Southeast Asia’s largest platform companies all reported second quarter earnings recently. Some results were better than others, but Sea Group, Grab and GoTo all continue to struggle with the fundamentals. The latter two companies are not profitable, while Sea’s performance underwhelmed investors.
Japan’s megabanks are not the only Japanese financial services companies keen on growing their fintech footprint. The SoftBank spinoff SBI Holdings is a digital focused conglomerate with a securities division, a digital bank that is reportedly Japan’s largest by deposits, an asset management arm, an insurance business and a venture capital arm.
In a rapidly digitizing world, many Asian countries are going cashless in order to create better, faster, and cheaper payment infrastructure. But should 100% cashless be the goal?
While cashless transactions offer clear benefits, significant barriers exist to achieving a completely cashless society. Infrastructure limitations, inadequate digital literacy, and disparities in access to technology hinder the widespread adoption of digital payments in many Asian countries. In addition, cultural preferences and the role of cash in informal economies are tough to dislodge.
Despite high expectations for China's digital currency, adoption of the e-CNY for retail payments in the country remains modest at best. A key issue, and one we have been discussing for several years now, is interoperability with the existing, very effective digital payments ecosystem. The e-CNY is unlikely to be more than a novelty unless it can be fully interoperable with Alipay and WeChat Pay.
Asean has a cross-border payments dream that is slowly moving closer to coming true. Despite the very real interoperability challenges, Southeast Asian countries nonetheless seem determined to build a payments rail of their own that can boost the use of local currencies – perhaps at the dollar’s expense – while speeding up transaction time, lowering transaction costs and strengthening connectivity among their respective financial systems. The latest countries to sign onto this project are the Philippines, Vietnam and Brunei.
Just when it seemed Capital A had put aside its digital banking ambitions, the ever-ambitious airline/platform company announced its partnership with the Philippines’ ascendant online lender UnionDigital Bank. The tie-up between Capital A and UnionDigital Bank comes amid a growing travel recovery in Southeast Asia and strong demand for digital financial services in the Philippines.
Buy now, pay later (BNPL) has surged in Indonesia over the past few years, plugging a large lending gap and in many cases acting like a credit card in all but name. BNPL has grown so briskly in Indonesia that some analysts believe it will replace credit cards altogether.Perhaps not.
Australia-founded but Hong Kong-headquartered B2B payments sensation Airwallex has had a busy 2023 thus far. Not only did it just inject US$165 million into its Singapore entity, it also secured a China payments license in March and inked a partnership with American Express in January that will allow its clients in Australia, the UK, Singapore, and Hong Kong to accept Amex cards as a payment method option. It all seems to add up to an Asia-centric growth strategy that is less grandiose than what the Financial Times described in 2020 as the company wanting to “upend the global payments system.”
Japan’s cashless journey is unique in Asia. While most countries in the region that have accelerated cashless payments in recent years are seeking to simultaneously boost financial inclusion, Japan is one of Asia’s best banked countries, with more than 95% of its adult population having a bank account. For Japan, going cashless is not about increasing participation in the formal financial system, but rather about reducing cash-related costs, as well as bringing the country’s technological prowess to financial services and increasing competition in the financial sector.
In the mid-2010s, the fintech business of Tencent grew exponentially, with WeChat Pay and its offshoots allowing the company to become a viable competitor to Alipay in China. Yet even as Tencent captured close to half of China’s payments market, and established a digital bank, WeBank, that could rival Ant Group’s MYbank, it never displayed the same kind of appetite for global expansion as Jack Ma’s company.
Paytm seems to have found the secret sauce at last. After years of rolling out seemingly unrelated digital financial services, the Indian fintech giant is instead focusing on lending and seeing its revenue rise accordingly. In the first quarter of the 2024 fiscal year, Paytm’s revenue rose 39% year-on-year to 23.42 billion Indian rupees (US$286 million). The company reported an operating profit for a third straight quarter, despite higher employee expenses and no government incentives, while its net loss narrowed to 3.57 billion rupees.
One has to give Ant Group credit: Despite the bruising tech crackdown it has endured at home, it has not given up on its vision of creating a regional payments ecosystem. In fact, Ant arguably had the idea to link up the disparate markets of Southeast Asia via a proprietary digital payments network even before different countries in the region began to set up their own bilateral rails using QR codes.
