Vietnam’s Cashless Push and the Challenge of Distribution

(Source: iStock)

This past September, I needed to book a flight ticket from my quarantine camp outside of Hanoi to my home city, Da Nang. I was eligible for a free flight with Vietnam Airlines, and only had to pay taxes on the airfare. Yet ten minutes into my call with customer service, I had an awkward realization: I didn’t have any of the accepted means of payment.

Like most credit card-wielding, NYC-dwelling millennials, I rarely ever carried cash, save for the occasional trips to Nom Wah Tea Parlor. I rarely even carried a credit card, thanks to the convenience of Apple Pay. But Vietnam Airlines accepts neither credit card payments over the phone, nor any sort of transfer from foreign bank accounts. As I could not leave quarantine camp to show up at a ticketing counter to pay in cash, my only choice was to have my mom conduct a wire transfer from her Vietnamese account on my behalf.

Here’s how that process worked: I carefully noted down the recipient’s bank details, then called my mom to relay the information, with specific syntax to provide in the Notes section. Once my mom completed the wire transfer (after being automatically logged out of the mobile app multiple times), she texted me a screenshot of the confirmation page. I had a mini panic attack upon seeing her screenshot because she hadn’t followed the exact syntax that Vietnam Airlines had requested. I held my breath as I emailed the screenshot to a designated customer rep. After waiting for five hours, I finally received confirmation that my flight was booked, but not without a dozen back-and-forth phone calls and emails between three parties.

Cash is Still King

This cumbersome experience with Vietnam’s largest air carrier made me wonder about the state of digital payments adoption and Internet economy maturity in Vietnam. Perhaps unsurprisingly, only 30% of the population has a bank account. 90% of customers opt to pay cash on delivery for online purchases. Both figures fall in the lowest range of financial inclusion among ASEAN countries. Even casual observers can make out what industry veterans have long bemoaned: low digital payments uptake is severely bottlenecking the growth of Vietnam’s Internet economy.

The obstacles are many: ingrained cash habits, low financial and technological literacy, merchant resistance to absorbing e-payment costs, and an inadequate legal framework. But the crux of the problem is that the supply side faces a chicken-and-egg paradox. Payments systems need scale to be profitable. But how do you scale if you’re losing money to acquire customers who never return in lifetime value what they initially cost?

Enter The Mobile Money Opportunity

There are a few different types of digital payments providers in Vietnam, from e-wallets to established banks, to consumer technology platforms and telecommunications companies. For the rest of this article, I’m going to assume that the best way to scale digital payments adoption is via mobile channels, for three main reasons.

First, the biggest opportunity for market expansion in Vietnam lies in individuals living in smaller cities and rural areas — people outside of Hanoi and HCMC. They account for roughly three-quarters of the population, but only around 30% of online transactions. Call it profits at the bottom of the pyramid, or simply a massive untapped market.

Second, Vietnam has a particularly high rate of mobile penetration compared to banking adoption. For a population of 100 million, the country has about 150 million active mobile connections, yet only 4 million credit card holders. Mobile financial services could reduce the costs of last-mile connectivity compared to physical branches, and potentially leapfrog past traditional debit/credit card payments.

Source: Hanoi Times

Third, the biggest financial inclusion success stories in the past ten years have all been due to enabling mobile payments for everyday consumers: China’s Alipay, Kenya’s M-Pesa, India’s PayTM, Kazakhstan’s Kaspi (who recently made history on the London Stock Market with its $6.5B IPO), among others. Vietnam seems to be following this trend. In fact, the rate of mobile money adoption has been growing at a whopping 144% year-over-year.

From Rarity to Ubiquity: Four Ideas for Tackling the Distribution Challenge

As I said earlier, scale is the greatest determinant of eventual success and market leadership. For payment systems, scale can only be achieved by high rates of adoption on both the merchant and the consumer side. In order to sign on more consumers, you need to onboard more merchants, but merchants won’t sign up unless there’s already a sizable customer base. Simply put, you cannot scale a cross-sided network by trying to subsidize only one side of the market.

Effective scaling strategies, in Vietnam or elsewhere, involve catering to the different needs and incentives of each side of the network, particularly micro, small and medium-sized merchants and everyday consumers.

  • Courting merchants

A brief review of the top e-wallet providers and mobile banking services in Vietnam reveal an understandable lack of small merchant acceptance points. The most common revenue model charges merchants a percentage of each transaction, then uses the proceeds to fund promotions and new customer acquisition. This one-way subsidy from merchant to consumer might work in a card-based environment, where most consumers only have one type of card. However, the costs of switching are much lower for e-wallet customers, who have a greater tendency to sign up for multiple wallets to take advantage of as many promotions as possible. One-sided subsidy runs the risk of shutting out a majority of micro, small, and medium enterprises (MSMEs) who get by on a stream of thin-margin, low-value transactions.

Settlement time is highly variable and can take weeks, which further deters small merchants who need constant access to working capital. There is little information online about the merchant signup and onboarding process. Most banks, fintechs, e-wallets require that MSMEs reach out via email for even basic inquiries. This approach puts the onus on your average mom-and-pop owners in Cao Bang and Thua Thien Hue, who may or may not have access to a desktop, much less a Gmail account.

