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.
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.
In recent years, the fintech landscape in Asia has developed rapidly, with a diverse array of startups and established companies transforming how financial services are delivered and consumed. As we typically do, Kapronasia will be publishing our Asia fintech top-10 trends report for 2024 in the next few weeks, but in the meantime, it’s worthwhile previewing some of the key trends, challenges, and opportunities that will shape the Asian fintech industry in 2024.
Despite headwinds, there are reasons for optimism about fintech funding in Southeast Asia, a new report by UOB, PwC Singapore and the Singapore FinTech Association (SFA) finds. While funding has dropped precipitously from its peak pandemic heyday, there are still some bright spots, including growing investor interest in green fintechs, the enduring attractiveness of the Singaporean and Indonesian markets, and an abundance of strong early-stage startups.
Investors seem happy with Grab’s Q2 results. Since the self-proclaimed Southeast Asian super app said last week that it expects to break even in the third quarter rather than the fourth quarter, while its quarterly losses narrowed and revenue rose 77% to US$567 million, its shares have risen 17%. But questions remain about the long-term viability of Grab’s business model.
What goes up must come down says Newton’s law of gravity. It doesn’t technically apply to fintech funding, but can, at least in figurative sense, be a useful paradigm for exploring why the funding spigots in the Asia-Pacific region are no longer gushing forth large capital injections. According to a recent KPMG report, fintech funding in the region fell to just US$5.1 billion in the first half of the year, a dramatic decrease from the record-breaking US$45 billion raised during the same period a year earlier.
When it comes to fintech in South Asia, India has long dominated, whether in terms of overall investment, unicorns, or the broader ecosystem. While India will no doubt remain the biggest player in the region for the foreseeable future, its neighbors have an increasing number of market opportunities.
Peer-to-peer (P2P) lending has become a big industry in Indonesia in recent years, with an estimated 250 trillion rupiah (US$17 billion) loans disbursed in 2022, up from about 155 trillion rupiah (US$10.2 billion) in 2021. The first six months of 2023 saw a 28% growth in the P2P lending market, according to market research firm YouGov.
As technology has improved over time, so have financial services. Embedded finance – financial services provided via non-financial platforms or apps – is another iteration of this journey, and it is playing out in real time throughout Asia’s financial ecosystem.
Sea Group is no longer losing hundreds of millions of dollars. Instead, it’s making tens of millions. In the quarter ended March 2023, Sea posted a profit of US$88.1 million. With Sea now reaching the promised land of profitability, one would think that investors would react exuberantly. Not so. Instead, Sea’s stock slid almost 18% on May 16, the day it announced Q1 earnings, to close at US$72.45.
Vietnam is a unique fintech market. It may be the most fragmented of all the major ones in Southeast Asia, where dominant players have yet to emerge in most market segments. Because of the extreme fragmentation, Vietnam has produced fewer unicorns than Indonesia or the Philippines, and that makes the ones that do exist all the more notable. The one fintech firm in Vietnam that can realistically make a play for super app status is MoMo, which hit the US$1 billion valuation in December 2021 and has continued its steady ascent since.
The rising ubiquity of smartphones together with broader digital transformation in the business world are catalyzing the adoption of artificial intelligence (AI) in the financial services sector. As AI matures and becomes more widely integrated into business operations, this trend is set to accelerate.
During the pandemic, the idea of a travel-focused super app built on top of an airline and focused on the Asia-Pacific region seemed iffy. After all, international travel was grounded in Asia for longer than anywhere else in the world. But with the pandemic in the rearview mirror at last, Capital A CEO Tony Fernandes’ idea is starting to make more sense. All the groundwork AirAsia did to build its super app may come to fruition before long.