December 04 2023

Fintech funding in Southeast Asia: a glass half-full

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.

Green finance is ascendant both globally and in the Asean countries. With that in mind, the survey found that the region’s green technology sector received US$169 million in funding in the first nine months of 2023. Investor interest in sustainability is rising given climate-related regulations, government support and rising awareness of environmental issues. The APAC region is particularly vulnerable to climate-related impact and many governments in the region have begun exploring green financing initiatives and regulations to support the region's energy transition efforts. Investors expect that carbon emissions management and reporting as well as green financing solutions to be key growth areas for this sector.

When it comes to green finance in Southeast Asia, Singapore is leading the way. The city-state in 2019  became the first Southeast Asian country to introduce a carbon tax, which covers 80% of domestic emissions. A year later the Monetary Authority of Singapore (MAS) rolled out the Singapore Green Finance Center, dedicated to green finance research and talent development, while the National University of Singapore opened a research center for nature-based climate solutions. Singapore’s Economic Development Board reckons that serving as a carbon hub could generate as much as US$5.6 billion in gross value for the city-state’s economy by 2050.

Singapore is also leading Southeast Asia in overall fintech funding and deals. The city-state accounted for a commanding 59% of the US$1.3 billion raised in the first nine months of the year as well as 54% of the 94 deals. Indonesia was second, accounting for 27% of funding and 16% of deals.

There is no denying that funding has been sharply curtailed in the past year. In the first nine months of 2022, more than US$5 billion was raised by Southeast Asian fintechs and there were 235 deals. High interest rates, global economic uncertainty and rising geopolitical tensions are all having a detrimental effect on investor sentiment. And we have probably also reached a point at which investors start to realize that some of the business models championed by tech companies during the ultra-low interest rate environment of the 2010s lack staying power.

One trend to watch: For the first time, alternative lending firms raised the most funding, receiving almost a third of total ASEAN-6 investments with US$408 million. Alternative lending and insurtech were both outliers, exceeding their total funding amounts for 2022, partially due to the mega deals led by Kredivo, Bolttech and Advance Intelligence Group.

Meanwhile, the report concludes that despite broad cooling of investor excitement about tech firms, artificial intelligence will pick up the slack “as a key emerging space that will propel the next generation of fintech innovations.” To be sure, AI has many promising applications in financial services, but it is also a technology that has been at the center of many bubbles and hype cycles since ince the term was coined by computer scientist John McCarthy in 1955. 

It is worth considering AI-related insights at research firm CCS Insight, which has forecast a “cold shower” for AI hype in 2024 as its “cost, risk, and complexity” become apparent. That’s not to say that interest in AI will just fade away. Indeed, companies with billions to spend on maximizing generative AI’s potential like Amazon, Microsoft, Meta, and Google can be expected to push ahead. But we cannot say we expect the same will hold true for developers and SMEs that lack Big Tech’s financial resources and computing power.