Suppliers would be wise to court small merchant participation by eliminating the above friction points and providing value-added services. A lower merchant discount rate can be recouped through volume, enabled by faster settlement and a simpler onboarding process. Some payment providers partner with distributors to negotiate discounts on inventory, thereby passing on the savings without incurring direct costs for merchants. In turn, merchants can spend the electronic payments collected from customers on inventory, effectively reducing time to settlement.

Value-adds can come in the form of consistent communication and superior reliability. Some providers go even further by offering accounting and operations support, or analytics offerings that extract sales insights to suggest promotions and tailored solutions. A survey by Bain revealed, unsurprisingly, that 95% of SME executives in the Philippines, and 93% in Thailand, are interested in a payment provider that offers an integrated solution in accounting, operations, inventory management, and analytics.

  • Expanding CICO footprint

On the consumer side, widespread cash reliance means that cash-in/cash-out (CICO) infrastructures are needed to enable mass market uptake. Vietnam currently has 25 ATM machines per 100,000 population, the fourth lowest among ASEAN countries. Due to a 2014 central bank rule requiring e-wallets to be linked to domestic bank accounts, none of the major e-wallets, with the exception of Momo, has taken the trouble of building out its own CICO network.

At first glance, this regulation seems to defeat the purpose of mobile-based financial inclusion. But suppliers still have many reasons to invest in non-ATM CICO outlets, particularly in the interest of underbanked segments. Customers who have digitized part of their income still need to cash out for daily expenditures, and those who are paid in cash need to deposit money for digital transactions. Recurring use of digital financial services is a direct function of proximity to CICO service points.

Source: CGAP report

Alternative distribution models, such as those involving mobile money agents, can be built much more rapidly at lower costs than branches and ATMs. Moreover, human agents can provide customer support and build trust in ways that ATM machines cannot. This is especially valuable in communities with low technological awareness, low financial literacy, and high susceptibility to under-the-mattress savings and black credit schemes.

By partnering with FPT shops and national convenience store chains, Momo has drawn on a common CICO distribution strategy: piggybacking off of existing networks. Besides Momo, mobile operators currently have a distributional advantage thanks to their existing networks of local airtime agents, as well as a recently approved mobile money pilot project.

But banks, fintechs, and consumer platforms could make use of alternative channels, including, but not limited to, local convenience stores, gas stations, and postal services — which have a 99% penetration rate in SEA. Using geospatial analysis, providers could optimize the locations of their CICO networks in regions with low demand. To maximize the economics, they could experiment with tailored incentives and differentiated commission structures for agents in different geographical segments.

  • Digitizing disbursements

A successful cashless transition requires digitization of both expense- and income-related transactions. The ability to capture government and business disbursements will not only help drive critical momentum, but also consistent traffic.

Take the case of government-to-people payments: between 8–10% of the workforce is employed by the public sector, the highest rate in Southeast Asia. Roughly three-quarters of the population are involved in the informal economy, most of whom are encouraged to enroll in social insurance programs (Bao Hiem Xa Hoi). About a quarter of the workforce is enrolled in the publicly funded unemployment insurance program, and 15 million people were eligible for the government’s Covid relief package in April 2020. Or take the simple case of wages: 60% of the population receive their income in cash.

Government and business use cases both have unrealized potential to quickly onboard a critical mass. Once people start digitizing their income, it becomes a lot easier to stay within the e-money system and explore other use cases. Moreover, digitized remittance flows can increase transparency and reduce leakages.

  • Keeping your enemies closer

The market is crowded: there are over 30 licensed e-wallet providers, 78 banks offering Internet payment solutions, and a handful of up-and-coming neobanks. Competition is turning into a question of who can burn the most cash for a winner-take-all outcome.

But building a sustainable and profitable digital payment system requires a broad set of capabilities, and no single player has it all together. Consumer tech platforms like ZaloPay and Moca may have an edge in distribution, but might lack experience in financial intermediation and adjacent product development. Established banks enjoy strong capital access and incumbent advantage, but might struggle to innovate legacy IT systems. Pure-play fintechs have novel value propositions, but face the challenge of achieving funding, distribution and ubiquity.

While the industry dynamic is one of competition, there are obvious complementarities between the different types of players. To reduce excess capacity, digital payments providers might want to explore opportunities for cooperation, be it through a vertical partnership, an interoperability agreement, or an agent network acquisition. Playing well with others can lead to greater scale and a broader suite of touchpoints, and ultimately, a more sustainable competitive advantage.

Back to flight tickets

I’ve become a lot more accustomed to common methods of payment in Vietnam. I drop by the ticketing counter next to my gym to pay for flight reservations, and routinely head to the nearby FPT store to top off my Momo wallet for internet transactions. It’s a relatively simple, mindless, even frictionless process.

And here we sort of go back to where we started: how do we onboard people who don’t go to downtown gyms in big cities? It won’t happen overnight. It will depend on a number of wild cards. And there will be a long period of coexistence between cash and digital money. The good news is lots of players, incumbents and startups alike, are already working to deliver solutions ahead of market needs. A handful are attracting tens, if not hundreds of millions of dollars in venture capital funding. If the past rate of change is any indicator, I have every reason to believe that financial inclusion will happen faster than you can say “cashless.”



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