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Is the Vietnam Fintech wave rising or falling?

Vietnam's growing GDP, population and smartphone penetration made it the next battleground for digital business in Asia.

I had the chance to visit Ho Chi Minh City last September. It was my first visit to Vietnam, but as a Chinese, it took me no time to feel at home. The colorful e-wallet stickers are everywhere, in Saigon Center shopping mall, in Bến Thành market and of course, random food stands in every alley. All this would suggest Vietnam is dominated by digital payment, but it's not that simple.

What are we looking at and what opportunities should we expect?

The demographics and macroeconomics of ASEAN member countries rightly earned a lot of attention in recent years. 67% of its population age is between 15 to 64, with an average age of 30.8. 360m internet users, of which 90% use mobile connections (e-Conomy SEA 2019 by Google, Temasek, and Bain & Company). Vietnam leads the way in ASEAN, with its 7% GDP growth two years in a row and more than 90m population. At the same time, this country has 145.8m mobile connections by January 2020, which is equivalent to 150% of the total population (Digital 2020 by We Are Social). Among those mobile connections, smartphone penetration is above 70%.

Statista projects Vietnam will record US$311m of mobile POS total payment value in 2020 with an annual growth rate (CAGR 2020-2023) of 35.9% reaching US$782m by 2023.

mobile payment user, VN

Source: Statista, Mobile POS Payments penetration rate 11.9% in 2020 (14.1% in 2023)

The gap is still big but with very promising potential. Khanh Tran, ex-founding partner of Vietnam’s largest VC fund VinaCapital Ventures, has much hope for Vietnam's future development. “Internet, mobile penetration and tech-savviness of the people have always been the key selling points for the region at large and Vietnam in particular. We ought to see another wave of booming of online/e-commerce business models as countries will eventually get back to work in a ‘new normal’ with social distancing potentially here for good," Khanh says.

Khanh believes the virus may actually be a medium-term catalyst for Vietnam. “During the pandemic crisis, we have seen many scientists in Vietnam that came up with deeptech solutions to help the country to deal with the virus. I expect to see more of deeptech innovations coming out of Vietnam over the near future which subsequently attract more capital coming into the country, as investors can see more clearly what Vietnamese talent can do.”

David Jimenez Maireles, a European expat leading Vietnam Maritime Commercial Joint Stock Bank (MSB)’s digital bank efforts, was attracted to the Vietnamese' growing digital addiction to more than 6.5 hours of mobile screen time per day and their natural curiosity to try new things.

“Most of the sectors are undeveloped: fintech, regtech, payments, wealthtech, neobanks and challenger banks, etc.," David explains. "In the next two to three years, the country will leapfrog many of their peers and will embrace the digital economy vividly.” He compares the situation to China in 2013/14 when they shifted from a cash-heavy economy to a QR code payments supported by superapps.

Nguyen Thai Hai Van, Grab's Managing Director for Vietnam, is reading from the same script. “With the current COVID situation, we will see wider adoption of digital financial services, as customers leverage digital options to access and fulfill their financial needs. Consumers prefer cashless payments for hygiene and convenience, and merchants look to digitize their services and sign up for e-payments. We expect more small businesses will start to adopt digital payments in their daily transactions, and retail customers will look to complete most of their financial needs using mobile apps,” she says.

Hai Van argues Vietnam’s young, vibrant and tech-savvy generation will help to transform this country into a digital economy, especially for e-commerce. This segment is expected to post an annual growth rate of 49% between 2015 and 2025 with the market size is projected to reach US$23 billion by 2025, according to Google, Temasek, and Bain & Company e-Conomy SEA 2019 report.

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But what are the barriers?

Clearly, there is potential, but all recognize there are still barriers to clear.

Take e-commerce as an example. Vietnam has successfully nurtured e-commerce brands. For whom web browsers and smartphones generated over 70% of user traffic. However, cash-on-delivery still dominates. While infrastructure and logistics can’t be updated overnight, tradition or habit is a bigger issue here.

“The Grab app is not just one of the most frequently used consumer apps in Vietnam, but by the end of 2019, 43% of all transactions on the Grab platform were already cashless,” Hai Van explains. She doesn’t believe changing habits is impossible, but it will require the right fit. “We do believe that Vietnamese people are ready for cashless payments, especially small and daily transactions if the technology fits their everyday needs.”

However, this mindset will not change very quickly, Khanh suggests. “It’s mainly due to the trust issue - 'I need to see and touch what I buy before I pay.’ What e-commerce players can do is to work with cashless payment providers to provide intermediary services like escrow, pay later, etc to help transform this mindset.”

But help is one the way. “The low penetration of debit and credit cards with a low percentage of POS in the country has created the perfect storm for mobile wallets, digital bank-to-bank transfers, and QR code payments,” David says. A "real-time, seamless, customer-friendly and device-agnostic payment system will win the market in the blink of an eye.”

