Some things are not meant to be fixed
Another fintech platform just raised USD 7.6 million in Series A funding this week.
“A factory worker who runs out of cash on the 15th of the month should not have to borrow from someone charging 20 to 30 per cent a month to make it to payday. Salary Hero lets that worker draw down wages already earned, through their employer, before the official pay date."
Salary loans or payday loans are actually fairly common, especially in many rural banks.
On the face of it, the interest rates seem lower than what the ah longs (a.k.a. unlicensed moneylenders) are offering. But the upfront fees—which are often either omitted or lost in the fine print—can go as high as 7 percent. Because these fees are considered to be administrative or one-off, they rarely get categorized as credit income, hence understating the headline interest rate. But when you include all of these on an annualized basis the all-in costs add up significantly.
So whenever I see headlines like these, I am reminded that the financial literacy gap is real in Southeast Asia.
As a lender, you can't charge a high interest rate and still pass off as being inclusive. But between the fine print, there are hidden costs and a market for those who are desperate for cash.
Just to be clear, this article is not an opinion on Salary Hero but a broader perspective on the state of SME lending in Southeast Asia.
I spent a considerable amount of time in the Philippines a couple of years ago to understand the local market for SME lending. In this part of the world, lending to the individual or his/her business are usually one and the same.
Back then, I had assembled a small tactical team of local staff to conduct a study of the local business demographics. At the end of the exercise, I reported the findings in the form of a presentation at our headquarters. Based on conversations we had with over fifty business owners, a significant lot were not averse towards the idea of taking out a loan, even at what we understood to be close to predatory interest rates.
But this wasn't a commercial decision involving pricing. It was a first step towards gaining some insight to the local market and how it differed from the way small businesses operate in China.
Many of the vendors I surveyed were ready to pledge property titles, vehicles and just about any asset of value just to get immediate cash for a client that takes too long to pay. Another vendor also lamented how the billing process was either too tedious or prone to glitches in the invoicing system, ultimately leading to delays in payment.
Bottom line: Companies were generally interested in the idea of receiving their cash earlier, even at the extent of paying a small fee.
Coincidentally, a somewhat similar observation had also come up over a decade ago when I was working on the sale of a notable consumer electronics and furniture retailer during my banking days.
A closer look at the numbers revealed a huge chunk of profit margins made from selling products on instalment plans. And the target demographic comprised primarily those from the lower income bracket and who were also willing to pay a higher price in exchange for stretching their payments over twelve months and beyond.
The retailer was making more money financing their consumers’ purchase compared to just selling their products off the shelves.
The consumer banks were also doing the same. Products with the highest margins often went to credit cards and personal loans that charge 2 to 3 percent monthly on the unpaid balance. On an annualized basis, this works out to be up to 36%. Personally, I make it a point never to pay for this interest (I don’t carry a credit card balance ever) even though it is a highly profitable business for the bank. Understandably, my relationship manager does very little to engage me unless it involves me getting a personal loan.
But underpinning these examples is a very simple behavioural attribute that bankers exploit:
Credit cards and unsecured personal loans are tailored to those who consistently spend more than they earn, and who are oblivious to the fees that they pay at every turn.
And as long as financial institutions remain rooted in traditional ways of analyzing credit scores and risk management, there will always be lenders who will capitalize on this dislocation in the market and extend high yielding loans to owners of small businesses.
Salary Hero is on a noble mission to "end financial stress for every SEA worker". According to co-founder Prabhav Rakhra, the firm was established “because the financial system in Southeast Asia is broken for the people who can least afford it.”
But this dislocation in the financial system is not necessarily a bad thing.
A global workforce survey done in 2025 showed that Southeast Asia has a sizeable population that continues to live from paycheck-to-paycheck. Even in a high income economy such as Singapore, this number is a surprising 60%. Many of the borrowers who can "least afford it" are in fact normal salaried workers going about their daily jobs.
When your world revolves around customers that take forever to pay or sustaining an expensive cost of living, this cash flow can provide a critical lifeline, even if it costs. The truth is that a lot borrowers—even the affluent ones—remain clueless when it comes to managing their personal finances. Operating expenses exceed incomes and they have simply been conditioned to taking on debt to fill the gap.
But change that behaviour and the financial literacy gap closes, potentially upending those who are in the business of bridging this financing gap.
Do you fix the broken financial system when the profitability and viability of your business model depends on the system staying broken?
This is the paradox when it comes to investing and charting a growth strategy for a micro financing business in Southeast Asia. By solving for financial stress, you eliminate the very need for borrowers to take on subprime credit in the first place.
Paying 20% interest per month on a loan might sound crazy. But a lot of these people have been brought up accustomed to a lifetime of debt and instalment programs, and therefore taking on credit becomes a part of life. Who are you to say otherwise?
Those people can be misinformed. They can have incomplete information. They can be bad at math. They can be persuaded by rotten marketing. They can have no idea what they are doing. They can misjudge the consequences of their actions. Oh, can they ever. Those buying $400 in lottery tickets are by and large the same people who couldn't come up with $400 in an emergency. They are blowing their safety nets on something with a one-in-million chance of hitting it big. That seems crazy to me. It probably seems crazy to you, too. But I’m not in the lowest income group. You’re likely not, either. So it’s hard for many of us to intuitively grasp the subconscious reasoning of low-income lottery ticket buyers. —Morgan Housel
