Asia's super apps will aim to cash in on fintech in 2021

Written by Kapronasia || February 18 2021

Since the advent of the internet, technology startups have disrupted one industry after another. It was only a matter of time before they set their sights on financial services.

As it turns out, banking is harder to disrupt than retail, transportation, entertainment or almost anything else. The reason is simple: Trust is paramount in banking and takes time to build, while most digital banks have yet to develop compelling value propositions.

A few of Asia's platform companies have defied this conventional wisdom. The most notable is WeChat, the Tencent-owned app that bundles messaging, digibanking, e-commerce and entertainment under the same umbrella. WeChat was not the first platform company to thrive as a fintech - Alipay was - but it was the first to harness messaging's network effect for that purpose.

Financial services and payment apps account for about 25% of Tencent's overall revenue, which Refinitiv expects will hit US$20.36 billion in the fourth quarter of 2020. Gaming, however, remains Tencent's largest breadwinner, contributing 1/3 of revenue in the quarter ended September 2020.

Tencent's ecosystem is among the stickiest of any platform company, allowing WeChat to become a super app in China. Everything users need is right there, except perhaps services from Alibaba. And for those, users have Alipay. Both companies have earned customer trust through reliability and consistency. They also have benefited from the relative digital weakness of China's incumbent banks and lack of foreign competition.

Korea's super app

Tencent and Alipay's counterparts in Asia are trying to emulate their achievements. Thus far, the only one to succeed is Korea's Kakao, which just happens to have received investment from both Chinese tech giants. Kakao has followed a similar playbook to WeChat, focusing on its home market, building a critical mass of messaging users, then offering them an e-wallet, and finally a full digital bank. The network effect has been integral to Kakao's success: Its messenger Kakao Talk has 46 million monthly active users in Korea, equivalent to 88% of the country's population.

Kakao has a robust ecosystem that is a super app in everything but name. Besides Kakao Talk, Kakao Pay and Kakao Bank, it boasts Kakao Games, monetized content provider Kakao Page and transportation services provider Kakao Mobility. Ant is invested in Kakao Pay while Tencent has stakes in Kakao Games and Kakao Bank.

Kakao Bank reached profitability just 18 months after its launch and has not swung to a loss since. In the third quarter of 2020, the South Korean neobank posted a profit of 40.6 billion won (US$36 million), up nearly 700% over the same period in 2019. Kakao's business is thriving on the back of robust demand for its loans, stock trading services and credit cards.

Kakao Games is doing nearly as well. Its third quarter profit grew 177% to 21.2 billion won while its IPO last September on Korea's Kosdaq raised 384 billion won.

To be sure, Kakao will face intensifying competition. Viva Republica's Toss is a formidable player with a growing suite of digibanking services. In February, Toss was awarded a preliminary license to operate an online bank, which should go live by mid-year. K bank, long sidelined by fundraising travails, is back in force. In January, K bank added a record 750 billion won in deposits to bring the total on its books to 4.5 trillion won. During that same period, Kakao Bank's deposits grew by a more modest 112 billion won.

Yet Kakao Bank's parent company offers an unparalleled base of potential customers. Overall, the Kakao group posted a net profit of 167.1 billion won in 2020, compared to a loss of 341.9 billion won in 2019. As long as Kakao Bank stays the course, its IPO prospects will look promising indeed. Once the company goes public, it will be able to even better fund expansion efforts.

Southeast Asia's loss-making super apps

Southeast Asia has two self-proclaimed super apps of its own: Grab and Gojek, the region's two largest platform companies and most valuable tech startups. Both firms began as Uber clones, complete with the baggage that cash-burning business model brings, before pivoting to food delivery and then digital banking to put out the fire.

Thus far, the results are mixed. Grab has a burgeoning fintech arm, a Singapore digital bank license and a license to spend from its backers. In fact, investors just handed Grab another US$300 million in Grab Financial Group's Series A round. Gojek has a growing fintech unit of its own and a newly acquired 22% stake in Indonesia's Bank Jago for which it paid US$159 million. The tie-up with Bank Jago will allow Gojek to effectively act as a bank in Indonesia without having to apply for a banking license.

However, neither Grab nor Gojek is profitable, despite being in operation for nine and eleven years respectively. Both Moody's and S&P Global reckon that Grab will continue to lose money into 2023. While Kakao Bank is moving ahead with an IPO this year, Grab and Gojek are still trying to find the exit ramp.

