Many of the most prominent fintechs are known for sky-high valuations and red ink on their balance sheets. There's a disconnect between what private investors deem the companies are worth and their actual financial performance. The biggest challenger banks in Europe, such as N26, Revolut and Monzo, are unprofitable. The same goes for Paytm, a payments bank that is India's most valuable tech startup. Ditto for Grab and Go-Jek, the Southeast Asian Uber clones which are trying to reinvent themselves as digital banks.
In a sign of increasing tensions between the U.S. and China in the financial sector, the Nasdaq is tightening scrutiny of small Chinese companies' IPOs. These firms usually raise most of their capital from Chinese investors rather than American ones. The shares of these companies tend to trade thinly once they've gone public, limiting their appeal to large institutional investors - on whose interests the Nasdaq focuses.
In Asia's red-hot fintech scene, Taiwan flies largely under the radar. That's largely because no unicorns have yet emerged among its fintech startups, or any other startups for that matter. Taiwan did introduce a fintech regulatory sandbox in late 2017 and more recently established regulations for security token offerings (STOs), but the policies have yet to activate the fintech market. Fintech investment in Taiwan remains limited, especially compared to regional hubs like Singapore and Hong Kong.
Ardent fintech investors swear that in fact, there is no fintech bubble. Their reasoning is simple: Traditional financial services is ripe for disruption, perhaps a bit like physical retail in the fledgling days of e-commerce. Demand for alternative digital-first banking services is real. In some emerging markets, banking levels are so low that fintechs have a chance swoop in and gain a foothold from the ground up.
If there ever was a market that could benefit from open banking, it would be Hong Kong. A small group of powerful incumbents has long dominated retail banking in the former British colony, leaving consumers frustrated with the lack of options. Data from Goldman Sachs show that HSBC, Standard Chartered, Bank of China and Hang Seng Bank account for 2/3 of retail banking loans in Hong Kong. Those four banks are even more dominant in the credit card and retail mortgage markets.
Among Asian banks, Singapore's DBS is among the most active in fintech. It has a partnership with Indonesian ride-hailing giant Go-Jek, a fintech accelerator in Hong Kong and a tech-driven Innovation Plan covering machine learning, cloud computing and API development. It has thus far created a platform of 155 APIs across roughly 20 categories. Given that DBS is well ahead of the curve when it comes to financial technology development, should it be concerned about Citibank's recent deals in its neighborhood?
Recent reports in the U.S. media have described the Trump administration mulling a plan that would involve the delisting of Chinese firms from U.S. stock exchanges. The Trump administration has denied the reports, while political heavyweights such as Senate Majority Leader Mitch McConnell have dismissed the idea outright. McConnell told CNBC that the Treasury Department made clear it does not favor delisting Chinese firms from U.S. stock exchanges.
The arrival of open banking in Australia comes at an opportune time. Virtual banks are fast setting up shop amidst widespread demand for more choices in consumer banking. Consumers, while not dissatisfied with existing banks, would like better digital-first options. For their part, regulators are keen to boost compliance across the industry. The findings of the Financial Services Royal Commission did not cast Australia's traditional banks in a flattering light. That's one reason Australia has not hesitated to issue full banking licenses to several fintechs.
How late is too late? That's the key question as PayPal prepares to enter China's digital payments market with the acquisition of the Chinese state-owned online payments provider GoPay. PayPal took the 70% stake in GoPay through one of its local subsidiaries, Yinbaobao. When the deal closes - expected in the fourth quarter - PayPal will become the first foreign online payments provider in China.
Japan's biggest brokerages are moving to tap opportunities in the forthcoming security tokens market. From April 2020, Japan will permit fundraising through security token offerings, which have already been launched in the U.S., Singapore and Taiwan.
UK-based Revolut is the one of the world's most valuable challenger banks with a valuation of US$1.7 billion. With seemingly unlimited coffers of venture capital to draw upon, the company is targeting a $10 billion valuation in the next few years. Its executives say that the company would need to be valued at US$20 billion or more before it would consider going public.
Revolut's backers are pouring money into the company because they believe it is pioneering banking of the future: digitally native, frictionless, having a minimal branch network (and thus a more competitive cost structure than traditional retail banks) and a stronger focus on niche customer segments underserved by incumbents. Currently, Revolut offers foreign exchange, stock and crypto brokerage services, plus peer-to-peer payments.
Demand for cross-border remittances is surging across Southeast Asia, home to a sizeable migrant worker population and many of the world's fastest growing economies. The amounts being remitted by the region's 21 million migrant workers are considerable - $68 billion annually, according to Siam Commercial Bank (SCB). Given their modest earnings, migrant workers need affordable banking services. They cannot easily absorb the high fees associated with some traditional remittance services.
Taiwan has only recently begun to kick its cash habit. For years, small merchants on the island would only accept bills and coins. Some still don't take plastic and mobile payments. Many do, but there's a catch: They tell the customer goods are pricier if paid for with a credit card. They aren't supposed to pass on the merchant fee to the customer - it's technically illegal - but local consumers aren't likely to file a complaint with the authorities.