GCash is by several measures the most successful e-wallet in the Philippines. There is no question it has a massive user base – 81 million active users and 2.5 million merchants and social sellers as of May. What’s more, according to the company’s leadership, it became EBITDA profitable three years ahead of schedule, though it has declined to be more specific than that. While the global economic environment is not optimal for an IPO, GCash itself is doing well enough that it can probably afford to go ahead with the listing before year-end.
In recent years, the biggest credit story in India has been buy now, pay later, sometimes abbreviated as BNPL. Tremendous demand for credit has driven the BNPL boom in the subcontinent, but tighter regulation and slower growth are both now inevitable. As BNPL slows in India, there is an opportunity for the overlooked – but better regulated and steadily growing – credit card segment to build market share. To be sure, credit cards remain more of a premium product in India now than BNPL and the market is significantly smaller than for installment payments. Still, it is not small given India’s overall market size.
Patience is a virtue, and good things come to those who wait? Or so it seems in the case of Paytm, India’s most prominent fintech, once best known for looking like yet another questionable bet by Masayoshi Son, but now reminding us he knows how to pick winners after all. Paytm stumbled out of the gates of its November 2021 IPO, but since then has gradually improved its core metrics and has had a pretty good 2023. The company’s stock is up 67% this year; it has a booming lending business and may be profitable sooner than expected.
For the longest time, the China payments market was an oligopoly of the privileged three: first the state-owned UnionPay, and then as the country transitioned to mobile payments, Alipay and Tenpay. U.S. card giants like Visa, Mastercard, and American Express as well as PayPal could only look on with envy and frustration as Beijing kicked the can down the road on boosting market access – which was supposed to have been complete by 2006 per the conditions it agreed to upon accession to the World Trade Organization in 2001.
The paramountcy of the SWIFT interbank messaging network to cross-border payments can be measured in many ways, and SWIFT itself likes to do so with its data on transaction numbers and amounts. For instance, as of December 2022, Swift had recorded an average of 44.8 million FIN messages (payments and securities transactions) per day during the year, a year on year rise of 6.6%.
Raising money is not nearly as easy it used to be for fintechs, but that has not stopped PhonePe. India’s Walmart-owned payments fintech giant just raised another US$100 million from private equity firm General Atlantic as it races towards a US$1 billion fundraising goal. PhonePe is arguably the most prominent Indian fintech unicorn that has yet go public, with a valuation of US$12 billion, massive transaction volume and a commanding presence on the ubiquitous United Payments Interface (UPI) payments rail.
Across Asia’s emerging markets, earned wage access (EWA) has been gaining traction rapidly in the past two years. In a nutshell, EWA platforms allow employees of a company to access a portion of their earned pay before payday. EWA is catching on fast in some of Southeast Asia’s largest emerging markets where per-capita GDP remains relatively low and significant portions of the population are either unbanked or underbanked.
This commentary was written in collaboration with Banking Circle.
The majority of cross-border payments are currently carried out via telegraphic transfers supported by SWIFT’s network of correspondent banks. These transfers are often criticized for being slow and expensive. A transfer can take several days to complete, while the World Bank estimates the average cost of a transaction to be about 6% of the transfer value.
It’s all about financial inclusion: That’s why buy now, pay later (BNPL) is continuing to grow briskly in Indonesia, why regulators are maintaining a light touch, why venture capitalists and others keep pouring money into the country’s BNPL firms. Indonesia has an unbanked population of 181 million that is larger than the populations of most countries and many more underbanked people. Interest-free (if you pay on time) installment payments seamlessly integrated into e-wallets could become a dominant form of de facto credit in the country.
It is no exaggeration to say that India’s United Payments Interface (UPI) real-time payments system has been a game changer for the subcontinent. In a nutshell, UPI has transformed how Indians make payments, allowing them for the first time to easily transfer money instantly from one bank account to another: from a customer to a business, or between individuals.
In the roughly seven years since it was launched, UPI has accrued 260 million users in a population of 1.4 billion and been a decisive factor in India’s embrace of cashless payments thanks to its ease of use and interoperability. Mastercard’s 2022 New Payments Index found that Indians are the most willing of any consumers in the Asia-Pacific region to use emerging cashless payment methods with 93% likely to have made such a payment in the past year.
While many fintech success stories have come entirely from the private sector, state-backed UPI shows that public-private digital financial inclusion efforts can bear fruit when they are implemented well. Having achieved dominance at home, UPI now has set its sights on global expansion.
The question is: Can what works for digital payments in India work globally?