And what a long, winding road it has been since 2019, when two watershed events put Grab and Gojek on the defensive. The first was Uber's disappointing IPO, which showed public markets did not share VCs' unflappable confidence in ride hailing and food delivery. The second was WeWork's implosion, which forced the tech world to rethink the mantra that unicorns could thrive on size alone. As a major investor in both WeWork and Grab, SoftBank did not want to see another of its prodigies flop.

Since then both Grab and Gojek have been under increasing pressure from investors to find a viable exit strategy. That's where the "super app" positioning comes in. The Southeast Asian unicorns never directly compare themselves to WeChat and Alipay, but they strive to replicate the Chinese tech giants' success. It recalls when Xiaomi designed iPhone lookalikes and its founder Lei Jun dressed in similar clothing to Steve Jobs.

The super app concept makes sense for China and Korea. It is a harder sell in diverse, fragmented Southeast Asia. Neither Grab nor Gojek has a digital service that can keep users in those disparate markets glued to their respective apps - which is how WeChat, Alipay and Kakao gained user loyalty. There is no messaging, e-commerce or entertainment. Facebook has a small stake in Gojek but is more interested in rolling out WhatsApp Pay in Indonesia - one of WhatsApp's largest markets - than integrating its services with Gojek.

The Chinese super apps and Kakao have become so ubiquitous that for most Chinese and Koreans, it is hard to imagine life without them. There are few if any alternatives.

Not so for Grab and Gojek, which operate ultracompetitive ride-hailing and food-delivery businesses that lose money because of thin margins and fleeting user loyalty. Subsidies remain crucial to keeping the user base content. Grab may soon have more transportation competition in Singapore if the city-state's taxi giant ComfortDelGro decides to turn its ride-hailing trial run into a full-fledged business.

Meanwhile, Singapore's banking sector will be a tough nut for Grab to crack. The city-state is among the world's best-banked countries. Unlike in China or Korea, Singapore's incumbent banks are well prepared for digital challengers, of which there are three others besides Grab. The most formidable of them is internet services company Sea Group.

A Sea change in digibanking

Sea has taken a different route than Grab and Gojek. The ride-hailing giants have tried to pile on a bevy of digital services to build a winning super-app mash-up. For instance, Grab recently added robo-investing and telemedicine, while Gojek introduced gold trading. Before covid-19 hit, Grab was even more ambitious, but the pandemic-induced downturn forced a rethink. Grab vowed to "become leaner as an organization in order to tackle the challenges of the post-pandemic economy," Grab co-founder Anthony Tan told Business Insider last June.

In contrast, Sea has been lean from its inception, allowing it to build the strongest digital services ecosystem of any Southeast Asia-based platform company.

A small array of complementary services has been integral to its success: gaming (Garena), e-commerce (Shopee) and fintech (Sea Money). Sea has never declared itself to be a super app.

Sea's approach bears the unmistakable imprimatur of both Tencent - which holds a 40% stake in the company - and Alibaba. But the Singaporean firm is the first platform company to boast the dual revenue drivers of gaming and e-commerce.

It could not have picked better businesses to feed customers into its digital bank. Gaming and e-commerce are both growing expeditiously in Southeast Asia. Sea can draw retail banking customers from its youthful gamers - About 65 million of its 572 million+ active gaming users already spend money on games - as well as e-commerce shoppers.

At the same time, Sea can tap Shopee merchants to find SME customers. Shopee recorded more than 741 million orders in the third quarter of 2020, up almost 131% on an annual basis. Indonesia accounted for 310 million of the orders. According to AppAnnie, Shopee is Indonesia' top e-commerce platform by average monthly active users, downloads, and total time spent in app on Android.

Sea will face the same challenges as Grab in Singapore, but will benefit from its superior ecosystem. Sea's customer data about e-commerce shopping habits, for instance, could help it tailor retail-banking products for Singaporeans. In contrast, Grab's data about Singaporeans' take-out ordering and transportation habits offer less relevant insights for retail banking.

To be sure, Sea uses subsidies to encourage user adoption of Shopee and Sea Money, but it does not have a costly ride-hailing business to worry about. And being listed on the NYSE, Sea can raise cash cheaply to fund expansion. In fact, in December alone, it raised US$3 billion. Its cash burn is thus less problematic than Grab's or Gojek's.

