Asia Financial Industry Blog

Fintech Research

Brazil's Nubank is growing so fast it's hard to keep up. In June, Nubank hit the 25-million customer milestone, up from 15 million in October 2019. Most neobanks talk up the need to build scale and grow fast, but Nubank is one that walks the walk. The Sao Paolo-based company is the largest independent digital bank in the world. Granted, it did not happen overnight. Nubank has been around since 2013. But the Brazilian neobank, currently valued at US$10 billion, appears to have found the secret sauce.

German neobank unicorn N26 has a well earned reputation for audacity. In July 2019, its co-founder Maximilian Tayenthal famously (or infamously) told The Financial Times that "profitability is not one of our core metrics." If we had to sum up the fintech bubble's ethos in one line, that just might be it. In that same interview, Tayenthal highlighted N26's "deep-pocketed investors," which include Peter Thiel - the smart money, at least based on his bets on Facebook and PayPal. Despite the coronavirus pandemic, investors handed N26 another US$100 million in early May, while its valuation held steady at US$3.5 billion.

Neobank valuations have long seemed inflated given how few of the banks are profitable. Now the £2 billion valuation of loss-making UK challenger bank Monzo could be adjusted downward as its business slows amid the global economic downturn. Monzo is considered one of Europe's top challenger banks along with Revolut and N26. In mid-May, The Financial Times reported that Monzo is close to reaching a deal with investors that would value it at roughly £1.25 billion, a 40% decrease from the £2 billion valuation it achieved in June 2019. 

For Europe's cash-burning neobanks, the current economic downturn is a rude awakening. In March as Europe went into lockdown, the unicorn trio of Revolut, Monzo and N26 saw their growth rate drop by 18% to 36% in their home markets (The UK for the former two and Germany for N26), according to Sifted. These three digital banks - among Europe's most highly valued - have prioritized rapid growth over profitability. They have spent heavily to build scale quickly, assuming they will eventually move into the black on solid revenue-per-user figures. If growth suddenly stalls, their business models start to look less solid.

As it turns out, Facebook's much hyped Libra cryptocurrency project is more evolutionary than revolutionary. Libra 2.0, rolled out in mid-April, is modest in its ambitions. Gone is the concept of a global digital currency to potentially rival the dollar and evade regulatory oversight. Instead, Facebook wants to launch a series of digital coins backed by fiat currencies. The proposal includes the idea to build a "digital composite" of some of the coins for cross-border transactions and use in countries with no virtual currencies. Of equal importance, Libra will not be decentralized and "permissionless." That was never going to fly with central bankers or politicians, who don't want to deal with Bitcoin on a much larger scale.

To be sure, many crypto diehards are crestfallen. Even those who are not fans of Facebook liked the idea of an anonymous, decentralized digital currency that might one day challenge fiat currency hegemony. If Facebook could have pulled off such a project, crypto in an iteration close to how Bitcoin founder Satoshi Nakomoto (a pseudonym) imagined it would have finally broken into the mainstream global financial system. When Nakomoto launched Bitcoin in 2009, he sought to reduce our reliance on centralized financial institutions to transfer funds, and instead foster anonymous peer-to-peer transfers on the blockchain.

The Singaporean government recently released the second edition of its Model Artificial Intelligence Governance Framework, which includes recommendations for governing Artificial Intelligence that could influence international guidelines and regulations. The updated framework introduces some notable changes from the first edition, which was published back in January 2019. Among them are recommendations that AI developers and operators strive to make their systems human-centric, explainable, transparent and fair. This emphasis on responsible governance is in keeping with the Monetary Authority of Singapore's FEAT guidelines from 2019, and presents a stark contrast to the approach taken by the European Union in their recent white paper on Artificial Intelligence

The coronavirus outbreak is weighing heavily on the balance sheets of some neobanks, while others appear to be weathering the crisis well. For digital banks in Europe, which is the second hardest hit region behind the United States, the challenge to their businesses is particularly formidable. Very few of Europe's top neobanks by valuation were profitable before the contagion broke out. In fact, they occasionally played down the need to be profitable. WeWork's abortive IPO helped change their calculations. Yet it is hard to see how they will come closer to profitability amidst a painful economic downturn.

Singapore-based Credify, a digital identity startup, closed its US$1 million seed-funding round in late February. Leading the round were venture capital firm Beenext and Deepcore, a SoftBank-backed Japanese artificial intelligence incubator. Credify provides digital identity and trust system solutions aimed at mitigating credibility issues in e-commerce and lending. Credify says that it will use the seed funding to enhance its product suite, boost localization of software development in Southeast Asia and push ahead with client engagements.

Fintech investment declined 3.7% in 2019 to US$53.3 billion as deals in China dropped off dramatically, according to a report published by Accenture in February. The slow in China deal flow can be attributed in part to the protracted U.S.-China trade war. Investor enthusiasm for the China market has cooled amidst an uncertain business environment. China's economy grew 6.1% in 2019, the slowest pace in three decades. At the same time, it would have been hard for China to equal its 2018 deal tally, buoyed by Ant Financial's mammoth US$14 billion funding round.

It is important to note that some of the most high-profile fintechs which raised millions of dollars last year have yet to break even, never mind post a profit: Revolut, N26, the fintech units of Grab and Gojek, to name a few. Yet, that did not stop investors from continuing to support their costly expansion. Accenture's data show that the 92% drop in China's fintech investment was the main reason for the modest decline in global fintech investment last year.

While virtual banks and mobile wallets may be some things that may come to mind when one thinks about the possibilities of fintech expansion in Asia Pacific, the region is also home to one of the largest untapped markets in the world that few seem to be paying attention to- Islamic finance.

To name a few, Indonesia, Malaysia, Brunei, and Pakistan are all Muslim-majority countries that are located in the Asia Pacific region, where some 986 million believers make up the majority of the fastest-growing religious group in the world. An estimated $3.2 trillion in halal lifestyle spending will be expensed by 2024, according to the 2019 State of the Global Islamic Economy report from DinarStandard.

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