Economic headwinds have been having an impact across the investment space. Global venture capital (VC) investment has fallen, with S&P finding investment volumes had dropped 64.7% year-on-year to February 2023, sliding from $48.22bn a year earlier to just $17bn. As interest rates rise and returns decrease, investors are becoming more selective on where they put their funds.
Yet, some spaces are still capturing interest. Asia’s fintech space continues to enjoy significant funding as investors look to tap this expanding market. In its Pulse of Fintech H2 2022 report, KPMG outlined how fintech investments in Singapore alone during 2022 reached a three-year high, with a total of $4.1bn across 250 deals. Across the whole region, a record $50.5bn in fintech investment was recorded across 1227 deals. What has helped to motivate this is the wide variety of emerging fintech services.
Violet Chung, partner at McKinsey in Hong Kong, says: “Payments stood out as the most funded vertical within the fintech sector. However, the industry has also evolved and other areas, such as digital banking, investing and wealth management, cryptocurrency and blockchain, and insurtech are looking promising.
“The business-to-business (B2B) segment emerged as an area with the highest potential in terms of attracting fundings, with two-thirds of the funding going to B2B fintechs and the remaining one-third to business-to-consumer (B2C) fintechs.”
The rise of the superapps
This evolution in the fintech sector has spawned a new generation of companies, cutting across sectors and jurisdictions. Asia has spawned the evolution of superapps — those that go beyond providing one simple service, such as payments, to opening up a full ecosystem to consumers that keeps them within the boundaries of the app to conduct a variety of services.
Among the region’s largest fintechs, Vietnamese e-wallet MoMo is stepping into superapp territory, earning ‘unicorn’ status in December 2021 when it secured $200m in Series E funding. Mizuho took a 7.5% stake of the company with a $170m investment, which took the value of the company to $2.27bn. The app boasts more than 30 million users in a country of 100 million.
What is taking MoMo up to the level of a superapp is its expanding operations, following the steps taken by the likes of WeChat in China and Gojek in Indonesia. In addition to the e-wallet and payment transfer functions, the app allows users to buy insurance, pay bills, buy cinema tickets and shop online.
At a high level, equity funding has tightened significantly over the past few months
And the plans do not stop there. In June 2022, MoMo’s parent company M-Service purchased 4.4 million shares in CV Securities JSC, representing 49% of the company. MoMo moved into the small and medium-sized enterprise (SME) space with the acquisition of Nhanh, a multi-channel sales management software provider that supports 80,000 SME customers. The app is expanding its services beyond Vietnamese companies, as it partnered with online streaming service Netflix to allow users to pay their membership fees through the e-wallet. With only around 300,000 reported Netflix users in Vietnam at the end of 2019, tapping into an existing customer base could benefit the global brand.
Srikanth Vadlamani, vice-president, senior credit officer at Moody’s Investors Service, says the fintech sector occupies a comparatively modest portion of the financial services space. “The fintech sector in Asia has expanded into other financial services, in particular to lending. Some have ventured into banking as well, through digital banking licences. However, the scale of operations in these other segments is still quite small.”
Despite this, they are expanding in services and capacity. Aurojyoti Bose, project manager for business fundamentals at GlobalData, says: “We have seen digital payments platforms, buy now, pay later services, neobanks, lending, mobile-based stock trading and investing platforms gaining investors’ interest in 2022.”
Business credit and financing is one area that is attracting investors attention. Australia-based B2B payments firm Shift raised $18m in Series C funding in February 2023, in a round led by Sequoia Capital Southeast Asia. This comes on top of a $98m debt facility to support its lending operations. Singapore’s Aspire also gained support from Sequoia, in addition to Lightspeed, PayPal and Tencent in its Series C round. Providing financial services for SMEs, the neobank raised an oversubscribed $100m, helped by the company’s announcement of total payment volumes of $12bn. It has supported more than 15,000 business in south-east Asia over the past 12 months.
VC firms are carving out niches in supporting the next generation of companies. Sequoia Capital India and Southeast Asia’s rapid scale-up programme Surge announced its latest cohort of start-ups during March 2023, covering sectors including climate tech, the metaverse and e-commerce. Surge brings $3m in seed capital and business support to help these start-ups on their growth journey.
Fintechs are looking to meet their financing goals through accessing a diversity of sources. “Fintechs are finding their financing from a variety of sources, such as private equity (PE), VC and corporate investors,” says Ms Chung. “Much of the funding is still coming from PE and VC. However, corporate investors, such as banks and financial institutions, are also becoming more active in fintech investing as they seek to partner with and learn from innovative start-ups.”
Investors’ expectations
While the fintech space continues to expand, there has been a slowdown in the level of VC entering the Asia-Pacific region. Figures from GlobalData show declines across all funding stages. There were 400 VC funding deals with disclosed funding rounds in Asia-Pacific during 2022, down from 464 in 2021. Early stage volume was down by 14.4%, and growth, expansion and late-stage funding rounds down by 12.4%.
