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COVID-19 helped accelerate Southeast Asia’s digital future. Now what?

August 6, 2021, 11:30 PM UTC

Entire books will be written on how the COVID-19 pandemic transformed how we live and work. But, at least in Southeast Asia, it’s led to one irreversible change: the long-predicted shift from the physical to the digital world.

Over the past year, consumers had no option but to go online to shop for groceries, conduct banking, or pursue education. They will undoubtedly maintain much of their reliance on digital services and―at long last―leapfrog to levels of digital adoption in commerce and payments with more advanced omnichannel models, bringing the region to the levels of China or developed countries in the West.

Investors are recognizing Southeast Asia’s value as one of the last digital economy opportunities in the world―and the further growth potential that lies ahead. Each week seems to bring a new headline showing the region’s digital vibrancy, including Singapore-based ride-hailing company Grab’s proposed IPO this year for a valuation of nearly $40 billion, Indonesia’s newly formed tech giant GoTo, and an expected IPO for Singapore’s online classified marketplace operator Carousell. 

The coronavirus introduced an unanticipated and massive digital adoption spurt. Our research done in partnership with Google and Temasek, and based on Kantar data from Singapore, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, showed that over a third of consumers are new to digital platforms, and over 90% say they intend to continue using those platforms after the pandemic.

The numbers tell an impressive story: 40 million new Internet users were added in 2020; 400 million, or 70% of the region’s population, are now online. The Internet economy remains resilient at US$100 billion gross merchandise value (GMV) per year, even with the global slowdown.

And as more consumers and SMEs come online, and with a continuously supportive ecosystem and regulatory environment, the size of the digital economy could be as large as $300 billion, a significant scaling opportunity, despite an environment made challenging by COVID and market fragmentation.

Digital consumers have already gone through the hard steps of digital adoption: learning how to set up digital payments, shop online, order food, and so on. Continuing to use those services is easy, and for many, it simply will be much more convenient to shop online.

Shoppers are buying more groceries online, and they’re not going back. As intracity travel resumes, so will ride hailing. And the surge in users of digital streaming is likely to continue: More than half of the surveyed users say they intend to continue their video and music subscriptions indefinitely. Yet that prediction comes with a caution for providers of streaming services. Users have also indicated a likelihood to unsubscribe once the trial period ends. 

Education and groceries benefited most from the influx of new digital consumers. For example, 55% of users of online education services were new to the services in 2020. In grocery e-commerce, 47% of consumers were new. Meanwhile, 34% of survey respondents in the region said they used food delivery services more now than they had before the pandemic.

However, some of the biggest opportunities exist in the budding digital financial services sector, which spans payments, remittance, insurance, investing, and lending.

Payments are steadily moving online. Based on Kantar research, the average number of cash transactions dropped by 11% during COVID-19, with more merchants shifting online out of necessity. Because of the rise in digital activity, we’ve increased our 2025 global online transaction value estimates from $1 trillion to $1.2 trillion. With rates in 2020 reaching the levels we anticipated for 2025, Southeast Asia achieved five years of consumer adoption in a single year.

Adoption of digital remittances doubled as regulators and employers went online to pay migrant workers electronically, and then helped them transfer funds to their families. Convenience and lower prices will likely sustain behavioral change, with up to 40% of total remittance value expected to be transacted online by 2025.

In insurance, purchases moved online as traditional channels were disrupted during COVID-19. Life and health insurance received an online boost as consumers became more risk-conscious in the pandemic. Microinsurance gained traction and now offers significant potential for serving underinsured segments. According to our research, traditional products don’t sell well online. That means established insurers that rely heavily on agents and bancassurance will need to digitalize their channel mix quickly and adapt new products for the digital channel. With such advances in place, the insurance subsector could grow 31% by 2025.

Southeast Asian consumers are also more comfortable with investing online. There are three primary competitors in online investment: pure-play fintechs (e.g., robo-advisers), consumer tech platforms, and established wealth management companies. Each of these players has sufficient room to address a different customer segment with distinct value propositions. One such fintech firm, Endowus, increased its clients by 20 times and its assets under advice by seven times in the year following its October 2019 public launch. Big players are also paying attention to this space: Grab acquired the startup Bento in February 2020.

Interestingly, the only sector that stalled in 2020 was digital lending, mostly owing to concerns about credit quality amid the pandemic. Yet the long-term opportunity remains bright, given the large number of individuals and companies without access to credit in Southeast Asia, favorable regulators, and continued innovation in credit scoring algorithms. We expect digital lending to be a $92 billion business across the region by 2025.

The rising consumer activity across sectors will generate further capital investments, attract more talent, and drive continued significant growth over the decade ahead. Southeast Asia’s digital economy will finally take its place on the global stage, an unexpected side effect of COVID-19.

Florian Hoppe is a Bain & Co. partner based in Singapore.

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