must obtain a license
from the SSC.
Source: CCAF et al. (2019).

Peter J. Morgan


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doi: 10.1111/aepr.

12379 Asian Economic Policy Review (2022) 17, 183–208

Fintech and Financial Inclusion in Southeast

JEL codes: D14, E42, E51, G21

Accepted: 4 January 2022

†Correspondence: Peter J. Morgan, Asia Development Bank Institute, Kasumigaseki Building,

© 2022 Japan Center for Economic Research. 183

2. Scope of Fintech Products and Services in Southeast Asia and India

• Digital payments, clearing, and settlement: Electronic money (e-money), mobile

184 © 2022 Japan Center for Economic Research.

2.1 Digital payments

2.1.1 Mobile POS payments and digital commerce

2.1.2 Mobile money

© 2022 Japan Center for Economic Research. 185

2.1.3 Remittances and international money transfers

2.1.4 Digital currencies

186 © 2022 Japan Center for Economic Research.

• Account-based CBDC targeting the general public;

2.2 Alternative ﬁnance: Crowdfunding, P2P lending, online balance sheet

© 2022 Japan Center for Economic Research. 187

Cambodia Retail two-tier issuance; blockchain based Implemented 2020

3. Financial Inclusion Progress, Policies, and Impacts of Fintech

3.1 Progress of ﬁnancial inclusion

188 © 2022 Japan Center for Economic Research.

Table 2 Comparison of alternative ﬁnance lending and conventional lending, 2019

(1) (2) (3) (4) (5)

Brunei 29.1 29.1 — — —

© 2022 Japan Center for Economic Research. 189

% of adults (% age 15+) with a financial institution account

Figure 1 Share of adult population with a ﬁnancial institution account.

% of adults (% age 15+) made or received digital payments in

Figure 2 Share of adult population using digital payments.

190 © 2022 Japan Center for Economic Research.

% of adults (% age 15+) with a mobile money account

Figure 3 Share of adult population with a mobile money account.

© 2022 Japan Center for Economic Research. 191

3.2 Role of Fintech in expanding ﬁnancial inclusion

SME outstanding loans with commercial banks (% of GDP)

Figure 4 Share of commercial bank loans to SMEs in GDP.

192 © 2022 Japan Center for Economic Research.

3.2.1 Digital payments

Complete Data Set 17% 28% 50% 5%

Asset Management 2%10% 77% 11%

Personal Financial Management 10% 13% 62% 16%

Capital Management 12% 30% 56% 2%

Digital Lending 19% 47% 31% 3%

Digital Payment 25% 16% 51% 8%

Unbanked Underbanked Banked Unknown

© 2022 Japan Center for Economic Research. 193

3.3 Policies to promote Fintech in expanding ﬁnancial inclusion

194 © 2022 Japan Center for Economic Research.

3.4 Possible negative impacts of Fintech

© 2022 Japan Center for Economic Research. 195

3.4.1 Excessive borrowing

3.4.2 Cyber-related risks

3.4.3 Income and wealth distribution

196 © 2022 Japan Center for Economic Research.

© 2022 Japan Center for Economic Research. 197