FinanceVietnam2020
Research Note

Fintechs grow influence in financial services in Asia

By Neeti Aggarwal

Within Asia, China has been the undisputed leader in terms of total fintech investments raised. In other parts of the region, fintechs in South East Asia witnessed a 143% growth in funding that reached $484 million in 2018

 

2018 witnessed a stellar growth in fintech funding as they strengthened presence in financial services in Asia competing with incumbent players but also enabling new opportunities through partnership and financial inclusion.

Over last five years more than $100 billion has been invested into fintech companies by venture capital (VC) funds. 2018 was a landmark year with an unprecedented VC funding of $39.57 billion, a 120% jump in global funding and 15% in the number of deals compared to the previous year, according to data from CB Insights.  

The fintech landscape in Asia is changing rapidly. The VC funding deals for fintechs in the region witnessed the big jump of 38% in 2018 compared to the previous year, accounting for a record $22.65 billion. The figures for the year were however inflated on account of a whopping $14 billion investment raised by Ant Financial and another mega deal was $1.35 billion raised by China based Lufax.

The total funding for Asian fintech ($22.65 billion) is much higher than $11.89 billion invested in US based fintechs and $3.53 billion in UK based fintechs.

Within Asia, China has been the undisputed leader in the total fintech investments raised. Among other parts of the region, Fintech in South East Asia witnessed a 143% growth in funding, reaching $484 million in 2018 according to the report.

Global VC investment in fintech witnessed a strong 120% growth in 2018

Latest report shows that in the first quarter of 2019 the fintech funding in Asia has however dropped by 59% compared to first quarter in 2018, while the total number of deals showed a small decline of 2%. Europe saw its funding grow to $1.7B, surpassing Asia which saw mere $875M in funding in Q1’19. Notably also for the first time Indian fintech companies raised $256 million higher than compared to $192 million invested in Chinese fintechs in Q1 2019.

One of the key factors for sliding investment in China is tightening of regulations in the country, impacting the peer to peer lending and cryptocurrency companies. China houses thousands of small P2P companies, a result of its lax regulatory policies, but many of which may now have to close shops if they do not meet the regulatory requirements. China has also banned the initial coin offerings (ICO) and warned investors against investment in cryptocurrencies.

Payment platforms and technology companies strengthened reach in Asian financial services

Fostering innovation, fintech companies have changed the dynamics in financial services sector in Asia.

These companies neatly tapped into the large segment of unbanked customers in the region with their complete digital and straight through propositions in niche segments such as mobile payments, alternative finance, real time loans and P2P platforms, all focussed on customer centric experience.

Started as payment platforms like Paytm and Ant Financial scaled their operations to a much broader spectrum of services. Paytm has now established a Payments Bank in India, and besides its core digital wallet it offers services in bill payments, UPI and mobile only marketplace. Ant financial leads the payment industry with Alipay and the group expanded into lending, wealth management and insurance in financial services within China, and expanded across Asia through investments and new partnerships. These include partnership in payments with Mynt in the Philippines, in Thailand with Ascend that owns TrueMoney wallet, Dana in Indonesia and owns about 40% stake in Paytm in India. The company is reportedly planning to use the funds raised in 2018 to further expand globally.

With their innovative and efficient digital proposition, these fintech companies not only posed strong competition to incumbent banks but also changed the customer expectations from their banks. This forced banks to undertake rapid digital transformation and improve their service offerings to capture millennial customers.

Leaders from other industries also expanded into financial services using mobile payment route, most notable being the ride hailing giants Grab and Go-Jek. Grab started its operations in 2012 and has since then expanded into 8 countries and last year it picked up Uber’s Southeast Asian operations as well. Grab and Go-Jek both started in cabs business but cashing on the core strength of payments between millions of drivers and customers, the two companies have expanded now into financial services through mobile payments (Go-Pay and Grab-Pay) and digital wallets. Their reach among customers provides them access to huge unbanked segment of the population. More importantly, using the trove of customers’ payment data they are in a position to develop credit assessment of customers to offer them extended financial service like small loans to unbanked customers. Grab has already launched Grab Financial Services to provide these services

Data analytics and emerging technologies solve customer pain points

Most technology companies and challenger banks rely extensively on machine learning, predictive analytics and effective data science to offer innovative solutions to customers. Their main appeal has been the ability to collect and effectively analyse data, which changed the industry dynamics. With their nimble architectures and innovative use of emerging technologies, fintech companies carved themselves markets in niche segments while solving key pain points for customers.

