The chill in fintech funding that saw investment in the sector fall 75% in 2023 dovetails with growing investor skepticism of unsustainable business models. In private markets, that is reflected in the difficulty of raising big-ticket funding, while for listed companies it is painfully obvious from battered share prices, regulatory travails and a continuing struggle to shift away from a growth-first ethos.

Platform companies – or as they often refer to themselves, “super apps” – in Southeast Asia, India and Korea are all to some degree facing one or more of these challenges, and it is unclear how well prepared they are to make changes to their business models to ensure future growth is sustainable.

Don’t say we didn’t warn you

Some of the most prominent platform companies in Asia are facing intensifying regulatory scrutiny due at least in part to their own missteps. No matter what the outcome, there will be implications for their fintech businesses given the paramountcy of customer trust in financial services.

The latest erstwhile high flyer to fall afoul of regulators is India’s Paytm, whose payments bank has been ordered to cease providing most services by Feb. 29 and which could lose its payments license. The Reserve Bank of India (RBI) and other government agencies suspect the payments bank of multiple violations, notably inadequate money-laundering controls. While Paytm has denied any wrongdoing and has publicly conveyed a sense of being caught off guard, media reports suggest that the RBI had warned the company over problematic dealings between its payments bank and payments app over the past two years that were not heeded. It is likely that in its long-running rush for growth at all costs, which included expansion into everything from gold investment to stock trading, Paytm may have overlooked important aspects of compliance.

Meanwhile, China’s Ant Group is just starting to emerge from a regulatory crackdown that lasted almost three years and sharply decreased its valuation and margins on many of its services. If it does eventually go public, Ant will not come close to the $34.5 billion it was expected to raise in November 2020 – which would have been the largest IPO of all time. Further, Ant founder Jack Ma – the architect of some of its greatest successes as well as its falling out with regulators given his unwillingness to read the writing on the wall – has been forced to relinquish control over the company’s operations. It is unclear how successful Ant will be when it is regulated more like a bank and does not have Ma at the helm.

While its misstep has not yet led to consequences as significant as those faced by Paytm or Ant, Korea’s Kakao has also recently had regulatory issues. In November 2023, prosecutors raided Kakao's office building in Pangyo, Gyeonggi, alleging that the tech juggernaut had engaged in stock manipulation during its takeover of K-pop agency SM Entertainment. Prosecutors say that Kakao violated Korea’s Capital Markets Act. Because of that alleged offense, chief investment officer Bae Jae-hyun was indicted. Prosecutors reported that Bae and two other executives manipulated the stock price 409 times on Feb. 16, 17, 27 and 28. They further alleged that Kakao did not report the stock purchases to the Financial Supervisory Service.

Investors know best

The reaction of investors in public markets to the travails of platform companies in Asia is instructional for evaluating real-world implications of their missteps. When these companies were still protected by the mysterious working of private markets, it was hard to measure the impact of their regulatory problems or questionable business models. No longer.

Across the board – and despite their almost universally strong fintech businesses – these companies are not performing well in the stock market. The most severe at the moment is Paytm. Currently trading at about 325 Indian rupees, it has fallen 23% in the past five days and 56% in the past month, wiping out billions of dollars in market capitalization. The freefall is likely to continue unless Indian regulators give the company a reprieve.

Meanwhile, Kakao Pay’s share price has fallen about 14% in the past month to 48,800 won, while Kakao Bank’s has decreased by about 2% to 29,800 won. While Kakao Bank posted a net profit in 2023, Kakao Pay lost money.

Some platform companies that have not had regulatory trouble, but whose business models remain unproven, are also underperforming in the stock market as investors remain unconvinced about their prospects. These companies include Singapore’s Sea Group and Grab as well as Indonesia’s GoTo. Sea’s stock has fallen precipitously from an all-time high of $366.99 on October 19, 2021 to less than $43. Grab’s share price has failed to rise above the low single digits, while GoTo’s has fallen 30% in the past year and 9% in the past six months.

Back to basics

With the era of cheap, easy money – which encouraged startups with questionable business models to burn cash to grow quickly – over, we suspect that some of the firms will have to make adjustments to their core business models to remain competitive with both incumbent banks and certain pure-play fintechs that are not weighed down with the baggage of things like a ride-hailing or food-delivery business, or deep-seated regulatory travails.

Something we often hear from defenders of these companies is that it takes Big Tech a while to become profitable. They point to Amazon and Facebook, which needed eight and five years, respectively, to achieve profitability. Google, meanwhile, became profitable less than three years after its founding.

We find that argument of dubious accuracy. Companies like Paytm, Grab and GoTo are more than a decade old, while Sea is nine years old, and they are not first movers in their respective industries in the same way the U.S. companies were. In fact, the Southeast Asian companies didn’t even enter financial services until they realized they needed a better story to tell investors.

Ant Group, on the other hand, was a first mover and despite its restructuring and reduced margins, will be a major force in China’s fintech sector – and maybe in some overseas markets eventually – for years to come.

The same is true for Ant-backed Kakao to some extent, and the company has an advantage over Southeast Asian super apps in that it is not stretched too thin and its businesses are better separated.

Looking ahead, the forthcoming earnings reports of Grab, GoTo and Sea should shed some additional light on where they need to make adjustments to their respective business models. We expect that all three companies will report strong growth in their fintech units in the fourth quarter of 2023, but we are less certain about their other businesses.

Japanese e-commerce giant Rakuten has struggled in recent years amid intensifying competition in its domestic market and high costs linked to its decision to move into mobile communications. However, digital financial services is a bright spot for Japan’s largest platform company and Rakuten Bank’s April 2023 IPO – which raised US$624 million – was Japan’s largest market debut since 2018 when SoftBank’s telecoms unit raised US$23 billion. The stock has gained more than 36% since then and is currently trading at 2,627 yen (US$17.49).

With the crypto bear market receding and the possible return to a bull market, it is interesting to note that the amount stolen from crypto exchanges fell in 2023. However, the overall number of digital asset hacks still grew. Maybe it was the belief that the bear market would endure that partially deterred the cybercriminals? Probably not. As it turns out, the main reason that less crypto was stolen last year was that digital asset platforms are becoming more sophisticated in their security and responses to attacks, and are working more successfully with law enforcement than in the past.

As a core fintech service, payments are often tougher to monetize than higher-margin segments like lending, and this helps to explain why Kakao’s digital banking unit continues to outperform its payments arm. While Kakao Bank had yet another record year in 2023, the South Korea tech juggernaut’s payments swung to a loss. Kakao Pay has been trying to follow the Ant Group (a key Kakao Pay investor) formula which worked so well for the Chinese company – operating payments and digibanking as two distinct businesses. But we wonder if this model will work for the Korean company in the long run.