In fact, since Square bought Afterpay for a whopping US$27.9 billion in 2021, there has not been a mega deal in APAC’s fintech sector. While there are media reports that Grab and GoTo are considering a merger, both companies say that such reports are nothing but speculation.

There are both macroeconomic and structural reasons for the dearth of consolidation in Asia-Pacific’s fintech sector, and barring any dramatic changes, we do not expect the situation to change anytime soon.

Challenging macroeconomic environment

Data from Dealogic show that overall M&A volumes in all industries fell 18% to roughly US$3 trillion last year, the lowest level since 2013. M&A volumes in the United States - the world's largest investment banking market - declined 8% to $1.42 trillion. Volumes in Europe and Asia Pacific declined more sharply, by 32% and 20% respectively.

One of the main culprits for the drop in deals was high interest rates, which make it pricier for private equity firms and companies with low credit ratings to raise acquisition financing. Higher interest rates have inevitably lowered valuations, as fund income calculations have to be reworked. The U.S. benchmark interest rate has been at a 30-year high of 5.25% to 5.5% for more than a year, despite expectations it would be lowered. If we consider that as recently as April 2022, it was at 0.33%, we can see how dramatically the cost of borrowing money has risen in a brief period of time.

At the same time, economic uncertainty and market volatility make it tougher for acquirers and sellers to agree on deal prices. Recent bank failures in the U.S. have given rise to understandable caution and new stress-test modeling has exasperated the effect of higher interest rates. 

Too big to merge

While certain macroeconomic factors have affected consolidation across industries, Asia’s fintech sector has some structural issues that inhibit M&A. Of these, the most notable is the tendency for Asian tech giants to organically build out fintech capabilities and try to create all-in-one super apps that allow them cross-sell users everything from online banking to food delivery, entertainment and ride hailing services. These companies exist in China, Korea, Southeast Asia and India.

In theory, the scale these companies have built would make it easy for them to buy up prime assets that strengthen their respective digital finance offerings. However, they are already so big that efforts to grow bigger still could attract regulatory ire. In fact, several of them have fallen afoul of regulators either for alleged monopolistic practices – Alipay and Tenpay in China – or repeated compliance failures – Paytm in India. Also in India, payments juggernauts PhonePe and Google Pay are under pressure because of their dominance of the UPI retail payments rail, while WhatsApp Pay has been restricted to some degree from offering payment services to Indians over fears it would be too dominant given its 500 million messaging app users.

When Grab and Gojek were discussing a merger in 2020, one of the main concerns about the deal was that regulators would never approve it. After all, a marriage of the two super apps would have created a ride hailing and food delivery behemoth that would have been in a position to crush most of its small competitors. This concern, as well as some differences of opinion on how the deal should be structured, prompted the two companies to terminate the discussions.

Gojek ended up merging with Tokopedia instead, which sat better with regulators – Gojek lacked a strong e-commerce business and that was/is Tokopedia’s foremost capability – but did not offer the same fintech opportunities as a merger with Grab. Since 2020, Grab has launched a trio of digital banks and continued to make strategic investments in Southeast Asian fintech firms.

Stealth consolidation

In a February 2024 research note, McKinsey & Company observes that “in our experience, most banking leaders still view fintechs as expensive and lacking clear paths to profitability, and remain skeptical about the goodwill these acquisitions could create.” Because many large banks struggle to integrate fintechs, they “would rather partner with them than acquire them,” McKinsey adds.

In Indonesia, a variation on this dynamic has emerged in which conglomerates and tech companies collaborate to revamp incumbent banks as digital lenders. For instance, in November 2023, the Hong Kong digital bank WeLab and its Indonesian conglomerate partner Astra launched Bank Saqu, the rejigged version of the incumbent lender Bank Jasa Jakarta that the two companies bought in 2022. Indonesian regulators are receptive to the acquisition of small incumbent banks by foreign tech companies as long as they have a local partner – usually a conglomerate.

In an earlier deal, which took place in Feb. 2021 before interest rates soared, Sea Group bought Indonesia's Bank BKE outright and turned it into SeaBank Indonesia. It did not take long for the undisclosed investment to pay off, especially given the synergies between Shopee's e-commerce ecosystem and digital banking. SeaBank Indonesia recorded a net profit of 269.2 billion rupiah (US$18 million) in FY 2022, compared with a loss of 313.4 billion rupiah (US$21 million) in FY 2021.

Meanwhile, in Thailand, incumbent banking giant SCBX and Korea’s Kakao Bank plan to apply for a virtual banking license together as consortium partners. Under their agreement, SCBX will hold a majority stake in the venture while Kakao will have at least a 20% share. Hong Kong’s WeBank will serve as a tech partner for the consortium, providing tech architecture and solutions.