If Chinese media reports are correct, Tencent's digital wallet will soon have a virtual credit card. The Chinese internet giant is reportedly developing a payment product called Fenfu for WeChat Pay, with an expected fourth quarter launch. Fenfu would allow WeChat Pay to compete directly in the virtual credit segment with its rivals' products.
In the early 2010s, back when Donald Trump still hosted The Apprentice and the title of "Tariff Man" belonged to Herbert Hoover, China was pursuing high-profile financial reform. Shanghai, tasked by the central government with becoming a global financial center by 2020, was abuzz with the sound of renminbi internationalization. The Lujiazui financial district regularly hosted forums where participants benchmarked the growing use of the yuan in trade settlement, the rise of offshore yuan trading hubs in Hong Kong and London and the renminbi's path to global reserve currency status.
Chinese payments giant UnionPay is on the road again - the Belt and Road, that is. Constrained by slowing economic growth at home, UnionPay is aligning itself with some of the key emerging markets involved in China's high-profile global infrastructure initiative. In recent months, UnionPay has boosted its presence in the United Arab Emirates, Kenya and Nepal with a focus on mobile banking, pre-paid payments and cross-border payments.
Estonia is perhaps the most connected nation on earth. Wired magazine describes the small Eastern European country as "the most advanced digital society in the world." Data compiled by the Estonian government show that 99% of Estonia's services are online, 98% of Estonians have a digital ID card and about 47% of Estonians vote online.
Americans are fond of their smartphones. They use them for voice communication, texting, internet browsing, photo sharing and of course streaming videos. Yet, unlike citizens across Asia, Americans rarely use their phones for banking purposes.
Data compiled by consultancy Bain & Co. show that mobile payment adoption rates in the U.S. last year were below 10%, compared to above 80% in China. The U.S.'s mobile payments usage seems especially low given the country's high level of smartphone penetration. About 81% of the U.S.'s 327 million people own a smartphone, according to Pew Research.
Financial reform in China has been stalled for years. Foreign banks have never managed to hold more than about 2.4% of the market - and that was back in 2007. KPMG estimates their share of domestic assets actually fell to just 1.32% by the end of 2017. The renminbi internationalization process gives new meaning to the term "incremental." The exchange rate remains controlled and the capital account closed, just as they were a decade ago when Beijing began promoting the yuan's use globally.
Yet, there are signs of change. In September, Beijing granted Deutsche Bank and BNP Paribas the right to underwrite onshore debt in China, a first for foreign banks in the world's second largest economy. Later in the month, China removed limits on two institutional investment policies that allow foreigners to invest in Chinese financial markets: the QFII scheme (dollar-denominated) and RQFII (yuan-denominated). Those moves follow Beijing's decision to allow foreign banks to take majority stakes in local securities joint ventures.
India has long been a non-allied country. Amidst rising Sino-American tech competition, India's policy has not changed. It leans towards neither Washington nor Beijing. As India's digital payments sector surges, Chinese and U.S. tech investors shut out from each other's markets are instead competing intensely on the subcontinent. Consolidation will occur as India's digital payments market matures, as it did in the e-commerce, ride-sharing and food-delivery segments, analysts say.
The contrast between WeChat's dominance in mainland China and low profile elsewhere is striking. Of all the markets where WeChat could be a success, Taiwan - with its many cultural similarities to the Chinese mainland - is perhaps the most obvious. Mainland Chinese costume dramas, known for their high production value, are a staple of Taiwanese television. Among smartphone brands, after Apple and Samsung, Oppo, Xiaomi and Huawei are among the most popular with Taiwanese consumers. In e-commerce, Taobao has carved out a strong niche for itself with young Taiwanese, especially women.
Fintech investors think big. Armed with heavy warchests, they seek out the noblest of disruptors - startups with a shot at redefining the rules of banking. Profitability is not the first order of business - or even the second one. As long as the idea is attractive and scaleable, losing money for a while is fine, perhaps even a given. It's a small price to pay if one of those neobanks ends up "democratizing banking."
To be sure, investors expect fintechs they back to eventually reach the black, but when is anyone's guess. It's a bit like trying to predict when the United States and China will reach a trade deal. With that in mind, we shouldn't be surprised that the founder of N26, Europe's most valuable challenger bank, recently said that profitability is not a core metric for his company. Yes, this is a privately-held (not state-owned) bank that seemingly shrugs at turning a profit. And it just so happens to have a valuation of $3.5 billion.
In China's peer-to-peer lending sector, there's no such thing as too big to fail. Chinese authorities have since last year been cracking down on widespread impropriety in the once ascendant segment. Even the preeminent platforms have not escaped unscathed, leaving many observers wondering if we have reached P2P's twilight in China.
Two years ago, Laos was removed from the Financial Action Task Force's (FATF) money-laundering grey list after the landlocked Southeast Asia country showed some improvement in its AML policies. Since then, however, progress has been limited. Laos's casinos, property market and money exchange shops remain at high risk for money laundering. No money laundering case has made it to court. The onus is on Laos to better control financial impropriety ahead of a 2020 evaluation of its AML policies. Failure to do so could result in a return to the grey list.