The largest U.S. payments firms have had their eyes on the China market for decades, in some cases since the country kicked off economic reforms in 1978. They have waited with the utmost patience to gain access to the colossal Chinese payments and cards market, valued at US$21 trillion in 2021 by research firm Global Data. In recent years, American Express and PayPal have made some incremental progress in the China market as Beijing has gradually permitted more foreign investment in its payments sector.
Defining atomic settlement
Atomic settlement refers to exchanging assets between two parties in a single transaction, typically instantaneously and often without intermediaries. This can be particularly useful in cross-border payments, as it allows for faster and cheaper transactions compared to traditional methods that rely on a more comprehensive network of correspondent banks or other financial institutions to facilitate the transfer.
India’s most valuable fintech startup has been on a roll, all things considered. Despite an increasingly challenging environment for funding, e-payments firm PhonePe is continuing to raise the enormous amounts of money, most recently US$200 million from its key backer Walmart and before that US$100 million Ribbit Capital, TVS Capital Funds (TCF) and Tiger Global. Valued at US$12 billion, PhonePe has projected a revenue of US$325 million for the calendar year 2022 and US$504 million for 2023, according to a valuation report prepared by KPMG and filed by PhonePe.
China’s payments market has been gradually opening to foreign competition in recent years for different reasons. On the one hand, the Chinese government is wary of allowing a couple of tech giants to indefinitely monopolize a market worth US$3.5 billion at the end of 2022, according to Daxue Consulting. On the other, financial services is one sector of the economy in which Beijing wants more foreign investment. It is against this backdrop that we should evaluate the prospects of Airwallex in China now that the Australian-founded and Hong Kong-based firm has secured an e-payments license for the China market.
Can what works for digital payments in India work globally? That is the most pressing question today for the National Payment Corporation of India’s (NPCI) United Payment Interface (UPI) payment rail, the most successful initiative of its kind. While many fintech success stories have come entirely from the private sector, UPI shows that public-private digital financial inclusion efforts can bear fruit when they are implemented well. Having achieved dominance domestically, UPI is now keen to expand overseas.
Japan’s affinity for cash has made it a relative laggard in adopting digital payments, especially compared to neighbors like Korea and China. Japan only broke the 30% milestone for cashless payments in 2021, partially due to the pandemic. In contrast, Korea was almost 94% cashless in 2020, while China was not far behind at 83%, according to the World Economic Forum.
A commentary in collaboration with Banking Circle.
Large banks have long dominated cross-border payments in Asia Pacific thanks to their control of traditional correspondent banking networks and until recently, the lack of viable competitors. Banks have been particularly dominant in B2B payments as the barrier to entry is higher than in the retail segment.
Meta makes almost all of its revenue from advertising. The company has long known it needs a new engine of revenue growth, but it waited too long to introduce payments and explore fintech in general.
In Asia, where fintech growth has generally been much faster than in Meta’s home market of the United States, the company has faced market barriers in some cases and intense competition overall. At this point, it may be able to gain some payments market share in certain Asian countries with WhatsApp Pay, but it will be an uphill climb.
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A commentary in collaboration with Banking Circle.
The advent of proxy-enabled national real-time payment (RTP) systems has become an integral part of Asia Pacific’s digital financial services market landscape in recent years, driven by central bankers’ determination to make financial flows faster, more efficient and more widely accessible. Southeast Asian countries have been among the most proactive in the development of such real-time payment systems, which have been rolled out domestically first and then gradually expanded into the cross-border space.
A commentary in collaboration with Banking Circle.
Mobile wallets are increasingly a preferred payment method across Asia Pacific, from China to Southeast Asia to Australia. Though e-wallet use in the region was growing steadily prior to the pandemic, the abrupt shift to online and contactless commerce in early 2020 supercharged mobile wallet adoption. This has important implications for Southeast Asia – where many people remain unbanked or underbanked and credit cards have yet to gain a strong foothold outside of Singapore and Malaysia.
Like its rival Alibaba, Tencent has developed a large portfolio of overseas fintech investments. Some of these are strategic bets on rising Big Tech companies with fintech arms, like Voyager Innovations in the Philippines and Sea Group in Singapore, which Tencent believes will eventually be dominant players. Other investments are more focused on facilitating access to the mainland China market for fintechs that have a niche there, such as Australia-founded but Hong Kong-headquartered Airwallex.
Walmart-backed PhonePe, one of the biggest players in India’s payments market, is now one of the subcontinent’s most valuable private fintech firms with a valuation of US$12 billion following a mammoth US$350 million capital injection. PhonePe’s valuation more than doubled from US$5.5 billion at the end of its previous funding round in December 2020.