Elusive blockbuster deal

Currently, there is just one possible blockbuster deal on the horizon in Asia-Pacific’s fintech sector: a Grab-GoTo merger. In a February research note, Australian investment bank Macquarie said that a union of Grab and GoTo is “inevitable.” Macquarie estimates cost savings of 50% from a merger. Even if that estimate is a bit bullish, it is likely that a union would significantly reduce the need to heavily subsidize customers and drivers in the ride hailing and food delivery segments – which always eaten into margins. Further, access to Grab’s many financial services businesses in Indonesia could create e-commerce synergies that would make the new entity more competitive vis a vis Sea Group’s Shopee – though GoTo only controls 25% of Tokopedia following TikTok’s acquisition of 75% of the Indonesian e-commerce firm. 

While both companies’ fintech units have performed well, competition in the Indonesian market is intense. A union of Grab and GoTo could potentially create much larger payments and digital banking units that could build scale faster, though it would depend on how the deal was structured.

Further, if we look at the performance of Grab and GoTo since their respective IPOs, we can see why consolidation could be the way forward. The share prices of both companies have plummeted since they went public. Grab’s has fallen more than 73% to US$3.34, while GoTo’s has done even worse, falling 84% to 59 Indonesian rupees (IDR). Neither company is profitable, though Grab is forecast to reach that milestone faster – in 2025 – while GoTo could swing to a profit in 2026.

However, the implications for market competition of a Grab-GoTo merger may not sit well with regulators. It is less an issue for digital financial services – which is highly fragmented in Indonesia – than ride hailing and food delivery. Indeed, the Indonesian Competition Commission (KPPU) has warned that a merger could lead to monopolistic practices in certain sectors. In Singapore, Grab is already under review by the city-state’s Competition and Consumer Commission for its acquisition of taxi company Trans-cab. Meanwhile, an Indonesian watchdog is also investigating Shopee for alleged monopolistic practices in Southeast Asia’s largest economy

 Cautious optimism

Looking ahead, some analysts are predicting an uptick in M&A activity this year after last year’s 10-year nadir. In March, Morgan Stanley said in a research note that deal-making volumes will surge 50% this year amid increasing confidence in the business environment and less concern over funding costs, inflation and a recession.

“We think that this 'winter' for mergers and acquisitions (M&A) is thawing and activity is set to return cyclically and secularly," Morgan Stanley said. The investment bank added that while it sees the highest dealmaking potential make in North America and Europe, Asia Pacific also shows promise: India, Australia, South Korea, Japan and Southeast Asia.

One factor to keep in mind for fintechs is that the increasing maturity of the industry has reduced the “wow” factor that once accompanied the arrival of new services and segments. When Square agreed to purchase Afterpay in 2021, buy now, pay later (BNPL) was enjoying a moment in the sun. It was seen as “the next big thing” in fintech and could do little wrong. But today, Afterpay is struggling a bit, having accumulated A$475 million in bad debts in the 18 months to the end of 2023 and recorded a net loss of A$615 million.

At the same time, BNPL firms could find that their costs rise and margins are squeezed, depending on how they are required to conform to Australian credit laws and proportionate lending standards. The BNPL firms are expected to be brought under credit laws this year. 

A more sober perspective on fintech firms’ potential will affect investors’ willingness to pay high prices for companies, which over time could push down inflated valuations.

Thinking strategically

In the months ahead, we do expect fintech M&A activity in Asia to pick up modestly, though stubbornly high interest rates will likely limit investor appetite for mega deals. The Fed is expected to cut rates modestly in September, according to a survey of 100 economists by Reuters.

Deep-pocketed firms can be expected to make small strategic investments that do not trip any regulatory alarms and strengthen footholds in key growth markets. For instance, in Oct. 2023, Kakao Bank took an undisclosed 10% stake in the Indonesia digital bank Superbank (previously an incumbent lender), joining existing investors Grab and Singtel. Kakao aims to expand to Southeast Asia now that its growth in Korea has moderated and it faces greater competition.

Another segment that could be ripe for M&A is crypto, now that the winter is finally over. To that end, in February, Kakao’s and Line Group’s respective blockchain networks Klaytn and Finschia said that they would merge, creating a comprehensive Web3 ecosystem with a presence in Thailand, Singapore, Vietnam, Taiwan and the United Arab Emirates. The two blockchain networks said they would establish a new foundation in Abu Dhabi to execute the merger.

While there has been rising skepticism about Web3’s potential of late, M&A deals like this one can help firms in the segment increase their competitiveness and clarify their value propositions. Web3 is also nascent compared to fintech segments like payments or digital banking, and thus less apt to raise antitrust concerns – even in the case of large mergers. The fact that Kakao and Line are backing these two blockchain networks augurs well for this initiative, as does the participation of 45 companies and a user base of more than 250 million Asian wallet users.

This deal could be one to follow closely as Klaytn and Finschia claim that they are creating Asia’s largest Web3 ecosystem as well as its largest blockchain. If blockchain is truly more of a problem solver than a solution in search of a problem, then this tie-up should bear fruit.