Top fintechs all want a piece of the massive Indonesian market, Southeast Asia's largest economy and most populous country with 260 million people. Yet stringent licensing requirements hamper their ability to operate independently. Even giants like Alipay and WeChat Pay are struggling to make their services available to local users. The easiest solution is to find a local Indonesian partner. That's the path WhatsApp is taking as it moves into the Indonesian market, Reuters reported. WhatsApp will reportedly serve as a platform in Indonesia in partnership with local digital wallets.
Singapore-based ride-hailing app Grab intends to become Southeast Asia's premier digital bank, with Vietnam serving as a key growth market. Flush with cash from a recent fundraising round that netted a record $4.5 billion - the most ever for a startup in the region - Grab plans to pour hundreds of billions of dollars into one of Asean's fastest growing economies.
Alibaba's expected Hong Kong listing was supposed to be a grand homecoming. After all, the company's $21.8 billion 2014 NYSE listing - at the time the largest global IPO ever - disappointed some folks in Chinese officialdom who hoped China's biggest e-commerce firm would go public closer to home. Since the HKSE revised its rules last year to allow dual listings, there has been much speculation about Alibaba listing in Hong Kong.
In August, international media reported that Alibaba would suspend plans to list its shares in Hong Kong. The stock offering, which was expected to raise US$10-15 million had been scheduled for late August, according to a recent New York Times report. The deal could well have been the largest of the year and the top follow-on share sale in seven years. Alibaba nixed plans to list its shares in Hong Kong because of ongoing protests in the city and associated instability, the report said.
Not even the failure to obtain a virtual-banking license can dampen investor interest in South Korea's fintech unicorn Viva Republica and its digital banking platform Toss. In mid-August, Viva Republica announced it had raised $64 million from a group of investors led by Hong Kong-based Aspex Management. The latest capital injection brings Viva Repubica's total valuation to US$2.2 billion and follows an $80 million funding round in December co-led by Korean investors, Kleiner Perkins and Ribbit Capital.
For Thailand, at first blush going cashless seems like a long shot. Cash accounts for 90% of overall transactions in the kingdom, despite 67% of Thailand's population using mobile payments in 2018. Thailand would need to maintain its rapid growth in digital payments over the last two years to make the transition from cash reliant to predominantly digital.
Myanmar is at risk of landing on the Financial Action Task Force's watchlist high-risk money-laundering destinations after a three-year reprieve, analysts say. In 2016, FATF removed Myanmar from the list, citing improvements in the country's efforts to combat financial crime. Since then, however, Myanamar has not taken adequate steps to implement safeguards against money laundering in both its banking system and non-financial institutions. If Myanmar appears on FATF's "grey list" again, investors could sour on the Southeast Asian nation's financial sector, which would harm fintech development as well as broader financial inclusion initiatives.
In July, Taiwan's Financial Supervisory Commission (FSC) granted three virtual-banking licenses, surprising some observers who expected the regulator would only issue two. All three teams that applied for the licenses - led respectively by Japanese super app Line, Taiwanese telecoms firm Chunghwa Telecom and Japanese e-commerce giant Rakuten - were well qualified, such that the FSC felt they all deserved to launch neobanks in Taiwan.
China's fintech giants are best known for dominating their home market. Outside of mainland China, they have limited market share. Merchants in countries popular with Chinese tourists increasingly accept Alipay or WeChat Pay, but the primary users are not locals but Chinese visitors who want to pay by smartphone as they do at home.
In Cambodia, however, Chinese fintechs have a chance to gain a strong foothold in the local payments market. To be sure, Cambodia's efforts to boost financial inclusion are a key reason for that. The Cambodian government sees digital banking as an efficient way to bring the kingdom's large unbanked population (estimated by the World Bank at 78% of Cambodians aged 15 and up) into the formal financial system. Further, commercial ties are burgeoning between Beijing and Phnom Penh. China is Cambodia's largest investor and source of tourists. That has opened up opportunities for Alipay and WeChat Pay to partner with local firms.
South Korea's financial regulators have taken a conservative approach to digital banking, issuing a limited number of licenses and outright rejecting a number of recent applicants. One of the only two firms to win a digital banking license thus far is Kakao Bank, a subsidiary of the Korean super app KakaoTalk. With its massive user base - which counts 94% of South Korea's population of 50 million as users - Kakao is poised to stake out a dominant position in the nascent South Korean digital banking market.
Despite the United Kingdom's Brexit travails, its digital banking sector remains red hot. Indeed, the UK is home to the most challenger bank unicorns of any country: OakNorth (valued at US$2.8 billion), Monzo (US$2.5 billion) and Revolut (US$1.7 billion). Further, if analysts' estimates are correct, Atom Bank (US$644 million) is closing in on the magic number of US$1 billion. Starling Bank, valued at $161 million, may be a ways off from unicorn status, but isn't doing too bad for itself all the same.
To be sure, these challenger banks all have strong potential, but they are not - at least for now - all equally profitable. And if profitability is a key metric by which to measure what these startups are actually worth, then we can argue that their valuation is inflated. In recent years, as fintech has steadily disrupted and even occasionally menaced traditional financial services, venture capital has been pouring into the segment. So goes the fintech bubble.