If David is right, then it's up to the fintech and broader financial services industry to offer better products, but that requires change.

“Opportunities at large brought by innovations always come at some cost," Khanh says. "Trying out new technologies is always easier said than done and the lessons are very much valuable. Leaders need to think of both importing innovations as well as exporting innovations and be very open to sharing the lessons/best practices they learn with a wider audience within their industry, so everyone can innovate faster, more efficiently, and ultimately, save costs.”

Grab, for its part, recognizes the importance of enabling partners to grow as well as themselves. “We see that people are digitalizing their daily needs which creates great incentives for online service to develop in Vietnam. Every problem from on-demand transport, food delivery, parcel delivery, to shopping for essentials is made only with one mobile app," Hai Van says. "Importantly, not only each industry has its own potential to grow, but the development of these three industries can also foster the growth of each other.”

Another key aspect of partnership is regulation. David believes the regulators in the region are open to support digital businesses but cautions “most of the markets are undeveloped because of the lack of regulation to help new digital businesses to flourish." According to David, better regulation will help Vietnam become a pole to attract, develop and retain digital talent. "The opportunities in the region will make Southeast very interesting for many people to explore new opportunities as well as local talent going back to their home countries to create new business," he adds.

MSB Photo credit: PR Newswire

Alternative data is king

Another key concern for regulators is the collection and use of customer data. David says "the lack of reliable and official data will force companies to come up with brand new ideas to identify and serve customers. The consolidation of different data sources will power new products and services.”

Fintechs and banks that use alternative data to reach the underbanked/underserved population do not always have a higher risk when compared with the incumbent banks. The greatest opportunity and initial successes seem to come from banks that have partnered with alternative lenders to extend their balance sheet to previously unreached segments.

Khanh, who used to lead strategy for Timo Bank, thinks “banks need to really change how they look at risk. If an alternative credit scoring algorithm has to go through the same old risk calculation formula, not much would the banks go on this horizon. There must be some framework that supports this internally at banks.”

For David, the unbanked and underbanked segments are the “next battlefield” between banks, fintech startups and other new players. “Most of the banks in the region have focused pretty much in the same customer group: affluent or mass affluent, leaving aside millions of potential customers unbanked. New core banking systems and smartphone penetration will allow banks and fintech to grasp an untapped market of 40 million customers in Vietnam alone.”

“Superapps, e-commerce players, and mobile wallets are in good positions with their massive customer base and trust gained over the years”, David says. He considers them the “perfect contender” to “gain a considerable market share very quickly at a low cost,” adding, “In the coming years, we’ll see an explosion of fintech startups developing new data models and incumbent banks investing millions to leverage their unstructured data to attract new customer segments and develop new credit risk models.”

With their comprehensive platform, Grab's goal is not just delivering Vietnamese users’ needs, but also to strengthen their driver-partners, delivery-partners, and merchant-partners to access new earning opportunities through technology, as well as to bring cashless benefits to the people of Vietnam through the strategic partnership with Moca. For example, Hai Van claims GrabFood merchants have seen their incremental business revenue grow by 300% within two to three months of joining the platform.

Those fintechs, incumbent banks and tech giants with massive userbases and strong use cases should work closely “when it comes to user acquisition and onboarding new customers onto their platforms,” Khanh says. “For example, a startup that is doing logistics would have thousands of service providers (drivers, etc) and service users (shippers, big corporates, etc), so it’s natural for such parties to require some fintechs’ solutions to help them with payments, lending, (on-demand) insurance and more. That’s where fintechs can come in to bridge the gap and acquire users strategically.”

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What’s next?

Apparently, Vietnam's digital economy has massive space for future development in spite of many critical challenges, such as digital onboarding. In addition to transparent and frequent communication with the regulators, the industry should coordinate to introduce consumers to new options, particularly during the pandemic environment. The health and resulting economic crisis will “accelerate the adoption of new technology (e.g. biometrics) and the development of new regulations to match what other countries in the region have already introduced (e.g. digital onboarding of new customers),” David says. "I don’t think Vietnamese customers will have to wait much longer to use their mobile phone to open a bank account and remove the need to visit a branch,” he explains.

In the end, banks, startups and superapps will all have a role to play in realizing Vietnam's potential through multiple solutions to solve Vietnamese’s daily puzzles. Hai Van believes continually digitize Vietnamese consumers' daily habits is the path forward. “Whether it’s a way to get from A to B in a safe and convenient manner, or to get their cravings satisfied, to put access to cashless payments right into the palm of their hands - every day we connect Vietnamese to what matters. And through this same platform, we also play a positive part to further grow the country’s digital economy and create millions of income-opportunities that will elevate the quality of life for all Vietnamese.”

Photos were taken by the author if not otherwise stated.

This article post was written by Fred Pi