Ms Chung notes that according to data from Dealroom.co, fintechs attracted $82.3bn in funding in 2022 — “by far the highest amount of investment that goes into funding compared to the other industries”. However, she notes this is a 36% decline on 2021’s figures.
While funds are slowing, this is partly due to investors becoming more selective in the projects they wish to invest in.
“In 2022, we witnessed a drop in fintech fundings that further intensified in the final quarter of 2022. The funding drop is most prominent in the mega-funding rounds. Despite the decline, Asia represents an increasing percentage of the total funding. There is a significant interest in investing in Asia’s fintech sector, with many investors looking to capitalise on the region’s growing middle class and the increasing adoption of digital banking services.”
Exploring underserved industry sectors is also appealing to investors. As Ms Chung highlighted, the B2B space is a high growth area and attracting more financing, now garnering around 66% of investments.
Investors may be wary; after all, they have been burned by unsuccessful fintech investments before. Joseph Healy, co-founder and CEO of SME-focused Judo Bank, says: “Back in 2018, the Australian authorities started to issue new banking licences for the first time in 40 years. They issued four licences, including to Judo Bank. Those other three banks — which were much more technology focused — have all since failed.”
The three banks, namely Volt Bank, 86400 and Xinja, operated as consumer-focused services. Volt Bank had been seeking A$200m ($133.6m) in Series F funding when it closed.
By comparison, Judo Bank has been able to thrive. “We built a plan on how to grow the bank, outlining how much equity capital we would need,” Mr Healy says. “We determined that we could have a balance sheet with lending assets of about $20bn that could be generating a net interest margin of above 3%. It would have a cost-to-income ratio of around 30%, and risk no higher than 50 basis points on other lending assets. We needed to raise around $1.5bn of core equity over the first five years, raising $1.2bn through private capital markets, and the final $300m we raised when the listed the bank on the Australian Stock Exchange in November 2021.”
Judo Bank has been able to attract the interest of global investors. Mr Healy says: “We have been able to raise predominately international capital. Bain Capital has just over 9% of the company. Singaporean sovereign wealth fund GIC has 7%. We also have significant shareholders based in London, New York and Abu Dhabi.”
The bank raised $284m in a round-four capital raise in February 2021, with financing coming from Australian fund UniSuper, US-based alternative investment manager Magnetar Capital and Moore Strategic Ventures.
At the time of the investment, Magnetar stated: “As a high-growth Australian challenger bank, Judo has strong fundamentals, a quality leadership team and a differentiated position in the Australian market.”
Differentiators
Having a solid financial plan and a product that differentiates itself from the market is what investors are now looking for. Japan’s SoftBank has become a leading player in the fintech investment space, making VC investments in companies including WeWork, Uber and Grab. The SoftBank Vision Fund is the world’s largest tech-focused VC fund, with more than $100bn in capital.
Chris Lee, investment partner for Asia at SoftBank Investment Advisers, says: “While we have scaled back the volume and scale of our investments in this challenging macro environment, we continue to see attractive opportunities in the fintech sector with ample room for continued growth.”
As part of the fintech portfolio, Mr Lee has worked on the investments behind Bangladesh-based financial inclusion platform bKash. Through its Vision Fund 2, SoftBank provided $250m for an approximately 20% stake in bKash in November 2021. The company was valued at $2bn. He is also on the team for Funding Societies, a digital financing platform supporting GIC in south-east Asia. Headquartered in Singapore, Funding Societies raised $144m in February 2022 as part of a Series C equity round. Led by the SoftBank Vision Fund 2, the company also gained interest from new investors including VNG Corporation, K3 Ventures and Ascend Vietnam. It also received $150m in debt lines from institutional investors.
Mr Lee says they are seeing the funding structure change. “While investor valuation expectations have declined, Asia is largely still enjoying strong underlying operating performance. To bridge the gap, we are seeing increased activity in structured equity or convertible instruments. VCs continue to be engaged with fintech players, as well as investors with strategic angles to expand products and services. International interest also remains high and emerging markets in Asia continue to showcase strong underlying growth which we believe is a differentiator.”
Finding this unique factor is vital, as Mr Lee says they are seeing strong players emerging in individual countries. “As we look ahead, Asian fintechs will need to demonstrate the ability to achieve both growth and profitability. This high bar on fintech businesses will act as a test and is a great opportunity for strong players to differentiate themselves.”
Banks find their place
With fintechs taking up market space, the incumbent banks are looking to find their own niche. This can be achieved through leveraging their expertise and building out their ecosystem, Ms Chung says.