Sea's stock has been on a tear for over a year now. In 2020 as the pandemic sent demand surging for Sea's gaming, e-commerce and fintech services, its stock value grew 385%. Sea is currently trading at around US$276, compared to US$47 a year ago.

Flush with cash from its soaring shares, Sea is turning up the heat in Indonesia.

In January, Sea acquired Bank BKE for an undisclosed sum. Like Gojek's acquisition of Bank Jago, this tie-up will allow Sea to offer deposit-taking and lending services to Indonesian customers without applying for a banking license.

Exit strategies

2021 will be a pivotal year for Asia's platform companies. Sea looks set for further strong growth, although it remains in the red. In the third quarter of 2020, the company's losses doubled to US$425.3 million, while revenue jumped 99% to US$1.21 billion. Fourth quarter earnings that should be announced in early March will provide more insight on Sea's prospects for the year.

For its part, Kakao Bank is likely to list in the second half of 2021, which would make it the first Korean neobank and second of the company's subsidiaries to go public after Kakao Games. The South Korean neobank, which is currently valued at approximately 10 trillion won (US$9.15 billion), has hired Credit Suisse, KB Investment & Securities and Citigroup as advisors for the deal. Specifics of the IPO, such as which of Korea's exchanges it will be listed on, and the deal size, have yet to be decided.

Grab and Gojek's exits will be less straightforward, but pressure from Sea will force both companies to stop kicking the can down the road. Gojek's strategy has gradually become apparent over the past month or so. With a rumored Grab-Gojek merger seemingly dead in the water, Gojek is instead looking to join forces with its fellow Indonesian tech juggernaut Tokopedia. The deal will not provoke regulatory ire thanks to both companies' local roots and complimentary services, and could boost the stickiness of Gojek's ecosystem in a way miscellaneous fintech services cannot.

The merged entity would reportedly have a holding company that would list on Indonesia's stock exchange in the second half of 2021. The two firms are also considering a second listing on the Nasdaq.

Ultimately, this merger should go through because Indonesia is the paramount market for both Gojek and Tokopedia. Joining forces will at a minimum strengthen both companies' hands, as they take on Sea in digital banking and e-commerce. Tokopedia, once Indonesia's top e-commerce platform, now trails Shopee in terms of website visits, app downloads and social media engagement, according to iPrice, an online shopping aggregator.

Gojek would be wise to double down on Indonesia while reducing expenditures elsewhere. It operates in Vietnam and Thailand and previously sought to enter the Philippines. Following a tie-up with Tokopedia, Gojek could become Indonesia's super app of choice, but not if its resources are stretched thin elsewhere.

As for Grab, the company may need to borrow a page out of Uber's book and start winding down operations in non-core markets ahead of its IPO. For instance, according to VN Explorer, Grab's losses in Vietnam reached as high as VND 1.67 trillion in 2019, up 89% year-on-year and the highest since it entered the market in 2014. Grab lost 1.7 billion baht in Thailand in 2019, according to The Bangkok Post.

It is hard to imagine any company having the funding and wherewithal to serve as a super app in all of Southeast Asia's major economies, even a firm as well capitalized and persistent as Grab. The Singaporean company should consider how public markets would react to a strategy of throwing more investor money at every problem while emphasizing EBITDA profitability over net income.

In the meantime, Grab has additional impetus to move along its IPO process. If Grab does not list by March 2023, it could be on the hook for a US$2 billion payout to Uber. That was part of the deal the two firms made when Uber sold its Southeast Asia business to Grab in 2018.

Looking ahead, as they seek to challenge incumbent banks, Asia's super apps should focus on earning the trust of both customers and regulators. The more data the super apps hold, the greater the risk of a fallout if there is a data breach. The greater a single app's dominance, the higher potential there is for anti-trust allegations.

East Asia has not yet experienced any consumer-led backlashes against Big Tech, but regulators in China unexpectedly launched a fintech crackdown in late 2020 that will significantly reduce Ant Group's clout. WeChat has been less affected, but these are early days for the crackdown.

Super apps should keep in mind that they are never too big to fail in banking, an industry that from both a customer and regulatory standpoint remains circumspect about being taken over by Big Tech.