Among emerging technologies, artificial intelligence (AI) and machine learning are being actively explored by many fintechs to provide unique insights from big data, enable better customer understanding, credit assessment, fraud controls, investment predictions and customer experience.  

With effective use of data insights many of these companies have expanded their product portfolios. For instance, 51 Credit Card, this China based fintech leads in management of all credit card bills and credit card applications for customers, and as a result, has access to customers credit card payment data using which it is able to generate insights into the credit risk assessment of customers.  China’s leading internet and e-commerce platform Lexinfintech is able to utilise customers’ online purchase data to develop predictive insights and addresses their credit needs by offering personal instalment loans and credit lines to finance purchases. Singapore’s leading P2P lending platform Validus provides financing to SMEs using data-driven insights through machine learning and AI to make better informed lending decisions. Using machine learning to analyse mobile data, HongKong’s leading fintech Welab provides consumer credit platform in Hong Kong and China and also B2B model by providing consumer lending technology to financial institutions.

In China, thousands of P2P lending companies mushroomed over the last few years. Some of these leading lending fintech companies such as Lufax, Yirendai etc have expanded their services into wealth management products using robo-advisory technology.  

By offering products in niche areas and customer centric interface, several fintech companies have shown notable growth. For instance in Japan, Folio, a leading investment fintech provides theme-based and Roboadvisory based investment services to customers in collaboration with Line, the leading messaging app in the country. Freee another Japanese fintech is now a market leader in the country in cloud based HR and accounting software for SMEs, ability to integrate through API it is enabling SME empowerment and solving key pain points.

Ping An backed OneConnect Financial technology that raised $650 million in 2018 is effectively using biometrics technology and facial expressions to generate insights. Its blockchain platform is being used for HKMA’s e-trade connect trade finance platform as well as for China custom’s department project in China.

Blockchain is also offering unique opportunities to fintech companies in cross border payment space as well, making it faster and cheaper. However, cryptocurrency companies are under pressure as regulators bring out guidelines and controls.

Growing bank-fintech partnerships

In this competitive scenario, while banks are rapidly undertaking digital transformation to compete, the leaders have opened their doors for fintech partnerships recognising the potential in customer service proposition. The collaboration presents significant opportunities for both parties. Fintech companies often lack the customer trust and reach, while banks have the advantage of customer access and data but lack the technology proposition. Banks thus gain to improve their service offerings while providing fintech companies a platform to achieve scale through these win-win partnerships.

Leading banks are enabling collaboration through open banking frameworks and application programming interfaces (APIs). For instance, DBS bank now has 350 APIs to integrate with partners for developing an ecosystem of services. To foster partnership and undertake experiments with fintech some of the leading banks in the region have developed innovation centres and set up data sandboxes.

Fintech ecosystem is facilitating banks to expand their service offerings riding on better insights. For example a leading bank in Singapore developed chatbot for home loans and machine learning based anti money laundering (AML) fraud control system with fintechs. A bank in Thailand used cloud based system of a fintech company to develop insights into customers for improved cross sell and lead generation, while another bank in Myanmar offered unsecured loan products by using decision analytics models from a fintech. A bank in India launched voice bots for better customer service in partnership with a fintech.

With legacy baggage banks have found it difficult to compete with nimble fintechs. Some leading banks have developed digital arms, such as Digibank by DBS, TMRW by UOB, Kakao Bank in Korea etc. Selected banks are also investing in fintech companies either directly or by developing their own venture funds. 

Banks are forced to catch up  

Fintech companies have changed the market dynamics of traditionally inefficient financial services. Regulators are now promoting innovation, entry barriers are reducing as they stake claim on greater market share and bring more unbanked population into financial services purview. Banks are now increasingly seen to emulate the fintech principles, moving towards open ended and more nimble architectures, promoting innovation culture and mobile first propositions. The disruption has just started as the industry starts incorporating emerging technologies. With the rising investments and market traction, the innovation in fintech is likely to gather speed forcing banks to embrace change with speed to survive. The ultimate beneficiary in this journey would undoubtedly be the consumer.

 



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