Growing e-commerce spending in Southeast Asia comes with growing complexities for platforms and merchants alike.
1. Rising fraud
Source: Fraud Rising: How Bots and Malware Are Compromising APAC’s Apps
According to AppsFlyer’s Fraud Rising: How Bots and Malware Are Compromising APAC’s Apps 2019 report, Southeast Asia stands to lose US$260 million to online fraud, with Thailand, Vietnam, and Indonesia expected to be the most heavily affected. Among the most common types of fraud in e-commerce are identity theft, phishing (posing as a trustworthy entity to acquire personal information like usernames and passwords), account takeover (illegally accessing someone’s account), mobile fraud, and chargeback fraud.1
2. New and different online payment preferences in each country
Source: Southeast Asia: The New e-Commerce Frontier
Each country’s e-commerce industry offers a different mix of local payment methods. This includes multiple e-wallets, bank transfers, and cash-on-delivery payments. Merchants have been providing this wide variety of digital payment options to cater to their unique customers’ payment preferences. As more digital payment options are being introduced, the more complex it will become for merchants to manage. We believe that there is an opportunity in helping to manage the complexities which arise from this.
3. Working capital to scale
According to the World Economic Forum, 33% of SMEs lack access to credit in Southeast Asia. This problem is more acute in the Philippines, where a staggering 50% of SMEs do not have access to formal loans.2 Traditional banks typically require credit histories and collateral to underwrite a small business loan, both of which many newer SMEs may lack. We expect that more ‘e-commerce friendly’ financing options will be helpful here. For example, 500-backed Impact Credit Solutions built a digital credit platform that aims to increase credit availability for SMEs in Southeast Asia.
4. Multiple e-commerce channels
Southeast Asia has more than one dominant e-commerce platform – we’ve seen it with dominant marketplaces such as Lazada, Shopee, Tokopedia, and 500-backed Bukalapak. However, merchants are also setting up their own e-commerce storefronts and selling on social media platforms such as Instagram, Facebook, TikTok, or Whatsapp.
We believe that startups that solve issues for marketplaces and merchants at scale have the potential to create value.
In the past, e-commerce platforms like Shopify offered merchants an easy way to launch their online business and start selling to customers without any coding experiences. As at 31 March 2021, Shopify’s market cap was US$135.8B on the NYSE.3 In Southeast Asia, we’re seeing mobile-first Shopify and storefronts for Whatsapp show up. 500-backed Indonesian mobile bookkeeping app BukuKas, launched their very own e-commerce platform, Tokko which enables merchants to create their storefronts and generate shareable links.
Another example from recent years includes ‘buy now pay later’ companies like Afterpay, Affirm, and Klarna. These companies allow platforms to provide credit in the form of installment loans to buyers. As at 31 March 2021, Afterpay’s market cap was US$22.21B4, while Affirm’s market cap was US$18.2B5. Klarna reported a post-money valuation of US$31B6. In Southeast Asia, 500 Durians counts FinAccel and a newer entrant Split within its portfolio. Since its inception three years ago, FinAccel has evaluated 3 million applications and disbursed almost 30 million loans.7 Split, on the other hand, pivoted into this business during the pandemic. Since April 2020, Split has signed up more than 150 brand partners.8
Aside from solving complexities for merchants and marketplaces, there are also opportunities in creating new income streams for them. Similar to the Indian unicorn Meesho, 500-backed LinkShop provides wider inventory choices and fulfillment for social sellers. Globally, we are also watching companies like Clearbanc and Riskified.
How big is the opportunity?
Projected ~US$100B of new spending on e-commerce in the next 5 years
The e-commerce space saw a 63% growth between 2019 and 2020, with its value soaring to US$62 billion this year from US$38 billion a year earlier, according to the e-Conomy SEA 2020 report by Google, Temasek, Bain & Company. As such, it’s now expected to be worth US$172 billion by 2025 instead of the US$150 billion based on earlier estimates. We believe that platforms and merchants will want to pay for services to help them capture this spending.
40M new e-commerce shoppers
The e-Conomy SEA 2020 report attributes this to the rise of online users in the region. Around 400 million people or 70% of Southeast Asia’s population are now online. In 2020 alone, 40 million people came online for the first time primarily driven by people turning to e-commerce sites to fulfill the retail needs they had before the lockdown. Lasting adoption of e-commerce is expected to continue across Southeast Asia as most first-time users said that they would keep making transactions online even after the pandemic. According to the report, over a third of 2020’s online commerce was generated by new shoppers, of which 8 in 10 intend to continue buying online going forward.
Offline merchants coming online
The pandemic has increased the number of new e-commerce merchants, as offline retailers who have held out thus far are forced to adapt.
Photo Courtesy of Bukalapak
One example is the 500-backed Indonesian e-commerce marketplace unicorn, Bukalapak. In just the first 7 months of 2020, Bukalapak recorded over 3 million new merchants joining its e-commerce platform, with the strongest growth rates seen in rural areas and smaller cities.9 Bukalapak now serves 13.5 million micro, small and medium enterprises and 100 million customers.10
Let’s build solutions for Southeast Asian e-commerce
As the e-commerce industry in Southeast Asia continues to grow, we believe this comes with rising complexities for e-commerce platforms and merchants. We anticipate that this will lead to opportunities for new business models to exist. If you are building a company in this space, we’d love to hear from you – let us know here.
Do you have any thoughts about the rising complexities for e-commerce marketplaces and merchants? Please feel free to reach out to us on LinkedIn, Facebook, Twitter, and Instagram.
500 Startups is a venture capital firm on a mission to uplift people and economies around the world through entrepreneurship. Across Southeast Asia, the 500 Durians family of funds have backed over 240 companies across multiple sectors from internet to consumer to deep technology. We look to connect founders with capital, expertise, and regional and global networks to help them succeed.
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