06/04/23

ASIA: Fintech rises above global investment dip.

As published on ft.com, Thursday 6 April, 2023.

Fintech companies suffered a difficult period, globally, last year, as soaring inflation and rising in­terest rates prompted inves­tors to pull back from the sector.

Large parts of the industry struggled to raise funds and valuations were slashed. Swedish buy now, pay later provider Klarna was a case in point: the group’s valuation was cut to $6.7bn in a 2022 funding round, down 85 per cent from $46bn the previous year. Overall, global investment into fintech halved to $75.2bn, according to analytics firm CB Insights.

But Asia fintechs bucked this trend: investment reached a record high of $50.5bn last year, data from consultancy group KPMG shows. And, while the collapse last month of US-based specialist lender Silicon Valley Bank has further darkened global investor sentiment, the outlook for fintech — in Asia-Pacific, at least — is bright.

Analysts expect fintech businesses — from payments services to bitcoin — to surge across Asia as incomes climb and the adoption of digital technology expands further among fast-growing populations.

According to HSBC, Asia’s total financial wealth, from bank deposits to investments, has nearly tripled since 2006 to $140tn. However, some 70 per cent of south-east Asia is either unbanked or underbanked, says consultancy firm Bain.

This is a strong attraction for investors, says Tzu-Chung Liang, south-east Asia financial services strategy and transaction leader at consultancy firm EY. “Asia has one of the world’s youngest workforce and consumer groups, with a high adoption rate of mobile and digital technologies, so it’s a ripe market for financial innovation,” he argues.

Across the region, Singapore is the standout market for fintech. Deals in the city state drew the bulk of sector funding — $1.8bn — in south-east Asia in the first nine months of last year, according to commercial lender United Overseas Bank (UOB).

The Monetary Authority of Singapore, the city-state’s de facto central bank, has been an important driver of growth, says Paul Ng, financial services lead for south-east Asia at consultancy Accenture, through developing “infrastructures, technology, and upgrading skills in the financial industry”. He notes that the MAS has established, and leads, an industry collaboration, Veritas Consortium, to strengthen governance around the use of artificial intelligence and data.

But Wing-Fai Ng, chair of AGBA, a Hong Kong-based financial services and fintech business, says that, while Singapore has created a “favourable environment” through supportive regulation and seed capital, “many of its businesses have lacked the ability to scale up. Singapore is itself a small market and trading across national borders in Asia can be difficult.”

Other countries are catching up. Indonesia, for example, accounted for a quarter of the deals in south-east Asia in the first nine months of last year, amounting to $1.4bn of funding, according to UOB.

“The country’s resilient economy partly fuels this appetite, supported by robust consumer demand and healthy commodity exports,” says Ng at Accenture. “In particular, its early-to-growth-stage investments present an attractive risk-reward profile for investors. Homegrown venture capital firms have been actively investing, further driving regional growth.”

Indonesia has produced several fintech “unicorns” — start-up companies valued at more than $1bn — including business payments processor Xendit, services provider Gojek, and digital payments platform Ovo.

Saurabh Tripathi, global leader of fintech and payments at consultancy Boston Consulting Group, also highlights India, where he says digital payments “have been the most impressive global growth story”.

He points out that, “with 7,460 fintech companies, India now has the third largest number of fintechs after the US and China.”

Australia is a home to some of the fastest growing fintechs, too. Judo Bank, for example, is already generating a profit just five years since it launched. Joseph Healy, chief executive, says this is “faster than any other new bank”. Lending in the six months to the end of February jumped by nearly a quarter to A$7.5bn.

Placed fourth in this year’s FT ranking of high-growth companies in Asia, Judo concentrates solely on lending to small businesses, an approach that becomes “more relevant in times of uncertainty”, Healy says. “With a low ratio of customers per banker, we understand our customers in a way that other banks simply can’t replicate,” he suggests.

Still, it is businesses in China, which are not included in our ranking due to difficulties in verifying data, that have dominated fintech in Asia. The country has created regional super apps: such as Alipay from ecommerce giant Alibaba and WeChat from Tencent Holdings, China’s most valuable company by market value.

But analysts believe that Beijing’s recent tech clampdown is likely to benefit markets and operators elsewhere, as Chinese businesses take a more cautious approach to growth.

Ecommerce group JD.com, for instance, is axing its services in Indonesia and Thailand, marking a blow to its international expansion plans but providing scope for its rivals to step in.

This tougher approach in China may create an opportunity for other parts of the region to lure more fintech business. Liang at EY says south-east Asia “may be seen as an attractive place for investment, in light of the increased scrutiny tech companies face in China”.

However, the Beijing crackdown has not damped Chinese investor appetite for start-ups elsewhere in Asia, notes Ng at AGBA, who says: “Chinese investors and businesses have gravitated towards the larger consumer markets such as Indonesia, Vietnam and Malaysia.”

There may be some strong headwinds — from soaring inflation to SVB’s recent collapse — but this should not suppress Asia’s growth. As Ng at Accenture says: “Fintech remains one of the most popular and resilient segments in Asia, despite recent macroeconomic challenges.”