From the McKinsey ‘How Asian banks can regain the cross-border payments crown’ report, she points to how banks can upgrade their offerings and establish their positions in fast-growing segments. In particular, a focus on SMEs through use-case-specific innovations and identifying what could drive opportunities and growth may help banks keep their foothold in the market.
Potentially rich areas for collaboration are with banking-as-a-service providers and with clearing banks
Ms Chung further points to the importance of embracing partnerships and mergers and acquisitions. “Potentially rich areas for collaboration are with banking-as-a-service (BaaS) providers and with clearing banks, which can provide access to specific corridors.”
Working with emerging companies is not a new strategy for banks, but these are services they could learn from. Mr Vadlamani says: “Collaborating with firms with a digital footprint, including fintechs, has been one of the common digital strategies that banks are following. However, improving their own offerings lies at the core of their digital strategy.”
The role of the traditional bank should not be written off. Under its SC Ventures business unit, Standard Chartered has been actively pursuing the next steps in banking, and looking to invest in different ways.
Alex Manson, head of SC Ventures, says: “SC Ventures is both a corporate VC fund and an innovation unit, where we invest in ventures that we have existing partnerships with, build ventures and inspire new ventures through our ‘intrapreneurship’ programme.”
SC Ventures is focused on four key areas that will “rewire the DNA of banking”: online economy and lifestyle, digital assets, SMEs and world trade, and sustainability and inclusion. Staff are encouraged to be innovative within the supportive confines of the business, as part of the intrapreneurship programme.
Examples of the fintechs Standard Chartered has worked with are Hong Kong-based virtual bank Mox and Singaporean digital bank Trust Bank. Launched in 2020 as a joint venture between the bank and Hong Kong-based telecommunications company PCCW, Hong Kong Telecom and online travel agency Trip.com, Mox has signed up 400,000 customers. It is described as “Asia’s first all-in-one numberless bank card”, which provides enhanced security for customers. “The joint venture leverages the banks’ cutting-edge core technology stack and cloud-native capabilities to enable a seamless, data-enriched and personalised customer experience,” Mr Manson says.
Standard Chartered has forecast that Mox, which offers retail banking services, including deposit savings, credit cards and wealth products, will break even by the end of 2023, or the start of 2024.
Trust Bank, meanwhile, was established with S$455m ($338m) from its shareholders of Standard Chartered, supermarket FairPrice Group and NTUC Enterprise, the holding entity of a group of social enterprises. Through these links, the bank provides discounts within the stores through its debit and credit cards. Customers can also access savings accounts and accident insurance. Trust Bank has signed more than 450,000 customers since its launch in September 2022.
Singapore-based bank DBS, meanwhile, has worked across multiple sectors of innovation to capture the next trends in banking, which go beyond payments and deposit accounts. The bank launched the second cycle of its Sustaintech Xcelerator in 2022, with a focus on reducing carbon emissions through reforestation, carbon capture, and utilising data on carbon accounting and environmental, social and governance measures. Successful applicants will be given S$250,000 to scale their offerings and access to mentors in climate tech.
there will be increased need for custody and payment solutions, many of which will involve trusted financial partners like DBS
Bidyut Dumra, group head of innovation at DBS, says the bank is always on the lookout for emerging trends. “As financial services are being customised for different emerging tech economies, such as the metaverse and generative artificial intelligence, there will be increased need for custody and payment solutions, many of which will involve trusted financial partners like DBS.”
The bank has also been directly financing developments, launching a joint debt financing platform with the Singapore government-owned investment company Temasek called EvolutionX Debt Capital — a $500m growth stage debt financing platform, providing support to companies focused within China, India and south-east Asia. To date, the fund has invested in companies including Indian B2B e-commerce company Udaan and Indian digital healthcare platform API Holdings.
Next steps
The KPMG Pulse of Fintech report notes that trends to look out for in 2023 are payments companies and inventors in Asia shifting their focus from new customer acquisition to deepening customer engagement. The B2B space will also attract more attention as the space expands.
Moody’s Mr Vadlamani says: “At a high level, equity funding has tightened significantly over the past few months. We expect this to curb fintechs’ aggressive expansion plans as the focus shifts to profitability rather than customer or revenue growth.”
This shift in focus, combined with customer taste moving towards unified digital services and optimised user journeys, may see the superapps become the big winners in the space. Banks that can also latch on to the idea of offering integrated experiences could also keep hold of their market share, as Ms Chung notes that “leading banks are expected to become a network of platforms”.
While McKinsey has identified five cross-industry banking arenas from everyday banking to BaaS, with multiple sub-platforms, Ms Chung says few fintechs and banks will capture all of the opportunities, but will need to operate across multiple platforms. She adds: “As such, banks should be prepared to evolve through multiple stages on their way to becoming a platform network.” Banks may find that the ecosystem approach helps them to keep their foothold.
