Financial Industry Blog - Kapronasia

It has been a rollercoaster seven weeks for India’s preeminent fintech Paytm, which on January 31 was accused by the Reserve Bank of India (RBI) of “persistent noncompliance.” To be precise, it was Paytm Payments Bank that the RBI named, and it is the payments unit of the company that ceased to exist as of March 15. The good news for Paytm is that the RBI’s crackdown on its payment bank is not a lethal blow – and was never intended as such.

With funding for fintech startups having fallen precipitously from the days of ultra-low interest rates and a focus on growth at all costs, a reality is setting in: Disrupting the giants of incumbent financial services is no easy task. In many cases, it has proven elusive.

The March 7 launch of Hong Kong’s wholesale CBDC project was memorable. Firstly, the enthusiasm of the city’s financial regulators for this project is strong. While painting in broad brushstrokes, they outlined some lofty objectives for the digital HKD. The project aims to develop an interoperable platform that will improve efficiency, transparency and financial inclusion in the monetary and financial systems. “We’re calling it Project Ensemble” internally, to conjure a group of items working together, Hong Kong Monetary Authority (HKMA) deputy chief executive Howard Lee said at a press conference. “We hope it will play beautifully, like music.

India’s United Payments Interface (UPI) payments rail is the most successful initiative of its kind. Domestically, UPI has achieved a dominance that no other payments rail is likely to surpass. According to a report by PwC, it is projected that daily UPI transactions will reach 1 billion by FY 2026-27, representing approximately 90% of India's non-cash transactions. 2024 started with UPI transactions processed in January reaching a record high of INR 18.41 trillion. Given UPI's success, India has sought to expand its footprint internationally and in the past few years it has become available in a number of countries from the United Arab Emirates and Bhutan to the UK and France. Yet questions remain about whether UPI can serve as a foundational platform for digital payments outside of India.

Throughout Asia, most countries have introduced digital banks in some form, either to increase market competition, boost financial inclusion or both. Thailand is an exception. It has approached digital banking with a marked lack of urgency, with the Bank of Thailand (BoT) mulling the idea for several years before in Jan. 2023 stating that it would allow digital banks by 2025. In a March 5 announcement, the Kingdom’s Finance Ministry said that Thailand will accept applications for virtual banks within the next six months with the goal of supporting people with no or limited access to financial services.

Cybersecurity has always been a crucial aspect of operations for financial institutions and technology providers alike. However, the intensifying digitization of financial services, combined with increasing computational power and the ongoing shift of financial activities online, is amplifying cybersecurity’s importance. With the annual cost of cybercrime soaring worldwide, financial institutions and market participants across Asia Pacific must reevaluate and reinforce their cybersecurity.

It’s been a long road to reach this point but Sea has finally done it: The Singapore-based company recorded its first full year of profitability in 2023. Net income was US$163 million, while revenue reached US$13 billion, up 5% from 2022. However, Sea owed its profitability more to its performance in the first half of 2023 than the second as it lost money in both the third and fourth quarters. Questions remain about the company’s long-term outlook given the intensity of competition it faces in both e-commerce and digital financial services.

Singapore has been battling a surge in financial crime since the coronavirus pandemic, with 2023 being notable as the city-state dealt with its largest ever money laundering case. The investigation is ongoing and thus far authorities have seized more than US$2.2 billion. However, more mundane types of financial crime continue to be a challenge for Singapore, notably online scams. In 2023, scams reported in Singapore rose roughly 47% to 46,563, the highest amount since the police began tracking this type of crime in 2016.

It increasingly appears that India’s fintech unicorn Paytm has a way forward from the regulatory pressure it is facing, but the company will have to part ways with its payments bank and restructure accordingly. To that end, India's Financial Intelligence Unit (FIU) on March 1 imposed a penalty of 54.9 million rupees (US$662,565) on Paytm Payments Bank for violations in reporting illegal money routed through its accounts. Given that Paytm overall has a market capitalization of almost US$3.3 billion, the fine itself is manageable, but the loss of its payments bank will require that the company rejig its operations to remain competitive.

Since its return to China in 1997, Hong Kong has become the country’s indispensable offshore financial center, with considerable international links. It has engaged in financial innovation, such as the cultivation of the world’s premier offshore renminbi trading hub. However, Hong Kong also faces much more competition from Singapore than it did in the late 1990s, and other Asian cities like Tokyo.

Undertaking cross-border payments involving central bank digital currencies (CBDCs) is a complicated endeavor, and despite some media hype in the summer of 2023, the mBridge project of the Bank of International Settlements (BIS) and the central banks of mainland China, Hong Kong, Thailand and the United Arab Emirates (UAE) did not launch late last year. Many questions remain about the ultimate utility of using CBDCs in cross-border payments as well as any attempt to directly challenge the US dollar in global financial flows. 

Both Razorpay and Paytm are Indian fintech unicorns that have at different times struggled with  mercurial regulators, but that’s about where the similarities end. Razorpay has focused only on the B2B segment, while Paytm has tried to gain a foothold in both retail and non-retail payments. While both companies have relied heavily on venture capital investment, Razorpay has very little, if any exposure, to China in this regard, while Ant Group’s stake in Paytm is coming under increasing scrutiny. With Paytm’s payments bank in mortal danger and Razorpay preparing to move its domicile from the U.S. to India while planning an IPO, the two fintech unicorns are both at inflection points. However, just one of them is ascendant.

Given that ride hailing and food delivery tend to burn cash, Grab’s profitable fourth quarter augurs well for the Singapore-based company, especially considering brisk growth in its fintech services. However, we should keep in mind that it was a modest profit of US$11 million, which seems to have come about in part due to a "reversal of an accounting accrual," according to a statement by the company. Revenue in the October-December period, meanwhile, reached US$653 million, ahead of a consensus estimate of US$629 million.

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.

The Reserve Bank of India’s (RBI) harsh crackdown on Paytm has shaken up the subcontinent’s fintech sector. If Paytm were to lose its payments bank due to the RBI’s directives, not only would the future of India’s largest fintech look more uncertain, there also could be unpredictable knock-on effects that reverberated throughout the industry. While the RBI’s move initially appeared to be abrupt, recent media reports suggest that the regulator had issued multiple warnings to the company over dealings between its payments bank and its payments app over the past two years that were not heeded. 

2023 was a challenging year for the fintech sector, with funding dropping precipitously in most parts of the world. However, the United Arab Emirates (UAE) managed to defy this negative trend. While overall investment in fintech firms decreased 48% year-on-year to US$51.2 billion in 2023, the UAE’s funding jumped 92% to US$1.3 billion across 54 deals, according to UK fintech industry body Innovate Finance.

In our 2024 Top 10 Fintech Trends report, we noted how the once red-hot Southeast Asian fintech sector cooled precipitously in 2023. In the ASEAN countries, fintech funding hit a five-year low in 2023 with firms in the region raising just US$2 billion, a 65% plunge from US$5.9 billion in 2022. Notably, seed-stage funding saw an even more pronounced decline, dropping by 84% to US$9.5 million. As it turns out, what occurred in Southeast Asia was symptomatic of a broader regional decline in fintech funding.

Of the five digital banks in Singapore, just three are active in the retail market, and with good reason. The city-state’s population has an exceedingly low number of financially excluded people, with Allianz Global Investment estimating that 98% of Singaporeans aged 25 and up have a bank account. That is not to say there are not opportunities for digital banks, but it depends on how one defines “underbanked.” 

Long a cornerstone of the business of Indian fintech giant Paytm, the company’s payments bank may have entered its twilight. While the Reserve Bank of India (RBI) has previously barred the payments bank from onboarding new customers, this new directive issued on January 31 is more comprehensive and foreboding. It appears the payments bank will no longer be operational after February 29, with just a few exceptions. India's central bank said it took the action due to "persistent non-compliances and continued material supervisory concerns in the bank” –  which it did not specify.

Singapore-based payments firm FOMO Pay has been expanding internationally on several continents. The company, which is a partner of Ripple, recently received a Money Service Operator license for Hong Kong and last week announced its expansion into Africa. It also recently secured a partnership with Mastercard and Z Bank.

We have long held the view that India sees little upside in cryptocurrency, whether as an asset class or for payments – the latter for which it is developing a central bank digital currency (CBDC). Indeed, the Indian government has made a conscious decision to promote the digital rupee while simultaneously gradually reducing the space in which the cryptocurrency market can operate. Recent regulatory actions have tightened the screws on crypto in India and are likely to drive it further underground and offshore.

As recently as October 2023, Indonesia’s peer-to-peer (P2P) lending company Investree was riding high. It was then that the company, which focuses on the B2B segment, announced it had raised $231 million in a Series D funding round led by Qatar’s JTA International Holding which also included participation from Japan’s SBI Holdings. The Series D round suggested high investor confidence in Investree, which had previously raised $23.5 million in a March 2020 Series C round led by MUFG Innovation Partners and Bank Rakyat Indonesia Ventures. Yet the events of recent weeks suggest all is not well at Investree – and that the viability of the company’s business model is shaky.

Despite the Philippines’ large unbanked population and geography that favors branchless banking, its digital lenders have yet to significantly disrupt the market. In fact, as it stands now, their market share appears to be a drop in the bucket.

India’s most prominent fintech unicorn has steadily improved its financials in recent years in a push to reach profitability sooner rather than later. In the October to December period, Paytm posted an operating profit – which the company defines as core profit before cost of employee stock options – for the fifth consecutive quarter. The figure was 2.19 billion rupees, a significant improvement over 310 million rupees during the same period a year earlier. Consolidated revenue, meanwhile, increased 38% to 28.5 billion rupees, with its payments business contributing 61% to the total. Despite these solid numbers, the company could face some headwinds in the months ahead.

Although China cracked down hard on cryptocurrency beginning in late 2017, it did not succeed in eradicating demand for digital assets. And unsurprisingly, given the size of the country, it remains unofficially a big crypto market. Data compiled by research firm Chainalysis show that the Chinese crypto market recorded an estimated US$86.4 billion in raw transaction volume between July 2022 and June 2023. Further, the proportion of large retail transactions of US$10,000-US$1 million is nearly twice the global average of 3.6%. While crypto bros would have us believe that a full-throated revival of crypto in the world’s second largest economy is just around the corner, the reality is more nuanced.

South Korea’s K Bank has been thinking about going public for a while now. Its business has grown briskly since it restarted normal operations in mid-2021. Market conditions, however, have been suboptimal and the digital lender undoubtedly has observed how its rival Kakao Bank has yet to live up to lofty investor expectations. Though Kakao’s stock has recovered somewhat over the past year, rising about 4.5%, it is still down almost 58% from its market debut in November 2021. K Bank wants to avoid such a scenario.

We recently wrote about how Google Pay has defied the odds in India, a crucial fintech market where both American tech and credit card giants have struggled to carve out a niche. The Google Pay app continues to hold a roughly 35% market share of the paramount homegrown payments rail United Payments Interface (UPI) in India, while WhatsApp Pay and Amazon Pay each have less than 1% and PayPal is absent altogether.

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